10QSB 1 v05870_10qsb.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 Commission File No. 0-29800 VIRTGAME CORP. (Name of Small Business Issuer in its charter) Delaware 33-0716247 ------------------------------- ----------------------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 6969 Corte Santa Fe, # A San Diego, California 92121 --------------------------------------- ---------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 858-373-5001 ------------ Not Applicable (former name) Check whether the issuer (1) filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| The number of shares of common stock, $.00001 par value issuable and outstanding as of August 13, 2004 was 34,342,322 Transitional Small Business Disclosure Format (Check one): Yes|_| No |X| . VIRTGAME CORP. TABLE OF CONTENTS FOR FORM 10-QSB QUARTER ENDED JUNE 30, 2004

Page Number PART 1 - FINANCIAL INFORMATION ITEM 1. Financial Statements o Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 3 2003 o Consolidated Statements of Operations (unaudited) for six months and three 5 months ended June 30, 2004 and 2003 o Consolidated Statements of Cash Flows (unaudited) for six months ended June 6 30, 2004 and 2003 o Notes to Consolidated Financial Statements (unaudited) 7 ITEM 2. Management's Discussion and Analysis or Plan of Operations 10 ITEM 3. Controls And Procedures 13 PART II - OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K. 14

2 VIRTGAME CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS JUNE 30, 2004 and DECEMBER 31, 2003 ASSETS ------

June 30, 2004 December 31, (Unaudited) 2003 ----------- ------------ Current assets: Cash and cash equivalents $1,350,983 $2,629,219 Accounts receivable, net of allowances 398,228 161,808 Inventory 96,207 Prepaid expenses and other current assets 65,354 47,227 ---------- ---------- Total current assets 1,910,772 2,838,254 ---------- ---------- Noncurrent assets: Deposits 4,294 6,379 Long-term receivables 350,355 Property and equipment, net 85,696 57,650 Capitalized software, net 1,257,526 923,326 ---------- ---------- Total noncurrent assets 1,697,871 987,355 ---------- ---------- Total assets $3,608,643 $3,825,609 ========== ==========

3 VIRTGAME CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS JUNE 30, 2004 and DECEMBER 31, 2003 LIABILITIES AND SHAREHOLDERS' EQUITY DEFICIT --------------------------------------------

June 30, 2004 December 31, (Unaudited) 2003 ------------ ------------ Current liabilities: Accounts payable $ 316,217 $ 168,468 Accrued expenses 62,920 172,723 ------------ ------------ Total current liabilities 379,137 341,191 ------------ ------------ Noncurrent liabilities: Long-term payables 140,142 -- ------------ ------------ Total noncurrent liabilities 140,142 -- ------------ ------------ Total liabilities 519,279 341,191 Shareholders' equity: Preferred stock, $.0001 par value, 10,000,000 shares authorized, Series A, 2,127.5 and 3,000 shares issued and outstanding in 1 1 2004 and 2003, respectively; Series B, 1,705 shares issued and outstanding Common stock, $.00001 par value; 100,000,000 shares authorized; 33,641,583 and 30,130,044 shares issued and outstanding in 2004 and 2003, respectively; 700,739 and 1,087,055 issuable in 2004 and 2003, respectively 343 312 Additional paid-in capital 26,799,927 26,841,283 Receivable from exercise of options (154,000) (66,000) Accumulated deficit (23,556,907) (23,291,178) ------------ ------------ Total shareholders' equity 3,089,364 3,484,418 ------------ ------------ Total liabilities and shareholders' equity $ 3,608,643 $ 3,825,609 ============ ============

4 VIRTGAME CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2004 AND 2003

Six months ended June 30, Three months ended June 30, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Revenue: $ 787,483 $ 324,800 $ 286,793 $ 50,742 Operating expenses (income): Salaries and payroll expenses 199,177 123,811 99,791 61,883 Research and development 284,107 223,606 138,209 113,248 Variable award stock-based compensation (141,450) (55,350) 123,000 30,750 Other operating expenses 662,715 506,257 352,394 140,059 ------------ ------------ ------------ ------------ Total expenses from operations 1,004,549 884,424 535,044 438,190 ------------ ------------ ------------ ------------ Loss from operations before financial expense and income taxes (217,066) (559,624) (248,251) (387,448) Financial income (expense): Interest income 10,242 1 6,152 1 Interest expense (51,150) (14,812) (25,925) (7,648) ------------ ------------ ------------ ------------ Total financial expense (40,908) (14,811) (19,773) (7,647) ------------ ------------ ------------ ------------ Loss from operations before income taxes (257,974) (574,435) (268,024) (395,095) Income tax expense (7,755) (1,511) (2,938) (363) ------------ ------------ ------------ ------------ Net loss $ (265,729) $ (575,946) $ (270,962) $ (395,458) ============ ============ ============ ============ Basic loss per share $ (0.01) $ (0.02) $ (0.01) $ (0.01) ============ ============ ============ ============ Shares used to compute basic loss per share 33,377,715 29,655,792 33,433,910 29,708,755 ============ ============ ============ ============

5 VIRTGAME CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

Six months ended June 30, 2004 2003 ----------- ----------- Cash flows from operating activities: Net loss $ (265,729) $ (575,946) Adjustments to reconcile net loss to net cash flows used in operating activities: Depreciation and amortization 224,306 154,754 Issuance of common stock options and warrants for consulting fees and compensation and adjustment to (129,325) 225,598 variable options Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable (236,420) (59,808) Inventory (96,207) -- Long-term receivable (350,355) -- Prepaid expenses and other current assets (18,127) (68,927) Deposits 2,085 615 Increase in: Accounts payable and accrued expenses 37,946 111,749 140,142 -- ----------- ----------- Net cash flows used in operating activities (691,684) (211,965) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (39,416) (9,225) Capitalization of software development cost (547,136) (219,761) ----------- ----------- Net cash flows used in investing activities (586,552) (228,986) ----------- ----------- Cash flows from financing activities: Net proceeds from the issuance of common stock -- 288,901 Receipt of option exercise receivable -- 125,000 Principal payments under capital lease -- (2,653) ----------- ----------- Net cash flows provided by (used in) financing activities -- 411,248 ----------- ----------- Net (decrease) in cash and cash equivalents (1,278,236) (29,703) Cash and cash equivalents at beginning of period 2,629,219 60,343 ----------- ----------- Cash and cash equivalents at end of period $ 1,350,983 $ 30,640 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 51,150 $ 1,815 =========== =========== Taxes $ 7,755 $ 1,511 =========== =========== Supplemental disclosure of noncash investing and financing activities: Retirement of debt and accounts payable for stock issued $ -- $ 1,348 =========== ===========

6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Basis of Presentation These consolidated financial statements of VirtGame Corp. (the "Company") do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-KSB for 2003. In the opinion of management, the financial information set forth in the accompanying consolidated financial statements reflects all adjustments necessary for a fair statement of the periods reported, and all such adjustments were of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year. Private Placement During December 2002 to April 2003 we sold 1,000,000 shares of our common stock at $0.50 a share to two accredited investors for an aggregate purchase price of $500,000 in private placements pursuant to agreements that included anti-dilution provisions. During the third quarter of year 2003 an additional 315,788 shares of common stock and warrants to purchase 700,000 shares of common stock, exercisable at $0.38 per share were issued to these two investors in accordance with these anti-dilution provisions. In July 2003 we completed a private placement offering of 120 units of our securities, at $25,000 per unit, resulting in total net proceeds of $2,304,214. Each unit consists of 25 shares of our Series A preferred stock and 35,000 common stock purchase warrants. The Series A Preferred Stock has a liquidation preference of $1,000 per share. Each share of Series A preferred stock is convertible into shares of our common stock at a conversion price equal to $0.38 per share, or at a rate of one common share for each $0.38 of liquidation preference, subject to certain anti-dilution rights, including a downward adjustment in the conversion price in the event of our sale of any common shares over the 24 month period following the termination date of the offering at a price less than $0.33 per share. The warrants made part of the units will entitle their holders to purchase one share of our common stock, over a five-year period, at an exercise price of $0.38 per share. At June 30, 2004, of the 120 units of Series A preferred shares, holders of 34.9 units had converted 872.5 shares of Series A preferred shares to 2,296,039 shares of our common stock. Between November 2003 and December 2003, we sold a total of 17.05 units to 6 accredited investors in a private placement offering pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 thereunder. The offering price was $100,000 per unit, resulting in total gross proceeds of $1,705,000. Each unit consisted of 100 shares of our Series B convertible preferred stock and warrants to purchase 35,714 shares of our common stock at an exercise price of $0.70 per share. The placement agent for the offering received commissions equal to 10% of the gross proceeds from the sale of the units, a warrant to purchase 243,571 shares of our common stock for $0.70 per share and a non-accountable expense allowance of $120,000. During the quarter ending June 30, 2004, the Company received $2,625 from an option holder who exercised 10,500 common stock options at $0.25 per share. Also during the quarter the company received two notes receivable from two other option holders who exercised 800,000 common stock options at $0.11 per share. The Company received a total of $154,000 in two notes representing both the options exercised during the quarter plus a $66,000 receivable as of December 31, 2003 from one of the option holders. The $154,000 notes receivable as of June 30, 2004 and the $66,000 receivable as of December 31, 2003 are included in the shareholders' equity section of the balance sheet. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 7 SIGNIFICANT ACCOUNTING POLICIES Revenue recognition The Company generates revenue as an application software provider for the gaming and lottery industries. Software license fee revenue and related accounting pronouncements The Company recognizes software license fee revenue in accordance with the provisions of Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended by SOP 98-9, "Software Revenue Recognition, With Respect to Certain Transactions." Software license fees represent revenues related to licenses for software delivered to customers for in-house applications. Revenues from single-element software license agreements are recognized upon shipment of the software. Revenues from software arrangements involving multiple elements are allocated to the individual elements based on their relative fair values. If services are considered essential to the functionality of the software products, both the software product revenue and service revenue are recognized using the percentage of completion method in accordance with the provisions of SOP 81-1, "Accounting for Performance of Construction Type and Certain Production Type Contracts. Contract revenues are recognized based on labor hours incurred to date compared to total estimated labor hours for the contract. Contract costs include all direct labor, direct material and indirect costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are recorded in the period in which such losses become probable based on the current contract estimates. Hosting fees represent revenues from post-contract customer support services where the Company's software is resident on a company server and are recognized ratably over the hosting period. Event fees are recognized as the events take place. In December 1999, the SEC staff issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," which summarized the SEC staff's views regarding the recognition and reporting of revenues in certain transactions. The implementation of SAB No. 101 does not require the Company to change the method by which it recognizes revenues. Revenues are recognized principally as services are provided to customers. Amounts billed in advance are recorded as current or long-term deferred revenue on the balance sheet, with current deferred revenue reflecting services expected to be provided within the next twelve months. Capitalized Software Effective January 1, 1999 the Company adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Among other provisions, SOP 98-1 requires that entities capitalize certain internal-use software costs once certain criteria are met. Under SOP 98-1, overhead, general and administrative and training costs are not capitalized. In addition, certain computer software costs are capitalized in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed," and are reported at the lower of unamortized cost or net realizable value. Capitalized software is amortized over five years and the amortization expense for the three months ended June 30, 2004 and 2003 was $114,302and $70,293 respectively. Research and development costs expensed for the three months ended June 30, 2004 and 2003 were $145,898 and $113,248 respectively. Income (Loss) per common share Basic income (loss) per common share has been computed on the basis of the weighted-average number of common shares outstanding. The common shares issuable upon exercise of employee stock options and stock warrants have not been included in the computation of loss per common share because their inclusion would have an anti-dilutive effect. The Company has elected to account for its stock-based compensation plans under APB 25. However, the Company has computed, for pro forma disclosure purposes, the value of all options granted during the period ending June 30, 2004 and 2003 using the minimum value method as prescribed by Statement of Financial Accounting Standards No. 123 (SFAS 123), as amended by SFAS No. 148. Under this method, the Company used the risk-free interest rate at the date of grant, the expected volatility, the expected dividend yield and the expected life of the options to determine the fair value of options granted. The risk-free interest rates of 4.5%, expected volatility of 224%, the dividend yield was assumed to be zero, and the expected life of the options was assumed to be three to five years based on the vesting period of options granted. 8 If the Company had accounted for these options in accordance with SFAS 123, the total value of options granted during the periods ending June 2004 and 2003 would be amortized on a pro forma basis over the vesting period of the options. Thus, the Company's consolidated net loss would have been as follows: Six Months Ending June 30, 2004 2003 Net loss: As reported $265,729 $575,946 Pro forma $477,068 $575,946 Loss per Share: As reported $0.01 $0.02 Pro forma $0.01 $0.02 Recent Accounting Standards In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this Statement is not expected to have a material effect on the condensed consolidated financial statements. 9 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS. Plan of Operations VirtGame is a provider of open architecture gaming software to the regulated gaming and lottery industries. We offer to licensed casinos and sports wagering and lottery operations a comprehensive suite of software products that provide: o distribution of server-based casino games, sports wagering and lotteries through various distribution channels, including local area networks within a casino (such as over-the-counter, stand-alone kiosks and in-room wagering) and wider area networks such as online closed-loop Intranets or the Internet; o open architecture supporting multiple operating system platforms and databases that require no special or proprietary hardware; and o customer management solutions, including managerial and financial reports and client data mining. We believe that because the Internet is not regulated on a jurisdictional basis by state and local regulatory bodies, it is not a suitable distribution channel for highly regulated gaming and lottery operators. We are taking a step-by-step approach to offer land-based casinos and lottery operators a legal solution for remote gaming within their own licensed jurisdiction. As the first step, we are deploying our open architecture gaming products within the casino floor. We then intend to introduce our proprietary and patented gaming distribution solution to extend the reach of the operator to their customers remotely. We have developed ways to create private networks from today's Internet infrastructures. Telecommunication companies have already spent a tremendous amount of capital on the World Wide Web. Our strategy is to capitalize on this sunk expense for the industry that spends billions of dollars building casinos to attract customers, and pays very little to expand its customer base. The states and governments are finding it difficult to stop the offshore Internet gaming companies. We believe that the only practical way to deal with the unlicensed Internet gaming operators is to allow the licensed and land-based casinos to compete online in a secured and regulated environment. This will also provide the opportunity for the states to tax this new source of gaming revenues. On January 21, 2003, the United States Patent and Trademark Office awarded us patent # 6,508,710 for "Gaming System with Location Verification". The patent covers virtual gaming environments with verification of players' location to regulate access to players in authorized locations. In October 2002, we received manufacturer and distributor licenses from the Nevada Gaming Commission, which are limited for 18 months. During the first quarter of year 2003 we licensed our sports wagering software to several casinos in Nevada. During the quarter ending June 30, 2004 the Nevada Gaming Commission granted us an unrestricted gaming license without time limitations as a manufacturer and distributor. As a software development company, we do not operate Internet casinos, sportsbooks or lotteries. Instead we have developed software products that are currently in use by licensed and regulated casinos, sportsbooks and lotteries. While we intend to derive income directly from gaming activities, we intend to do so pursuant to arrangements with licensed casino, sportsbooks and lottery operators in full compliance with applicable federal and state law. Since we do not accept wagers, we believe that existing U.S. and foreign gaming regulations are not applicable to us. However, as a participant in the gaming industry, the regulatory environment in this industry directly affects us, particularly as it relates to online casino gaming, sports wagering and lotteries. The U.S. Federal Interstate Wire Act provides language that, among other things, makes it a crime to use interstate or international telephone lines to transmit information assisting in the placing of wagers, unless the wagering is authorized in the jurisdiction from which and into which the transmission is made. Federal and state prosecutors and courts have consistently applied the Wire Act to Internet-based gaming. Consequently, both land-based and online gaming in the U.S. is prohibited unless authorized by the state from which and into which the transmission is made. In summary, the regulation of gaming in the U.S. is left to the states. Sales to three casino customers represented 95% of our revenues during the six months ended June 30, 2004 and represented 100% of our accounts receivable as of June 30, 2004. 10 During the six months ended June 30, 2004 we installed a proprietary sports book network called Sports Bet Xpress (SBX) in 24 Las Vegas bars and taverns with restricted gaming licenses following a preliminary lab and audit approval. SBX is a private network for sports account wagering from neighborhood bars and taverns into participating Nevada race and sports books. The installation of the SBX remote wagering kiosk network and its regulatory field audit was completed during the six months ended June 30, 2004. On August 12, 2004, we received recommendation of approval from the Nevada Gaming Control Board which is due to be reviewed and voted upon by the Nevada Gaming Commission on August 26, 2004. During the six months ended June 30, 2004, we produced twelve slot machines based on our proprietary open architecture server platform and for gaming lab approvals, demos and ultimately for resale. The cost of these machines represents the $96,207 inventory reflected on the balance sheet as of June 30, 2004. We submitted our server based machine platform to two gaming labs during the quarter ending June 30, 2004. We are not certain when, or if, we will obtain the gaming lab approvals for our server based gaming slot machines or whether we can secure enough gaming content to make these machines commercially viable. Currently, all our revenues are derived from software licensing and maintenance fees relating to our race and sports book products. Our licensing revenues are currently characterized by a low volume of sales with high fees relative to other software products. We do not operate the race and sports book operation of our casino customers. We install our race and sports book software on commodity servers and PC's owned by the casino operator, and earn maintenance fees by supporting our software element of the system while the casino operator is responsible for the hardware and network maintenance. The casino operator pays us monthly maintenance fees which are less than the initial licensing fees that we normally receive after the operator starts using our software to take live wagers. Our maintenance agreements are typically subject to renewal every five years for about 75% of the initial licensing fees due on renewal date. Until we have meaningful recurring revenues from our maintenance and support services, we will be relying on new software licensing contracts for generating most of our revenues. Comparison of operations During the second quarter of 2004, we entered into two new contracts for our PrimeLine Race and Sports Book software. Revenues from software application services were $286,793 for the three months June 30, 2004 compared to $50,742 for the three months ended June 30, 2003. Revenues for the six months June 30, 2004, were $787,483 compared to $324,800 for the six months ended June 30, 2003.The increase in revenues for the three and six months ended June 30, 2004 versus the prior year's was due to higher new customers' initial software licensing fees. Operating expenses increased by 20% to $535,044 for the three months ended June 30, 2004 compared to $438,190 during the three months ended June 30, 2003. The increase in operating expenses was due to a $275,204 increase in payroll, research and development and other operating expenses incurred due to hiring of consultants to help with our new slot machine platform development and promoting the SBX remote wagering network partially offset by $178,350 decrease in variable award stock-based compensation. The variable award stock-based compensation was down due to our lower closing stock price at the end of the quarter compared to the previous year. For the six months ended June 30, 2004 operating expenses increased by 14% to $1,004,549 in 2004 from $884,424 in 2003 which was primarily due to higher consulting expenses incurred in developing our new slot platform and promoting the SBX wagering network. We expect operating expenses to increase further as we get regulatory and lab approvals and as we start marketing these products. Interest expense increased to $25,925 for the three months ended June 30, 2004 from $7,648 for the three months ended June 30, 2003. For the six months ended June 30, 2004 interest expense increased by $36,338 to $51,150. These increases are due to the interest payment for the Series B preferred stock issued in December 2003 which carries 6% annual interest. In summary, net loss for the three months ended June 30, 2004 was $270,962 compared to net loss of $395,458 for the three months ended June 30, 2003. The decrease in our net loss for the second quarter of 2004 was due to a 465% increase in revenue coupled with a 22% increase in operating expenses during the second quarter of 2004 compared to same period in 2003. For the six months ended June 30, 2004 net loss was $265,729 compared to $575,946 for the prior year's six months. The decrease in our net loss for the six months ended June 30, 2004, resulted from a 142% increase in revenue coupled with a 13.6% increase in operating expenses during the first six months of 2004 compared to same period in 2003. 11 Liquidity and Capital Resources Our working capital as of June 30, 2004 was $1,531,635, a decrease of $965,428 compared to the working capital of $2,497,063 as of December 31, 2003. The long term receivable amount of $350,355 as of June 30, 2004 is due to a new contract we signed during the first quarter of 2004, which is payable over five years. Associated with this long term receivable we have a long term payable of $140,142 as of June 30, 2004, which represents the liability element of what we will owe to a distributor upon our receipt of these receivable amounts. Our plan of operations over the next 12 months includes the continued pursuit of our goal to position VirtGame as the leading provider of software applications and solutions to the regulated gaming and lottery industries by developing and integrating solutions to comply with the regulatory concerns of the gaming industry. We believe that our working capital as of the date of this report will not be sufficient to satisfy our estimated working capital requirements at our current level of operations for the next twelve months. Our cash and equivalents were $1,350,983 as of June 30, 2004, compared to cash and cash equivalents of $2,629,219 as of December 31, 2003. At our current cash "burn rate", we will need to raise additional cash through debt or equity financings during the second half of 2004 in order to meet our operating expenses beginning in 2005 and to fund our continued gaming software development and production of gaming equipment and devices and to finance possible future losses from operations as we expand our business lines and reach a profitable level of operations. We presently do not have any arrangements or understandings in place to raise additional capital through the sale of our securities, and there can be no assurance that we will able to raise additional capital on terms satisfactory to us. If we are unable to raise additional capital on satisfactory terms and on a timely basis, we will need to curtail our current level of operations, which will inhibit our ability to pursue our strategic and financial goals and will negatively affect or financial position and results of operations. As of June 30, 2004 our shareholders' equity was $3,089,364, compared to shareholders' equity of $3,484,418 at December 31, 2003. Forward Looking Statements This Quarterly Report contains forward-looking statements that are based on our beliefs as well as assumptions made by and information currently available to us. When used in this Quarterly Report, the words "believe," "endeavor," "expect," "anticipate," "estimate," "intends," and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are subject to certain risks, uncertainties and assumptions described in our 2003 Annual Report on Form 10-KSB, including, without limitation, our recent commencement of commercial operations; the absence of commercial acceptance of our services and products by potential customers; the absence of meaningful revenues as of the date of this report; our present financial condition and the risks and the availability of additional capital as and when required; the risks and uncertainties concerning technological changes and changes in laws and regulations affecting the gaming industry; increased competition; and general economic conditions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution you not to place undue reliance on any such forward-looking statements all of which speak only as of the date made. 12 ITEM 3. Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. There have been no significant changes in our internal controls or in other factors, which could significantly affect internal controls subsequent to the date we carried out our evaluation. There were no significant deficiencies or material weaknesses identified in the evaluation and therefore, no corrective actions were taken. As a small organization with 8 full time employees, the effectiveness of our controls heavily depended on the direct involvement of our Chief Executive Officer and Chief Financial Officer. 13 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 (Filed electronically herewith) 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 (Filed electronically herewith) 32.2 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C Section 1350 (Furnished electronically herewith). (b) Reports on Form 8-K Inapplicable. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VirtGame Corp. (Registrant) Date: August 13, 2004 /s/ BRUCE MERATI ----------------------------------- Bruce Merati Chief Executive Officer and Chief Financial Officer 15