Notes Payable:
On September 30, 2007, the Company had an aggregate balance of $3,599,519 for Notes Payable. The balance consisted of $50,000 in related party agreements, $600,000 on the Ropart Note Payable, $1,411,942 on the 2004 Race Car Simulator Corporation (“RCS”) borrowing, $122,500 on the 2005 Agreement, $721,636 on the 2006 Agreements, $474,039 in the 2007 Agreements and $219,402 on other agreements.
On March 29, 2006, Perfect Line and MOAC Mall Holdings, LLC, the Mall of America landlord, agreed to a settlement agreement whereby Perfect Line signed a promissory note totaling $294,652 payable in five (5) quarterly installments, with the first payment of $78,471 made on February 28, 2006, and payments of $54,045 to be made beginning July 14, 2006 and ending July 15, 2007. The $54,045 payments for 2006 were made on July 14 and November 15. See Note 6, Subsequent Events.
On July 14, 2006, the Company entered into Note and Warrant Purchase and Security Agreements with ten (10) investors in a private placement which is exempt from the registration provisions of the Securities Act of 1933, as amended, pursuant to Reg. D and Rule 506 adopted thereunder. The Notes, totaling $950,000,were issued by Perfect Line, will be fully paid down July 17, 2010, and bear interest at a rate of 16% per annum (increased from 15% on September 21, 2007) for the total interest amount over the four year period of $326,194. The principle balance of the notes on September 30, 2007, is $723,530. Each note came with an option to purchase common shares of the Company equal to two and one half times the amount of notes purchased divided by the exercise price of the option. The principle and interest on the Notes are payable weekly over a four year term and are secured by a first security interest in
20 of the simulators owned by Perfect Line.
On April 12, 2007, the Company entered into a Mutual Release and Settlement Agreement with Mall of Georgia, LLC. The terms of the agreement released the Company from any future lease obligations at the site and set the financial settlement at $194,660, payable in six (6) installments between May, 2007 and May, 2008. $95,580 is directly attributable to Perfect Line with the remainder of the note attributable to unpaid rent due from lease assignee, Checker Flag Lightning, LLC. See Note 6, Subsequent Events. The Company has filed a Motion for Partial Summary Judgment against Checker Flag Lightning, LLC in the amount of $357,352. See Part II, Item I, Legal Proceedings for more details.
On September 21, 2007, the Company entered into Note and Warrant Purchase and Security Agreements with ten (10) investors in a private placement which is exempt from the registration provisions of the Securities Act of 1933, as amended, pursuant to Reg. D and Rule 506 adopted thereunder. The Notes, totaling $475,000, were issued by Perfect Line, will be fully paid down September 13, 2011 and bear interest at a rate of 16% per annum for the total interest amount over the four (4) year period of $167,477. The principle balance of the notes on September 30, 2007, is $472,661. Each note came with an option to purchase common shares of the Company equal to two and one half times the amount of notes purchased divided by the exercise price of the option.
Deposits on Simulator Sales:
During the nine month period ending September 30, 2007, the Company recorded all or a portion of three simulator sales transactions. This activity resulted in the decrease of deposits on simulator sales of $16,233 to $1,002,860 as compared to the balance at December 31, 2006.
Other Liabilities:
Accounts payable, accrued payroll and payroll taxes, sales taxes payable, unearned revenue, and other accrued expenses fluctuate with the volume of business, timing of payments, and the day of the week on which the period ends.
17
Review of Consolidated Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2006
Revenues:
Revenues are comprised primarily of Company store sales, revenue share sales, and simulator leases and sales.
Revenues for the three months ended September 30, 2007, increased by $135,770 or 14.9% to $1,056,796 from $921,026 for the comparable period in 2006. This was the result of increased store sales and simulator sales in the three month period ending September 30, 2007.
Cost of Sales:
Cost of sales as a percentage of total revenues was 4% and 12% for the three months ended September 30, 2007 and 2006, respectively. Cost of sales decreased $71,774 or 65.7% to $37,445 for the three months ended September 30, 2007, from $109,219 for the comparable period in 2006. The primary reason for the decrease in cost of sales was due to realized cost being less than estimated in the second quarter of 2007.
Gross Profit:
Gross profit as a percentage of total revenue was 96% and 88% for the three months ended September 30, 2007 and 2006, respectively. Gross profit increased $207,544 or 25.6% to $1,019,351 for the three months ended September 30, 2007, from $811,807 for the comparable period in 2006. The increase in gross profit margin was primarily associated with realized cost being less than estimated in the second quarter of 2007.
General and Administrative:
General and administrative expenses decreased $170,263 or 17.4% to $807,957 for the three months ended September 30, 2007, compared to $978,220 for the comparable period in 2006. The primary reason for the decrease was a $168,255 decrease in other operating expenses.
Operating Profit:
The Company’s profit from operations during the three months ended September 30, 2007 was $211,394 compared to an operation loss during the three months ended September 30, 2006 of $166,413.
Interest Expense:
Interest expense was $172,103 and $151,172 for the three months ended September 30, 2007 and 2006, respectively.
Net Profit:
The Company’s net profit for the three months ended September 30, 2007, was $39,291 compared to a net loss of $317,585 for the same period in 2006.
NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2006
Revenues:
Revenues are comprised primarily of Company store sales, revenue share sales, and simulator leases and sales.
Revenues for the nine months ended September 30, 2007, decreased $278,194 or 8% to $3.321 million as compared with $3.600 million for the comparable period in 2006. This was the result of a combination of a strong simulator sales in the nine month period ending March 30, 2006, and soft sales in the nine month period ending September 30, 2007. Management believes that the timing of the sales transactions will balance out over the course of the next six months, but there can be no assurances.
18
Cost of Sales:
Cost of sales as a percentage of total revenues was 19% and 15% for the nine months ended September 30, 2007 and 2006, respectively. Cost of sales for the nine months ended September 30, 2007, increased by $64,414 or 12% to $620,331 compared with $555,917 for the comparable period in 2006. The primary reason for the increase in cost of sales was an increase of $19,769 in Company store merchandise and a $44,646 increase in simulator related expenses.
Gross Profit:
Gross profit as a percentage of total revenues was 81% and 85% for the nine months ended September 30, 2007 and 2006, respectively. Gross profit was $2.701 million for the nine months ended September 30, 2007, as compared to $3.044 million for the nine months ended September 30, 2006, a decrease of $342,608 or 11.3%. The decrease was primarily the result of lower simulator sales in the first three quarters of 2007. Management believes that the timing of the sales transactions will balance out over the course of the next six months, but there can be no assurances.
General and Administrative:
General and administrative expenses decreased $616,623 or 19% to $2.630 million for the nine months ended September 30, 2007, compared to $3,247 million for the same period in 2006. The primary reasons for the decrease in general and administration was a $178,749 decrease in payroll related expenses, an $9,323 decrease in occupancy expenses, and a net decrease in other operating expenses of $428,551. The decrease in other operating expenses is mainly attributed to decreases in Research & Development of $114,569, Credit Acquisition Fee of $95,000, Depreciation of $86,255, Outside Services of $68,558 and Insurance of $32,024.
Operating Profit:
The Company had a $70,939 profit from operations during the nine months ended September 30, 2007 compared to a $203,076 loss for the same period in 2006.
Interest Expense:
Interest expense was $461,396 and $400,452 for the nine months ended September 30, 2007 and 2006, respectively.
Income Taxes:
For the nine months ended September 30, 2007, the Company’s income tax expense was minimal because of the Company’s net operating loss carryforwards. For the nine months ended September 30, 2006, the Company did not record a provision for income taxes. No income tax is due for this period because the Company has net operating loss carryforwards from prior periods that fully offset the tax provision.
Net Loss:
The Company’s posted a net loss of $390,457 and $603,528 for the nine months ended September 30, 2007 and 2006, respectively.
Liquidity and Capital Resources
The primary source of funds available to the Company are receipts from customers for simulator and merchandise sales in its two owned and operated racing centers, percentage of gross revenues from simulator races and minimum guarantees from revenue share and lease sites, the sale of simulators, proceeds from equity offerings including the $2,610 million received in August 2002, proceeds from debt offerings including the $700,000 in Secured Bridge Notes and warrants issued in March 2003, the $604,000 in net proceeds from Notes and options issued between February and June, 2004, the additional loan of a net $100,000 from one of the existing Bridge Loan note holders, $122,000 from the 2005 Note, net proceeds of $855,000 borrowed in September of 2006, net proceeds of $427,500 borrowed in September of 2007, loans from shareholders, credit extended by vendors, and possible future financings.
19
On December 31, 2004, March 31, 2005 and April 15, 2005, the Company entered into three Asset Purchase Agreements with Race Car Simulation Corp. (“RCSC”) pursuant to which it sold forty-four (44) of its race car simulators that were located in existing revenue share locations, or had been installed in new revenue share sites. The sale is accounted for as a borrowing in accordance with the guidance provided in paragraphs 21-22 of SFAS 13. While this transaction generated an aggregate purchase price of $2,856,600, it also depleted monthly revenue share payments to the Company generated by the simulators that were sold. As of this filing, the net proceeds of $1,874,708 from the three sales transactions for the sale of forty-four (44) simulators to RCSC have been depleted. Management intends to continue to contract with revenue share and/or lease partners in a timely manner and install simulators
within its inventory to replenish the cash flow lost from the forty-four (44) simulators that were sold, although there can be no assurances. RCSC has filed a complaint against National Tour, Inc. and its chief executive officer, Johnny Capels, personally. RCSC claims that National Tour owes the company at least $193,000 in lease payments plus interest and other costs under the lease agreements between the parties. The lease agreements involve twelve (12) of the Company’s simulators which were part of the forty-four (44) considered a “borrowing” under GAAP guidelines, and may be a contingent liability for the Company under the terms of its guarantee to RCSC under the asset purchase agreement. The Company has an obligation under their agreement with RCSC to guarantee certain contracted revenue share or lease payments through 2007, and also has the obligation to find new revenue share or lease partners for the RCSC simulators. The Company is in the process of
removing eight SMS simulators from the Syracuse, NY site to Incredible Pizza sites in Oklahoma City, OK and Dallas, TX (four in each site). The Company and RCSC are in discussions of how best to resolve the guaranteed payments due under their agreement.
The Company believes that it has generated a significant interest in its simulators, and that some combination of revenue share agreements, lease agreements and simulator sales agreements with both the original SMS simulator and the new Reactor simulator will be sufficient to fund the daily operations of the business until a larger scale, multi-site virtual league format can be established, although there can be no assurances. Current prospects include family entertainment centers, bowling alleys, cruise ships, sports bars and large retailers.
Management is optimistic that the new Reactor simulator will be attractive to customers seeking a lower priced simulator with greater mobility and portability. The Reactor simulator debuted at the IAAPA convention in mid-November, 2005, and 44 Reactor simulators have been manufactured since that time. Management is also encouraged by the initial interest in, and the potential profitability of, the mobile application of the new Reactor, simulator although there can be no assurance.
The Company is pursuing some form of debt or equity financing sufficient to complete its development of the multi-site league play, and there is no assurance that such funding will be available, or available on terms acceptable to the Company.
During the nine months ending September 30, 2007, the operating activities of the Company used net cash of $330,152 compared to net cash used of $976,339 for the comparable period in 2006. The drivers for the decrease in cash used from operations can be attributed to the increase in prepaid expense, the increase in accounts payable and the amortization of the Dolphin financing agreement.
During the nine months ending September 30, 2007, the Company used $51,753 of net cash in investing activities compared with $279,273 of net cash used in investing activities during the comparable period in 2006. The decrease in cash from investing activities is primarily related to the purchase of simulators.
During the nine months ending September 30, 2007, the Company generated $299,217 of cash from financing activities compared with $1,132,274 of cash generated during the comparable period in 2006. The decrease from financing activities is primarily related to the payments on notes.
20
Cash flow from all sources (operations, investing activities and financing activities) was insufficient to fund the company during the nine months ending September 30, 2007, and resulted in an $82,688 reduction in the Company’s cash position. This compares with $123,338 in cash reduction for all sources for the period ending September 30, 2006.
The Company has funded its retained losses through the initial investment of $650,000 in May 2001, $400,000 of capital contributed in February 2002, approximately $2.610 million received in August 2002, loans from related parties including net proceeds of $687,500 received in March, 2003, and net proceeds received between February 2004 and June 2004 totaling $604,000, $122,500 in loan proceeds from the sale of the 2005 Notes between October and November, net proceeds of $845,000 in loan proceeds from the sale of the 2006 Notes in July, net proceeds of $855,000 borrowed in September of 2006, net proceeds of $427,500 borrowed in September of 2007, $1.003 million received in the form of deposits for the placement of race car simulators in revenue share locations, or for the future purchase by third parties of race car simulators, and credit extended by vendors.
As of September 30, 2007, the Company had cash totaling $133,635 compared to $216,323 at December 31, 2006. Current assets totaled $778,968 at September 30, 2007 compared to $726,018 on December 31, 2006. Current liabilities totaled $4,264,289 on September 30, 2007 compared with $3,843,284 on December 31, 2006. As such, these amounts represent an overall decrease in working capital of $368,055 for the nine months ending September 30, 2007.