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POCKET GAMES INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion of our financial condition and results of operations in conjunction with financial statements and notes thereto included elsewhere in this Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this quarterly report on Form 10-Q. This section of the prospectus includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like: "believe", "expect", "estimate", "anticipate", "intend", "project" and similar expressions, or words that, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this prospectus. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions. Our financial statements are stated in United States Dollars (USD or US$) and are prepared in accordance with United States Generally Accepted Accounting Principles. All references to "common shares" refer to the common shares in our capital stock. Overview We are a development-stage company incorporated in the State of Florida on October 4, 2013, to engage in the development and distribution of mobile games. We have generated only minimal revenues from business operations from a related party. Our independent registered public accounting firm has issued a going concern opinion. This means there is substantial doubt that we can continue as an on-going business unless we obtain additional capital to pay our ongoing operational costs. Accordingly, we must locate sources of capital to pay our operational costs. From our inception on October 4, 2013 through July 31, 2014, our business operations have primarily been focused on developing our business plan, developing the features of our first mobile game products, and developing a game for DNA Interactive Games Limited ("DNAIG"), a related party. During the quarter ended July 31, 2014, we ceased all developmental activities related to Pocket Football and do not anticipate completion of the Pocket Games product. We directed our efforts to the development of the Idol Hands game under the terms of our March 17, 2014, agreement with Fluid Games Limited ("FGL"), a company formed under the laws of the United Kingdom. During the period ending April 30, 2014, we redesigned the Idol Hand's camera operated control system and the menu system control in order to allow the user to control the game via an ordinary Keyboard and Mouse, rather than having to buy additional equipment from a third party. During March 2014, we tested the game and newly developed control system. In April 2014, the voice over work for the game was recalibrated and recorded. These modifications were needed to convert the tutorial voiceover of the hand movements from the 'camera control system' to the newly implemented 'Keyboard and Mouse' system. We completed 100% of the development of the Idol Hands game on September 1, 2014 and are currently undergoing quality assurance testing of the. We expect to offer the Idol Hands game for sale as our first product in October of 2014. We are in negotiations with online digital download retailers for distribution of the Idol Hands game including Stream, Amazon and Game. There is no assurance we will be successful in securing agreements with these retailers to distribute the Idol Hands game. Idol Hands will initially be sold exclusively as a 'Digital Download' for the PC platform through various online stores who will process the purchases from their site and pay us between 60 and 75 the purchase price. Purchasers of the game will pay a fee to download the product and own the title. Should we receive $350,000 of sales from the sale of the Idol Hands game, we plan to develop applications for iPad and iPhone as well as various Android tablets and phones. During June and July we plan to interview marketing companies to assist us with the marketing of the Idol Hands game and continue negotiations with online digital download retailers to potentially sell the game. 17 Third Party Development On October 22, 2013, we entered into an agreement with DNA Interactive Games Limited (the "DNA Agreement"), a company formed under the laws of the United Kingdom ("DNAIG"), which is controlled by our Chief Executive Officer, David Lovatt, to develop a game known as SH3G for iPad and the Android tablet platforms. Through the DNA Agreement, as amended, DNAIG agreed to pay us an aggregate fee of approximately $59,500 as we meet certain milestones, as outlined in the chart below. Through July 31, 2014, we have received $45,540. As set forth in the chart below, we received or expect to receive the following payments from DNAIG as we meet the milestones: Milestone Amount Paid Milestone Date Status of Milestone Submission of $3,000 Paid May 19, 2014 100% Military Campaign to Apple Submission of $6,490 Paid May 19, 2014 100% improved User Interface & game balancing Submission of DLC, $3,000 June 13th 2014 98% Wolfpack content cleared for submission to Apple by QA Android Build $14,000 October 1, 2014 65% Submission Through July 31, 2014, we paid $35,178 to FGL to assist us with the development of SH3G. Meeting the milestones above is dependent upon us raising sufficient capital through placement of our common stock or issuance of debt securities. We have not located investors to provide us with the capital required to meet these milestones and we may not be successful in locating investors to provide us with capital. If we are unable to obtain financing, we will not meet the milestones above and may have to suspend or cease operations. From inception on October 4, 2013, through July 31, 2014, we incurred costs and expenses of $3,049,503 including development costs, professional fees, general and administrative fees and interest expense. We have funded our operation through our revenue and through the sale of common stock to our two officers, and 35 non-affiliated investors. As of July 31, 2014, we had cash on hand of $787 which is not sufficient to pay for our operating costs. If we are unable to generate sufficient revenues or raise additional monies to fund our operations we will be unable to complete development of our products and may be forced to cease operations. We have generated minimal revenues from our operations. We cannot guarantee we will be successful in our business operations. Our business is subject to risks inherent in the establishment of a new business enterprise, including the financial risks associated with the limited capital resources currently available to us for the implementation of our business strategies. To become profitable and competitive, we must develop the business plan and execute the plan. Our management will attempt to secure financing through various means including borrowing and investment from institutions and private individuals. Since inception, the majority of our time has been spent on organizational matters and development of our first mobile game product, Pocket Football. 18 RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2014 AND THE PERIOD FROM OCTOBER 4, 2013 (INCEPTION) TO JULY 31, 2014: For the Period from For the Three For the Nine October 4, 2013 Months Ended Months Ended (inception) to July 31, 2014 July 31, 2014 July 31, 2014 $ $ $ Revenues, Related Party 9,490 40,540 45,540 Development Costs 67,125 117,362 122,304 General and Administrative 2,597,813 2,723,361 2,745,001 Professional Fees 35,265 202,193 227,527 Total Operating Expenses 2,700,203 3,042,916 3,094,832 Net Operating (Loss) (2,690,713) (3,002,376) (3,049,832) Total Other Income (Expense) (211) (211) (211) $ $ $ Net (Loss) (2,690,924) (3,002,587) (3,049,503) Revenues, Related Party: The Company was established on October 4, 2013 and is in the development stage and had no independent revenues or significant operations during the three and nine months ended July 31, 2014 and the period from October 4, 2013 (inception) to July 31, 2014. Related party revenues were $9,490 for the three months ended July 31, 2014 and $40,540 for the nine months ended July 31, 2014. Development Costs: Development costs were $67,125 for the three months ended July 31, 2014 and $117,362 for the nine months ended July 31, 2014. Development costs consisted of software and game development costs and included $75,000 of stock based compensation for the purchase of Intellectual Property on May 14, 2014. General and Administrative: General and administrative expense was $2,597,813 for the three months ended July 31, 2014 and $2,723,361 for the nine months ended July 31, 2014. General and administrative expenses consisted of bank fees, SEC filing costs and costs associated with the pursuit of getting our stock traded on the OTCBB, as well as $2,680,000 of compensation to our officers accrued during the nine months ended July 31, 2014. A total of $50,000 of officer compensation was paid with the issuance of 1,000,000 shares of common stock in lieu of cash during the nine months ended July 31, 2014 and another 1,000 shares of Series A Preferred Stock valued at $2,500,000 were issued as a bonus to the CEO. Professional Fees: Professional fees expense was $35,265 for the three months ended July 31, 2014 and $202,193 for the nine months ended July 31, 2014. Professional fees consisted of legal, consulting, accounting and auditing costs necessary to prepare our public filings. A total of $76,000 of compensation for consulting and legal services was paid with the issuance of 920,000 shares of common stock and a subscriptions payable for 300,000 shares of common stock in lieu of cash during the nine months ended July 31, 2014. 19 Net Operating Loss: Net operating loss for the three months ended July 31, 2014 was $2,690,713, or ($0.18) per share, and $3,002,376, or ($0.24) per share, for the nine months ended July 31, 2014. Net operating loss consisted primarily of fees incurred in connection with the pursuit of listing of our Common Stock on the OTCBB and with establishing an account with our transfer agent, as well as legal and audit fees related to our SEC filing costs, along with the development of our software products during the nine months ended July 31, 2014. A total of $2,686,000 of our net operating loss for the nine months ended July 31, 2014 was attributable to common and preferred stock payments in lieu of cash. Other Expense: Other expense was $211 for the three months ended July 31, 2014 and $211 for the nine months ended July 31, 2014. Other expenses consisted of interest expense on related party debts. Net Loss: Net loss for the three months ended July 31, 2014 was $2,690,924, or ($0.18) per share, and $3,002,587, or ($0.24) per share, for the nine months ended July 31, 2014. Net loss consisted primarily of fees incurred in connection with the pursuit of listing of our Common Stock on the OTCBB and with establishing an account with our transfer agent, as well as legal and audit fees related to our SEC filing costs, along with the development of our software products, and related party interest expense incurred during the nine months ended July 31, 2014. A total of $2,686,000 of our net operating loss for the nine months ended July 31, 2014 was attributable to common and preferred stock payments in lieu of cash. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes total current assets, liabilities, accumulated (deficit) and working capital (deficit) at July 31, 2014 and October 31, 2013. July 31, October 31, 2014 2013 Current Assets $ 787 $ 23,458 Current Liabilities $ 149,290 $ 42,929 Accumulated (Deficit) $ (3,049,503) $ (46,916) Working Capital (Deficit) $ (148,503) $ (19,471) Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. To date, we have funded our operations through the sale of our common stock. Our primary uses of cash have been for the development of games, compensation, and professional fees. All funds received have been expended in the furtherance of growing the business and establishing brand portfolios. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term: · An substantial increase in working capital requirements to finance our operations, · Addition of administrative and professional personnel as the business grows, · The cost of being a public company, and · Payments for development of games. 20 Satisfaction of our Cash Obligations for the Next 12 Months From October 4, 2013 (inception) through July 31, 2014, we generated revenues of $45,540 from our business operations, all of which was generated from revenues to a related party. Since our inception through July 31, 2014, we raised $164,500 from the sale of our common shares to investors for cash consideration. Our current cash on hand as July 31, 2014 was $787, which is insufficient to meet our current monthly operating costs of approximately $30,000. As of July 31, 2014, we had current liabilities of $149,290. We have a net loss and net cash used in operations of $3,049,503 and $153,213, respectively, for the period from October 4, 2013 (inception) to July 31, 2014 and our stockholders' deficit was $148,503, with an accumulated deficit during the development stage of $3,049,503 as of July 31, 2014. We currently have no external sources of liquidity such as arrangements with credit institutions or off-balance sheet arrangements that will have or are reasonably likely to have a current or future effect on our financial condition or immediate access to capital. We are dependent on the sale of our securities to fund our operations, and will remain so until we generate sufficient revenues to pay for our operating costs. Our officers and directors have made no written commitments with respect to providing a source of liquidity in the form of cash advances, loans and/or financial guarantees. If we are unable to raise the funds we will seek alternative financing through means such as borrowings from institutions or private individuals. There can be no assurance that we will be able to raise the capital we need for our operations from the sale of our securities. We have not located any sources for these funds and may not be able to do so in the future. We expect that we will seek additional financing in the future. However, we may not be able to obtain additional capital or generate sufficient revenues to fund our operations. If we are unsuccessful at raising sufficient funds, for whatever reason, to fund our operations, we may be forced to cease operations. If we fail to raise funds we expect that we will be required to seek protection from creditors under applicable bankruptcy laws. Going Concern Our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern and believes that our ability is dependent on our ability to implement our business plan, raise capital and generate revenues. See Note 2 of our financial statements. Critical Accounting Policies and Estimates While our significant accounting policies are more fully described in Note 1 to our financial statements for the period ended July 31, 2014, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis. Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to the accounting for and recovery of long-lived assets including income taxes, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements. 21 Software Development Costs Costs incurred in connection with the development of software products are accounted for in accordance with the Financial Accounting Standards Board Accounting Standards Codification ("ASC") 985 "Costs of Software to Be Sold, Leased or Marketed." Costs incurred prior to the establishment of technological feasibility are charged to research and development expense. Software development costs are capitalized after a product is determined to be technologically feasible and is in the process of being developed for market but may be expensed if the Company is in the development stage. Amortization of capitalized software development costs begins upon initial product shipment. Capitalized software development costs are amortized over the estimated life of the related product (generally thirty-six months), using the straight-line method. The Company evaluates its software assets for impairment whenever events or change in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of software assets to be held and used is measured by a comparison of the carrying amount of the asset to the future net undiscounted cash flows expected to be generated by the asset. If such software assets are considered to be impaired, the impairment to be recognized is the excess of the carrying amount over the fair value of the software asset. During the period from October 4, 2013 (inception) to October 31, 2013 and through July 31, 2014 the Company did not capitalize any software development costs. Revenue recognition We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. We intend on generating revenue from three sources; sale of game applications, sale of advertising provided with games, and outsourced application development services. To date, all revenues have been derived from a related party. Revenue through October 31, 2013, and to present includes only outsourced application development services recognized in accordance with ASC 605-28 "Milestone Method". We may bill for these services prior to attainment of the performance milestones. Receipts in excess of revenue earned as of the balance sheet date are included in deferred revenue. Stock-based compensation We account for stock-based instruments issued to employees in accordance with ASC Topic 718. ASC Topic 718 requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity based compensation issued to employees. We account for non-employee share-based awards in accordance with ASC Topic 505-50. Contractual Obligations As of July 31, 2014, we have no fixed contractual obligations or commitments that include future estimated payments. Off-Balance Sheet Arrangements As of the date of this report, we did not have any off-balance sheet arrangements that have, or is reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. |