Wednesday, August 12, 2009 2:40:06 PM
EGMI Q2 2009 CC Transcript
Here is the transcript. Still nothing on seekingalpha.
I’ve bolded sections that pertain to (or may pertain to) 2H09 and also made two comments about it in brackets. Kevin and Lee confirmed quite a ramp over the next two quarters, yet gave virtually no info about it other than to say it is Quiz Cards.
EGMI Q2 2009 CC
August 6, 2009
Kevin Donovan, CEO
Lee Cole, Board Member, Former CEO
Yvonne Zappulla, IR Rep
YVONNE ZAPPULLA
[Introduction and Safe Harbor]
One final note before handing the call over to Kevin. On September 15th at 12 noon Eastern, Electronic Game Card will be holding its annual shareholder meeting in our offices at Grannus Financial located at 1120 Avenue of the Americas in Manhattan. All are welcome. Please call me and confirm your attendance.
KEVIN DONOVAN
Well thank you very much, Yvonne, and thank you all for joining us this afternoon. These are very exciting times for the company and our shareholders. It’s a true privilege for me to report to all of you today our achievements during our second quarter of this year and provide you with an update on our progress as we head into the second half of this year and beyond.
For the second quarter 2009 Electronic Game Card generated record revenues of $3.1 million, an increase of approximately 23% over the prior year second-quarter revenue of $2.5 million and 4% above first quarter 2009 revenues. Our revenue growth during the quarter was predominantly driven by our further penetration of the electronic game card into the promotional market, additional licensing revenue in the Native American gaming market, and trial orders of new lines introduced at the end of last year.
Electronic Game Card reported record comprehensive net income of $2 million, which equates to $.03 per diluted share. This is slightly above expectations and compares to a net income of $1.3 million or $.02 per diluted share during the same period last year and income of $1.7 million first quarter 2009.
As of June 30, 2009 Electronic Game Card had approximately 62.7 million shares of common stock outstanding with a weighted fully diluted share count totaling 68.4 million. It is important to note for the foreseeable future that we only intend to increase the share count to accommodate employee, executive management, and Board of Director stock options, and only at levels that are reasonable.
The gross profit generated for the three months ended June 30, 2009 was at the record level of $2.5 million, generating an 80% gross margin. Growing and maximizing gross profit dollars is our top focus. Please note that as future events unfold over the coming quarters throughout this year, some of our current contracted opportunities may greatly accelerate our revenues at margin percentage levels that, while still strong, could be less than 70% margins we have enjoyed from less robust revenues and volumes.
Conversely there are a number of potential license royalty relationships with well-established household brand names that naturally generate little cost against revenues. As these new business relationships become public we will update you with proper guidance. The company’s operating expenses during the second quarter totaled $639,000 or approximately 20% of revenue.
These increases were largely due to higher costs resulting from the strengthened management team now in place and a heightened marketing effort. As we manage our growing business going forward our current staffing levels are expected to slightly increase as our sales and marketing team increased activity in North America and the Pacific Rim. However, we do not anticipate expenses as a percentage of revenue to increase from the levels we have generated over the past quarter. In fact, we believe the ratio will actually fall going forward.
Your company and board of directors have been highly disciplined in managing expenses and will continue to do so under my direction.
6:20
Our balance sheet continues to strengthen. Cash equivalents and marketable securities on June 30, 2009 totaled $11 million, an increase of approximately $1 million from first quarter 2009 and an increase of $2 million from December 31, 2008. At quarter-end the company’s current ratio rose sharply to 17.2, up from 10.7 last quarter due to a $400,000 reduction in current liabilities and a $1.7 million increase in current assets. Overall, total liabilities declined by $522,000 during the quarter, down to $869,000 and the Series A Convertible Redeemable Preferred stock totaled $3.3 million at quarter-end, a decrease of $1.2 million from the prior first quarter.
Importantly, Stockholders Equity has risen for the tenth consecutive quarter to $18 million, an increase of $3.3 million in just a three-month period of time.
Looking forward, the second half of the year is shaping up to deliver an acceleration in revenues and earnings to put us on target of hitting our guidance of $17 million in revenues and $.14 earnings per share.
Looking forward into 2010 we have a number of initiatives already announced and others soon to be announced that will create significant momentum to add to our 2009 base.
But before reviewing our business lines and future initiatives, it is important to discuss our base of operations and infrastructure that will enable us to smoothly ramp up our revenue levels. So I’d like to share some of those with you right now.
9:20
Number one, additions to be the Board and executive ranks.
As we have mentioned in our conference call last quarter, Linden Boyne will be retiring from both the Board and as CFO of Electronic Game Card on September 1st. We are very grateful for his support and admirable service to this company over the past three and one-half years, and he was instrumental in working closely with former interim CEO and current Board member, Lee Cole. The early years were not so easy to financially turn around this company, but the hard work that both Linden and Lee have given all of us a very healthy financial base upon which to build this strong company. Thank you very much Linden and we wish you many, many happy days ahead.
We’ve had a number of months to find a replacement for Linden and we searched extensively. We received almost 2,000 applications. We met with extraordinary talent during the review process, but our first choice, I am pleased to announce, accepted our invitation to join our firm and we are in the final stage of completing the employment agreement, with a media announcement scheduled for next week. Our new CFO will hit the ground running on September 1st, officially joining our team in our main office located in Irvine, California. Over the next six months our internal hiring plans are modest. We made two to three admin and mid-level individuals as project and operations managers for specific new growth areas and management of evergreen accounts.
With Linden’s departure from the Board of Directors it is our plan to make one to two strategic additions to our Board of Directors during the second half of this year. We have already begun discussions and the interview process with respective candidates. Our criteria in our selection process is based upon adding exponential value through potential – from the relationship network and seasoned public market experience as we position and prepare your company to reach our future goal of becoming a successful NASDAQ-listed company.
Second, new headquarters in Irvine, California. During the next quarter we will be opening a very cost-effective office headquartered in Southern California. Going forward over the next six months we anticipate all future additions to staff will be working from this location. Keep in mind we embrace an outsourced business model and therefore plan to keep our operations cost-effective and lean.
Our website is also in the process of getting a new look. The new site is far more robust and will be a selling aid to attract new business. This new EGC site went live as of today and I would like to personally thank everyone who was involved from London to John Tarasco[?] here in Southern California
And this is only, however, phase one. As you all know my roots are based in branding and marketing, and as we have discussed in the past our name is too limiting to carry this company and our vision into the future. Therefore over the next two to four months we will be rebranding the company to CirQ, and it’s spelled with a capital Q, announced as CirQ. And with that, phase two of our website and new brand will be launched at www.cirq.com, c-i-r-q.com. The new CirQ brand will provide the company with a broader scope of recognition for our technology platforms and easier adaptability to the new business applications, market opportunities, and B2B partnerships.
12:20
Number Three, in beefing up our infrastructure and moving forward: enhanced manufacturing. This is a critical point as we discuss our infrastructure. As we attract new enterprise-level relationships, capacity and price have become even more critical. Over the past three months we have established relationships with three additional outsourced manufacturing partners, which have permitted us to materially lower our product cost and potentially triple our capacity to provide greater flexibility to accommodate both large-scale runs and short-term turn-around projects. One group is who we have worked closely with in the past. Another group was introduced to EGC by our partner, Sovereign Game Card. And the third group is vertically integrated with our own marketing services and channels and distribution. These relationships have given our firm the opportunity to expand our addressable market even further given the substantially lower cost of production.
On average, we can now produce a base-model EGC game card at 25% to 35% less expensive than in the past on relatively low production runs. With larger orders and potentially with less security features we will likely see even further reductions in cost. This development is highly material for the lottery market as well as certain mass consumer promotional opportunities.
With these meaningful structural moves in place, let me recap. New CFO, new headquarter office in Southern California with slight increase in staffing, new website, new brand, new partnerships, new lower pricing on EGC game cards, and expanded manufacturing capacity. We are fully prepared to handle our expected growth.
So here is what I see as the upcoming future in the opportunities in each of our three business segments.
Number one, promotions. The bulk of our revenues have come from the promotions vertical and this will continue to be an important revenue generator through our internal sales efforts combined with our global distribution network.
14:30
[My comment: I would have liked to have seen something here in the Quiz Card discussion about Q3 or Q4 shipments.]
A very exciting development is our new iQuiz gaming platform, which has natural synergies with sports, music, movies, other entertainment genres, and areas of popular culture and interest. We recently signed a distribution agreement with FMM - The Moscoe Group based in the Twin Cities, which happens to be my home town and the home to some of the largest retail organizations in the world. FMM is a high-level, value-added marketing machine which over the past fifty years represents Fortune 500 products into the largest of retailers. We believe the opportunities between our two companies is significant. If we modestly penetrate just 10% of the 19,000 locations generated from the six retailers for which FMM is responsible, we would easily achieve the Street’s expectations for next year. Over the last week I spent time with FMM - The Moscoe Group in coordinating the selling process this fall of our retail products to the designated buyers for planograms and other merchandizing and distribution efforts for late Q1 and Q2 2010.
15:45
Other progress updates in our second vertical market, gaming. This quarter we recognized revenues from our two licensed deals with Sovereign Game Card, our native American casinos-focused licensed distribution partner and Scientific Games which totaled $375,000, the quarterly guaranteed minimum. Sovereign has been working diligently on several key initiatives and turnkey promotional orders with tribes in the Southwest, Northwest, and Midwest regions of the United States.
Another important recent development is our 8K filing and announced relationship with China Lot Synergy, which is responsible for the welfare lottery in China. This is only one of the two legal lotteries in the People’s Republic of China and, as we know, effective this past July 1st the massive illegal lotteries in China have been outlawed thereby creating a massive opportunity to capture business for the legal lotteries.
16:48
The Chinese welfare lottery market currently sells approximately 9 billion scratch tickets annually. We executed our MOU and we are in negotiations to finalize our definitive agreement. During my recent visit with Lee Cole to China Lot Synergy at their office in Beijing we met with their Chairman, their CEO, COO, and several other senior-level executives in marketing, operations, and logistics. They are a first-class, highly-knowledgeable, and well-run organization. This partnership will provide EGC with new strategic relationships with G-TEC and IGT for alignment synergies of new lottery opportunities within additional territories within the region and other parts of the world.
While in China I also had the opportunity to meet with the China sports lottery equivalent to China Lot Synergy. The China sports lottery is the only other legal lottery in China and is approximately equal in size to the China welfare lottery. We also have a serious opportunity here to explore further.
China is a great country of great visibility in 2010 as they play host to the world once again during the Shanghai World Expo 2010 whereby China expects to draw 70+ million visitors during this Expo, the biggest number in World Expo’s history, to the Fair from May 1 to October 31 in 2010.
In addition we have been working on sectors such as national and state lotteries outside the United States and casino gaming projects in Las Vegas, Australian, and Asian markets, where Miss Anna Houssels, our Executive Vice President of Sales and Director, has long-established, successful relationships. We are currently in the bidding process with one large casino group as it pertains to the Players Loyalty Club and in discussions with a gaming technology company to cross-license, market, and distribute our ECG game cards as promotional vehicles.
19:30
And finally a quick update on EGC products and betting shops opportunities in Eastern Europe. As you might recall our Executive Chairman, the Lord Leonard Steinberg, maintains his Perpetual President role at the company he launched over 50 years ago and subsequently sold to Stanley Leisure plc, which controls 1,500 betting parlors throughout east and western Europe whereby the company’s management team continues to gain progress in these new areas. I’m headed over to Europe mid-month of August to attend meetings and review sessions on our work within the region.
The third and last vertical market, our area focus. This is a $2.2 billion global market and growing, which is education. To our knowledge there are no interactive learning system products at the affordable $10 to $12 MSRP retail price points. We’re confident we have a category buster here, as an on-the-go, entertainment-style game card product based upon our early responses from our European B2B network’s reaction to our Thomas & Friends branded education game card. I invite you to visit our website and test this product online for yourselves. It’s contained within the education section at electronicgamecard.com. Currently there are several gold standard brands in education publishing and education media in review of this new product offering at Electronic Game Card. We expect the first cards to be shipped only in the U.K. either later this year or first quarter 2010.
[My comment: Roth said they would ship this year, with U.S. shipments to begin in 2010. With Kevin's comment it's hard to know if Thomas is part of the 2H09 ramp or not.]
20:40
Other Milestones and Developments. We are a technology company. As such, expect to see increased IP patents and international regulatory approvals. We are firm believers in the power of utilizing strategic distribution partnerships and you can expect more deals. We are huge believers in our company’s future and have all bought stock in the open market and continue to do so. You may have noticed that there was significant insider buying on July 21st. The Lord Leonard Steinberg purchased an additional 1 million shares, bringing his total holdings up to approximately 9 million shares or 14.4% of the company’s outstanding shares.
Finally, I want to highlight a note from earlier in this discussion with Miss Yvonne Zappulla. On September 15th 2009 at 12 noon Eastern, Electronic Game Card will be holding its annual shareholder meeting. Like last year’s meeting, it will be held for your convenience in New York City at the Grannus Financial offices at 1120 Avenue of the Americas, 4th floor. I will be there, joined by Lord Steinberg, our new CFO, and our Board members. All are welcome so please give Yvonne a call if you plan to attend.
So therefore, to summarize, we’ve had a successful first half of 2009. Our current backlog momentum gives us confidence in our guidance moving forward through the remainder of 2009 and 2010. The new management team has hit the ground running and has focused initiatives to close in the areas of gaming, promotions, and education, any one of which could greatly add to the company’s progress and revenue enhancements to the current guidance of $17 to $18 million in 2009 and full year earnings per share guidance of $.14 fully diluted EPS.
With that, I will now open this call up for questions.
22:40
Q&A
TODD EILERS – ROTH CAPITAL PARTNERS
Q. Good afternoon, everyone. Kevin, could you tell us how much of your revenue in the quarter was recorded in U.S. Dollars vs. Pound Sterling and Euro. I know that foreign currency impact was an issue last quarter. I was just wondering how much of an issue it might have been this quarter.
LC. Kevin, do you want me to answer that one because I’m familiar with the European sales?
KD. Yes, if you’d like to do that. Please, Lee.
LC. It was about 30% U.S. Dollar and the rest was in Euros and Pounds.
Q. OK. That’s helpful. And then, Lee, could you also tell us how many game cards were sold in the quarter and then also how much recurring revenue was generated in the quarter, which would include the Sci Games and the Sovereign royalties.
LC It was about – it was just over 1.6 million in cards and it was just over $1 million in recurring revenue.
Q. OK. And then, let’s see, Kevin, I believe you mentioned maybe some sales from your new agreement with FMM - The Moscoe Group possibly late in the fourth quarter but most definitely in the first quarter of 2010. As far as your other deal that you signed with China Lot, the MOU – I guess assuming that you guys can sign a definitive agreement here in the near term, when would you expect to maybe start to ship units into that market?
KD. Thanks, Todd. Let me go back to clarify the question regarding FMM – Moscoe Group. It’s not hitting this year, it’s hitting in late Q1 and Q2 of 2010.
Q. OK. Sorry about that.
KD. And we don’t – that’s OK. And we don’t expect to see any revenues from China Lot Synergy in 2009, or we’re looking at 2010 with some unique opportunities you know if you kind of look at what’s happening in China, growth opportunities in 2010.
LC. I think it’s worth adding as well, Todd, that both of these opportunities are additional to when we spoke on the last conference call. These are incremental new revenues.
Q. Absolutely. On that subject, how is the pipeline with respect to new deals. I guess I mean you mentioned a lot of areas. What are your expectations here over the next quarter. I mean last quarter you said you’d like to sign two deals. What are your expectations I guess for this quarter or for the end of the year?
26
KD. Todd, if you notice in my dissertation I don’t want to lock it to the quarter. And last quarter when I had referenced it I think it actually hurt us in two deals, because of the negotiations process. So I don’t want to commit to a time frame in terms of this quarter. But I do have to admit that our pipeline is very full right now and we’re trying to be very strategic and not give up things and provide strength in terms of the negotiations. So I’d like to comment that we are expecting additional contracts yet this fall.
Q. OK. That’s fair. How about with respect to your agreement with Scientific Games, I believe that comes up or expires in March of next year, if I’m correct. Have you started to talk with them regarding restructuring that agreement? And just you know what are your general I guess comments or thoughts regarding the existing relationship and how maybe some of the things you would like to accomplish with maybe a new agreement I guess going forward without giving away too much of your strategy I guess?
KD. Sure. Well, I think it’s safe to say, Scientific Games is a great company and we don’t want to give away our strategy and at this point we’d like to reserve our comments. So I think unless Lee has anything to add I would like to reserve comments for a little bit later time.
LC. Yeah, I think Kevin’s exactly correct there. We’re very aware of the market and let’s just say we’re looking at ways where we can enhance value for our shareholders with the existing agreement.
Q. And then lastly, just a couple of items on the cash flow. Do you guys have a cash flow from operations number and possibly a capex number in the quarter?
KD. Ah, let’s see here. Cash flow, capex.
LC. There wasn’t much capital expenditure. I think that was minimal. I haven’t got it in front of me.
KD. ____ Lee.
LC. And the cash flows, the free cash flows was about $1 million.
Q. OK. Then maybe we can talk off-line. I’m just trying to get - it looks like you guys did just under $2 million in EBITDA. So I’m just trying to get the delta from that to the million dollars in cash that you ___.
KD. Be happy to do that Todd, afterwards.
Q. Thanks guys. That does it for me.
KD. Thanks so much, Todd.
MICHAEL WEISS – JOSLYNDA CAPITAL
Q. Hi, guys. Congratulations. A couple of questions. One, a follow up from last time. The investments, which is almost 8, $7.5 million. Any progress made during the quarter on monetizing any of that and any input on value above the 7.5 million, or is that what they’re worth?
LC. Yeah, I can answer that one, Kevin. As sort of the majority of these investments extend from our previous strategy and come back from over a year ago or more, obviously we’ve – I’ve been responsible for monetizing them and whereas we thought we could monetize all these investments by the end of 2010 we’re now confident of monetizing them by the middle of next year. So we’ve got no – and while we’ve got no visible improvement this quarter there’s certain things going on in the background which maybe come to fruition next quarter, hopefully by the fourth quarter, but we’re very confident of monetizing all these investments in the next twelve months. And we definitely do not see monetizing those investments at less than cost. So obviously we’re hopeful of creating incremental income but definitely not less than cost.
Q. Also you implemented ability to buy stock at the last quarter. Did the company buy back any stock?
KD. No.
LC. We bought back – we didn’t buy back that much stock because we implemented the policy to buy back stock – initially the Board had implemented it at, to buy at $.60 when the stock was $.40 and unfortunately – or fortunately, the stock ran away.
Q. Now, have you given out 2010’s guidance? Or you have not officially given that out yet?
LC/KD. No.
Q. How much of ’09 is already booked would you say?
LC. Just over 60%.
Q. OK. And those were my questions. Thank you.
KD. Thanks, Michael.
31
IAN CASSEL – INDIVIDUAL INVESTOR
Q. Great quarter, guys.
LD. Thanks, Ian.
Q. My question. I have two questions. The first one: it looks like you’re currently in a $12 million revenue rate. And also it looks like you’re basically on a $.03 per quarter rate. And I was wondering, with the second half of the year now upon us and expectations for 17 to 18 million in revenue and $.14 in earnings, where is that extra bump in revenue and earnings going to come from?
LC. Coming from a new product which we’re shipping third quarter, ___ Quiz Card.
Q. OK. And my next question really pertains to your cash position. Are there any thoughts on how to deploy that cash? Are you looking at acquisitions, primarily going to be used for a buyback? What were your thoughts in that regard?
LC. Acquisitions – where we are at the moment - acquisitions that can add incremental value, add new technologies, _____ increase the business incrementally, like we’re incentivized to do, is what I think the Board’s generally thinking. What do you think, Kevin?
KD. I agree. And Ian we’ve looked at some even last quarter for acquisition, and we didn’t get the deal we wanted so we backed away from it. So we’re looking at technologies, we’re looking at other unique distribution opportunities, and things that can accretively add value to our revenues.
Q. Thank you.
KD. Thank you, Ian.
33
SKIP DAVIDSON – R[?] PARTNERS
Q. Good afternoon, guys. First of all your balance sheet looks like Fort Knox. 22 million assets, a little over 800K in liabilities. Congratulations, that’s unbelievable.
KD. Thank you,, Skip.
Q. Kevin, you’ve given us what’s happening now but having opportunities to chat with you I can see something in your eyes about the future. And is the future of the company really game cards, what we’re talking about now, or is it something bigger, a la what is a CirQ? And what if we have this conference call at this time next year do you think the company will look like vis-à-vis where it is today?
KD. Great. Skip, thank you very much for your questions and assessment and obviously your investment as well. The electronic game card, and I really want to talk about the brand and the company and – it’s really just one platform. And I think when the creators started off in creating electronic game card I think they were just singly focused on the electronic game card. So we still have not scratched the surface [Laughter] of the depth of opportunities within the lottery, gaming, promotions, and that’s why one of the key things is here in the United States and in the Asia Pacific Rim. So game cards is one platform. Quiz cards is a second platform. The third platform is going into our EPlay cards for education, which you can see from the Thomas and Friends. So the game card expansion into these other platforms, which are natural progressions, gives us a wider portfolio.
So CirQ is based on circuitry and there’s also a sense of sophistication and technology associated with that brand. So when we look in the future, a year from now, we’ll be taking in additional technologies both in licensing and acquisition, we’ll be putting them into our pipeline, into our channel with a wide range of products, still controlled within maybe five to six overall. And this will access it from into the mobile phones, into on-line, into the three vertical key markets, and also into the gift card market.
36
So it is evolving. It’s a great story, it is a great company, there’s great colleagues, and I think this company is really based firmly in proprietary technologies and it is an evolving company.
Q. Thank you.
KD. Thank you.
STEVE MADDEN – MADDEN CAPITAL
Q. Hi, guys. Great quarter. Two questions. One was: based on a lot of these new enterprise type relationships that you’ve either announced or and are close to going to contract with or the others you’ve hinted about, meaning larger brands, etc., recurring-type larger-volume deals, can you explain how that business model overlaps with your current model vis-à-vis gross margins. I’d expect them to be a little lower, higher-volume-type deals.
LC. I think that can work one of two ways. It just depends effectively with our current business if we do licensing deals or direct sales. If we do a licensing deal, like the Sci Games agreement, or distributor agreement, then it’s basically all margin, you know, we don’t manufacture, we just take a royalty. But if we manufacture and then we’re going into higher margin – into higher volume mass market retailers then we’re going to take less margin. So I think over the next two quarters you’re going to see which way that goes but whichever way it goes, we’re still going to hit our earnings per share.
Q. Gotcha. So you’ll be able to be more specific on that, and…
LC. Yes, cause with a couple of the big wins that are out there that I know Kevin’s working on, it just depends on whether those wins are license deals or direct sale deals.
37:50
Q. Great. And I guess just pressing on guidance a little bit more. You do have a great ramp ahead of you the next several quarters, which you’ve indicated you can do to meet the guidance, which is fabulous. And then Roth’s got guidance out there basically doubling revenues next year to 27 million and earnings per share of $.20. I think they’re the only analyst that covers the company. Is there anything you can say related to that, whether you’re comfortable with those numbers or anything?
LC. I mean I think Kevin alluded to it in his talk about what just the Moscoe relationship, FMM relationship, does by getting us into the retailers that they’re involved with. That sees[?] a big ramp in revenues, those sorts of relationships. And actually getting from $.14 to $.20 isn’t that substantial when – with the stuff we’ve got in the pipeline.
Q. Yeah, that’s my sense is if you can – you said in getting just 10% of the clients from the Moscoe deal you could meet expectations. That seems pretty easy to do.
KD. That’s correct, Steve. And that doesn’t include lottery, promotions, and all the other distributors.
Q. So you think in that $.20 number, that doesn’t include, does that not include China Lot, anything from there?
LC. No. No.
Q. Wow. OK. Thanks, guys.
KD. Steve, thank you.
JORDAN BENSHIE - GRACIA PARTNERS [?]
Q. Hello, guys. Congratulations. Looks like you guys are doing a great job.
KD. Thank you, Jordan.
Q. I saw your website and I think it looks great. I think the direction it’s going, definitely more modern, and sort of an iPod-ish type deal. Is that the same sort of direction that you guys are going to continue going on for the CirQor is it going to take a different sort of graphic design direction when it goes there?
KD. CirQ will evolve broader, but we – the goal right now is to increase our value. The old website really didn’t accommodate sampling of the card as much as the new one does. And we will take on a different type of look but everything is getting more modernized and more in step with the generation of buyers and consumers.
Q. And when do you expect CirQ to make its grand entrance?
KD. Well, I’d like to accomplish that goal before the end of this year, which would put us at – as we look back let’s say in January of 2010, and we look back at the company’s success over the year – one year since mine and Miss Anna Houssels tenure, as well as what the entire team has done, I think we will have some great success stories and I’d like to conclude with an exclamation point of that brand before the end of this year.
Q. OK. Great. Is it possible for you guys to sort of give a breakdown, and if I need to do this offline that’s fine too, of the different sales percentages for gaming, lotteries, promotion, entertainment, sports, and education, or the main ones and the percentage of sales that those equated to and how you see it increase quarter over quarter specifically in each of those?
KD. Lee do you, I could, do you want to do it off-line or do you want…
LC. We can give you a broad brush, and we can give you more detail off-line, but broad brush it’s about 55% promotions, 20% education, and about 30% gaming.
Q. I’m sorry. You said 55% promotion, 20% education, and what was the last one?
LC. And then the rest – the remainder is gaming.
Q. Remainder is gaming, OK. So those other sections that you have on the website, the lotteries, entertainment, and sports, that’s sort of….
LC. _____ promotions, education, or gaming, depending on the cards.
Q. OK.
KD. Some cards, Jordan, can be used in duality for – in the gaming sector with a promotional value. Or they could be used – the card could be used in the lottery as a prize machine, a terminal prize machine for lotteries as well as promotions for sweepstakes.
LC. Yeah, and as the product’s been evolving we’ve sort of been re-categorizing some of the products as well.
Q. Right. OK. Last question. I think that there’s a conference, a growth conference or something towards the end of August in Southern California. Are you guys attending that or?
KD. I’m not aware of that. Is Yvonne – Yvonne, are you on the line? I don’t know if she is, probably not.
Q. OK. I can give her a call and ask her.
KD. If you could, or email me, that would be great.
Q. OK, wonderful. Thanks guys. You’re doing a great job.
KD. Jordan, thank you so much.
Q. OK. Bye-bye.
KD. Bye-bye.
ANDREW COHEN – TRICADIA
Q. Hey, guys. Great quarter. I’m actually on your website right now playing Thomas the Tank. It’s a lot of fun. Thomas and Friends, I’m sorry.
KD. You have a pre-schooler don’t you? Or actually..
Q. Eight months, so she’s not quite up to this right now. We’re working on Dada. But anyway, do you – are there more opportunities to do these Thomas and Friends type branded Quiz Cards or is the Thomas the Tank an exclusive deal for the technology?
KD. No, again, Andrew, and thanks for your question and observation. We’re about platforms. So the platforms can be customized and skinned…
Q. OK.
KD. …to IP. So brands, if you think about some of the most popular brands in the world that gravitate towards parents and kids across all lines, whether it’s sports or characters on television or comic books. Those are ways to get through to kids and education, and so we’re talking with a variety of those groups.
Q. So you could skin it however you wanted to skin it. I mean I haven’t – my daughter ______ will be into all those at some point but I haven’t heard of Thomas and Friends. I assume it’s a more of a UK type….”
KD. It’s actually global, I think its…
Q. Is it global? OK.
KD. …300 million books worldwide and it’s still popular. It’s a trusted brand. So if you think about the marketplace application for this, FMM-Moscoe, think about this being sold in the stores in the airports. So it’s a on-the-go, parents trust it, it’s a way to get the kids entertained and educated. So it’s a great impulse item at a very low cost, affordable price point.
Q. OK Great. And I know you guys have been working, as you mentioned on the call, with Lord Steinberg’s contacts in his betting parlors throughout Europe. I can understand how that agreement would take some time, getting all the approvals and what-not. But given that it’s his operation, once you get an approval, or state approval for that product, is it a relatively quick roll-out or is it still more along the lines of what we’re doing with FMM, you know in taking six months or so to roll it out.
KD. Yeah, I think it’s – Lee you can comment further – but I really think it’s probably beyond the green light from a – being ready to organize and produce and get installed into the marketplace, it could be four to six months.
LC. And it’s like – and because it’s across Europe you’ve got different regulatory bodies in each different country, so it’s a bit like dealing with different states.
Q. OK. But you think - you mentioned it’s beyond the green light, so we’ve gotten some approvals or…
LC. Yeah, they’re in trials.
KD. Right.
Q. OK. I see. And is that a - just sort of help me, just walk me through what you’re envisioning in terms of how – what the cards would be sold for, would it be sold like a Sovereign Game Card type thing or would it be by sport or what?
LC. No, it’s actually as a sort of – as a betting product…
KD. It’s ____ a terminal.
LC. Device.
Q. OK. I got it. So it would be just like any lottery-type scratch card that we have. And Lee I know last year you were – you’d been working on getting technology where you could get the cards down to a price where you could sell lottery cards of, say for 10, is it $10 lottery cards, retail price? Has that panned out? Is that what you’re thinking of for China Lot Synergy? Or are we still using the same technology that we’ve had?
LC. We’re still using the same technology but with Kevin and some other peoples’ new initiatives and with changes in technology, that technology, you know we’ve reduced – the price of the card is reduced so it’s got nearer to that price we were looking at but we’re still not at that price. That card in particular was going to be the next generation and was relying on a couple of new bits of technology which haven’t come to fruition yet.
Q. OK. But you’re comfortable that you can sell into China with the ______ technology?
KD. Absolutely. And Andrew there are selling strategies that we’re working with with China Lot Synergy based on the uniqueness of all the things that are affordable to them, the channels that they have and the bundling opportunities and right now there’s a certain level of prize package on scratch-and-win, so our interactive component brings a potential higher pool of monies to that, so there’re strategies that we’re working closely with them on.
Q. OK. Well, looking forward to everything. You guys are definitely on a great path so good luck and congrats.
KD. Thank you so much, Andrew. Appreciate your support.
RICK SHELBIN – GLG PARTNERS
Q. Good afternoon.
KD. Hi Rick How are you?
Q. Good, Kevin. How are you?
KD. Good, thanks.
Q. My question is with regard to China Lot Synergy and just how that relationship’s going to evolve over time. And what I mean by that is so can you just walk us through the schedule of what happens when over the next couple of months you sign the deal and then you – do you have a product to already bring to market or do you have to go through a pilot phase and develop some sort of products for that market? How does it work?
KD. Well, we already have a product. So it’s the marketing, the merchandising, and the components of the winnings, and the distribution model. So those are the components that we would be working through. I mean there’s already initial discussions but the finalization of those after the DA is completed. And Lee, do you want to add to that?
LC. Yeah, I mean the interesting thing is that they’re adding features that we haven’t used previously in our thinking of lottery distribution ____ a collectible feature and putting added value onto the card. That was something that came from the guys out there. So, yeah, so I – yeah, that’s just part of the process.
KD. Rick, are you still there? Lee.
LC. Yeah.
KD. We may have lost Rick.
LC. Yeah.
{Operator Instructions.]
CLOSING REMARKS
KD. Well, thank you very much, Latrice. Appreciate it. I would like to personally thank all of you for your interest and support for our company. We are in an enviable position. We have a company that has a solid financial base to address a multi-billion dollar market opportunity with a proprietary product platform that generates high margins with little competition. To this we have added an infrastructure of high-level outstanding executives, high-level joint venture partners, and distributors, and top-quality low-cost manufacturing partners with ample capacity to meet the extraordinary growth we intend to deliver. Looking forward to updating you on our next call when we review the third quarter of 2009.
And if you have any questions in the meantime, please don’t hesitate to contact Yvonne Zappulla through the usual phone number and e-mail address. And that is it. I’d like to thank all my colleagues here in the U.S. and in London and a special note of thanks to our retiring CFO, Mr. Linden Boyne. I want to personally thank each and every one of you from the company. Have a great day.
Here is the transcript. Still nothing on seekingalpha.
I’ve bolded sections that pertain to (or may pertain to) 2H09 and also made two comments about it in brackets. Kevin and Lee confirmed quite a ramp over the next two quarters, yet gave virtually no info about it other than to say it is Quiz Cards.
EGMI Q2 2009 CC
August 6, 2009
Kevin Donovan, CEO
Lee Cole, Board Member, Former CEO
Yvonne Zappulla, IR Rep
YVONNE ZAPPULLA
[Introduction and Safe Harbor]
One final note before handing the call over to Kevin. On September 15th at 12 noon Eastern, Electronic Game Card will be holding its annual shareholder meeting in our offices at Grannus Financial located at 1120 Avenue of the Americas in Manhattan. All are welcome. Please call me and confirm your attendance.
KEVIN DONOVAN
Well thank you very much, Yvonne, and thank you all for joining us this afternoon. These are very exciting times for the company and our shareholders. It’s a true privilege for me to report to all of you today our achievements during our second quarter of this year and provide you with an update on our progress as we head into the second half of this year and beyond.
For the second quarter 2009 Electronic Game Card generated record revenues of $3.1 million, an increase of approximately 23% over the prior year second-quarter revenue of $2.5 million and 4% above first quarter 2009 revenues. Our revenue growth during the quarter was predominantly driven by our further penetration of the electronic game card into the promotional market, additional licensing revenue in the Native American gaming market, and trial orders of new lines introduced at the end of last year.
Electronic Game Card reported record comprehensive net income of $2 million, which equates to $.03 per diluted share. This is slightly above expectations and compares to a net income of $1.3 million or $.02 per diluted share during the same period last year and income of $1.7 million first quarter 2009.
As of June 30, 2009 Electronic Game Card had approximately 62.7 million shares of common stock outstanding with a weighted fully diluted share count totaling 68.4 million. It is important to note for the foreseeable future that we only intend to increase the share count to accommodate employee, executive management, and Board of Director stock options, and only at levels that are reasonable.
The gross profit generated for the three months ended June 30, 2009 was at the record level of $2.5 million, generating an 80% gross margin. Growing and maximizing gross profit dollars is our top focus. Please note that as future events unfold over the coming quarters throughout this year, some of our current contracted opportunities may greatly accelerate our revenues at margin percentage levels that, while still strong, could be less than 70% margins we have enjoyed from less robust revenues and volumes.
Conversely there are a number of potential license royalty relationships with well-established household brand names that naturally generate little cost against revenues. As these new business relationships become public we will update you with proper guidance. The company’s operating expenses during the second quarter totaled $639,000 or approximately 20% of revenue.
These increases were largely due to higher costs resulting from the strengthened management team now in place and a heightened marketing effort. As we manage our growing business going forward our current staffing levels are expected to slightly increase as our sales and marketing team increased activity in North America and the Pacific Rim. However, we do not anticipate expenses as a percentage of revenue to increase from the levels we have generated over the past quarter. In fact, we believe the ratio will actually fall going forward.
Your company and board of directors have been highly disciplined in managing expenses and will continue to do so under my direction.
6:20
Our balance sheet continues to strengthen. Cash equivalents and marketable securities on June 30, 2009 totaled $11 million, an increase of approximately $1 million from first quarter 2009 and an increase of $2 million from December 31, 2008. At quarter-end the company’s current ratio rose sharply to 17.2, up from 10.7 last quarter due to a $400,000 reduction in current liabilities and a $1.7 million increase in current assets. Overall, total liabilities declined by $522,000 during the quarter, down to $869,000 and the Series A Convertible Redeemable Preferred stock totaled $3.3 million at quarter-end, a decrease of $1.2 million from the prior first quarter.
Importantly, Stockholders Equity has risen for the tenth consecutive quarter to $18 million, an increase of $3.3 million in just a three-month period of time.
Looking forward, the second half of the year is shaping up to deliver an acceleration in revenues and earnings to put us on target of hitting our guidance of $17 million in revenues and $.14 earnings per share.
Looking forward into 2010 we have a number of initiatives already announced and others soon to be announced that will create significant momentum to add to our 2009 base.
But before reviewing our business lines and future initiatives, it is important to discuss our base of operations and infrastructure that will enable us to smoothly ramp up our revenue levels. So I’d like to share some of those with you right now.
9:20
Number one, additions to be the Board and executive ranks.
As we have mentioned in our conference call last quarter, Linden Boyne will be retiring from both the Board and as CFO of Electronic Game Card on September 1st. We are very grateful for his support and admirable service to this company over the past three and one-half years, and he was instrumental in working closely with former interim CEO and current Board member, Lee Cole. The early years were not so easy to financially turn around this company, but the hard work that both Linden and Lee have given all of us a very healthy financial base upon which to build this strong company. Thank you very much Linden and we wish you many, many happy days ahead.
We’ve had a number of months to find a replacement for Linden and we searched extensively. We received almost 2,000 applications. We met with extraordinary talent during the review process, but our first choice, I am pleased to announce, accepted our invitation to join our firm and we are in the final stage of completing the employment agreement, with a media announcement scheduled for next week. Our new CFO will hit the ground running on September 1st, officially joining our team in our main office located in Irvine, California. Over the next six months our internal hiring plans are modest. We made two to three admin and mid-level individuals as project and operations managers for specific new growth areas and management of evergreen accounts.
With Linden’s departure from the Board of Directors it is our plan to make one to two strategic additions to our Board of Directors during the second half of this year. We have already begun discussions and the interview process with respective candidates. Our criteria in our selection process is based upon adding exponential value through potential – from the relationship network and seasoned public market experience as we position and prepare your company to reach our future goal of becoming a successful NASDAQ-listed company.
Second, new headquarters in Irvine, California. During the next quarter we will be opening a very cost-effective office headquartered in Southern California. Going forward over the next six months we anticipate all future additions to staff will be working from this location. Keep in mind we embrace an outsourced business model and therefore plan to keep our operations cost-effective and lean.
Our website is also in the process of getting a new look. The new site is far more robust and will be a selling aid to attract new business. This new EGC site went live as of today and I would like to personally thank everyone who was involved from London to John Tarasco[?] here in Southern California
And this is only, however, phase one. As you all know my roots are based in branding and marketing, and as we have discussed in the past our name is too limiting to carry this company and our vision into the future. Therefore over the next two to four months we will be rebranding the company to CirQ, and it’s spelled with a capital Q, announced as CirQ. And with that, phase two of our website and new brand will be launched at www.cirq.com, c-i-r-q.com. The new CirQ brand will provide the company with a broader scope of recognition for our technology platforms and easier adaptability to the new business applications, market opportunities, and B2B partnerships.
12:20
Number Three, in beefing up our infrastructure and moving forward: enhanced manufacturing. This is a critical point as we discuss our infrastructure. As we attract new enterprise-level relationships, capacity and price have become even more critical. Over the past three months we have established relationships with three additional outsourced manufacturing partners, which have permitted us to materially lower our product cost and potentially triple our capacity to provide greater flexibility to accommodate both large-scale runs and short-term turn-around projects. One group is who we have worked closely with in the past. Another group was introduced to EGC by our partner, Sovereign Game Card. And the third group is vertically integrated with our own marketing services and channels and distribution. These relationships have given our firm the opportunity to expand our addressable market even further given the substantially lower cost of production.
On average, we can now produce a base-model EGC game card at 25% to 35% less expensive than in the past on relatively low production runs. With larger orders and potentially with less security features we will likely see even further reductions in cost. This development is highly material for the lottery market as well as certain mass consumer promotional opportunities.
With these meaningful structural moves in place, let me recap. New CFO, new headquarter office in Southern California with slight increase in staffing, new website, new brand, new partnerships, new lower pricing on EGC game cards, and expanded manufacturing capacity. We are fully prepared to handle our expected growth.
So here is what I see as the upcoming future in the opportunities in each of our three business segments.
Number one, promotions. The bulk of our revenues have come from the promotions vertical and this will continue to be an important revenue generator through our internal sales efforts combined with our global distribution network.
14:30
[My comment: I would have liked to have seen something here in the Quiz Card discussion about Q3 or Q4 shipments.]
A very exciting development is our new iQuiz gaming platform, which has natural synergies with sports, music, movies, other entertainment genres, and areas of popular culture and interest. We recently signed a distribution agreement with FMM - The Moscoe Group based in the Twin Cities, which happens to be my home town and the home to some of the largest retail organizations in the world. FMM is a high-level, value-added marketing machine which over the past fifty years represents Fortune 500 products into the largest of retailers. We believe the opportunities between our two companies is significant. If we modestly penetrate just 10% of the 19,000 locations generated from the six retailers for which FMM is responsible, we would easily achieve the Street’s expectations for next year. Over the last week I spent time with FMM - The Moscoe Group in coordinating the selling process this fall of our retail products to the designated buyers for planograms and other merchandizing and distribution efforts for late Q1 and Q2 2010.
15:45
Other progress updates in our second vertical market, gaming. This quarter we recognized revenues from our two licensed deals with Sovereign Game Card, our native American casinos-focused licensed distribution partner and Scientific Games which totaled $375,000, the quarterly guaranteed minimum. Sovereign has been working diligently on several key initiatives and turnkey promotional orders with tribes in the Southwest, Northwest, and Midwest regions of the United States.
Another important recent development is our 8K filing and announced relationship with China Lot Synergy, which is responsible for the welfare lottery in China. This is only one of the two legal lotteries in the People’s Republic of China and, as we know, effective this past July 1st the massive illegal lotteries in China have been outlawed thereby creating a massive opportunity to capture business for the legal lotteries.
16:48
The Chinese welfare lottery market currently sells approximately 9 billion scratch tickets annually. We executed our MOU and we are in negotiations to finalize our definitive agreement. During my recent visit with Lee Cole to China Lot Synergy at their office in Beijing we met with their Chairman, their CEO, COO, and several other senior-level executives in marketing, operations, and logistics. They are a first-class, highly-knowledgeable, and well-run organization. This partnership will provide EGC with new strategic relationships with G-TEC and IGT for alignment synergies of new lottery opportunities within additional territories within the region and other parts of the world.
While in China I also had the opportunity to meet with the China sports lottery equivalent to China Lot Synergy. The China sports lottery is the only other legal lottery in China and is approximately equal in size to the China welfare lottery. We also have a serious opportunity here to explore further.
China is a great country of great visibility in 2010 as they play host to the world once again during the Shanghai World Expo 2010 whereby China expects to draw 70+ million visitors during this Expo, the biggest number in World Expo’s history, to the Fair from May 1 to October 31 in 2010.
In addition we have been working on sectors such as national and state lotteries outside the United States and casino gaming projects in Las Vegas, Australian, and Asian markets, where Miss Anna Houssels, our Executive Vice President of Sales and Director, has long-established, successful relationships. We are currently in the bidding process with one large casino group as it pertains to the Players Loyalty Club and in discussions with a gaming technology company to cross-license, market, and distribute our ECG game cards as promotional vehicles.
19:30
And finally a quick update on EGC products and betting shops opportunities in Eastern Europe. As you might recall our Executive Chairman, the Lord Leonard Steinberg, maintains his Perpetual President role at the company he launched over 50 years ago and subsequently sold to Stanley Leisure plc, which controls 1,500 betting parlors throughout east and western Europe whereby the company’s management team continues to gain progress in these new areas. I’m headed over to Europe mid-month of August to attend meetings and review sessions on our work within the region.
The third and last vertical market, our area focus. This is a $2.2 billion global market and growing, which is education. To our knowledge there are no interactive learning system products at the affordable $10 to $12 MSRP retail price points. We’re confident we have a category buster here, as an on-the-go, entertainment-style game card product based upon our early responses from our European B2B network’s reaction to our Thomas & Friends branded education game card. I invite you to visit our website and test this product online for yourselves. It’s contained within the education section at electronicgamecard.com. Currently there are several gold standard brands in education publishing and education media in review of this new product offering at Electronic Game Card. We expect the first cards to be shipped only in the U.K. either later this year or first quarter 2010.
[My comment: Roth said they would ship this year, with U.S. shipments to begin in 2010. With Kevin's comment it's hard to know if Thomas is part of the 2H09 ramp or not.]
20:40
Other Milestones and Developments. We are a technology company. As such, expect to see increased IP patents and international regulatory approvals. We are firm believers in the power of utilizing strategic distribution partnerships and you can expect more deals. We are huge believers in our company’s future and have all bought stock in the open market and continue to do so. You may have noticed that there was significant insider buying on July 21st. The Lord Leonard Steinberg purchased an additional 1 million shares, bringing his total holdings up to approximately 9 million shares or 14.4% of the company’s outstanding shares.
Finally, I want to highlight a note from earlier in this discussion with Miss Yvonne Zappulla. On September 15th 2009 at 12 noon Eastern, Electronic Game Card will be holding its annual shareholder meeting. Like last year’s meeting, it will be held for your convenience in New York City at the Grannus Financial offices at 1120 Avenue of the Americas, 4th floor. I will be there, joined by Lord Steinberg, our new CFO, and our Board members. All are welcome so please give Yvonne a call if you plan to attend.
So therefore, to summarize, we’ve had a successful first half of 2009. Our current backlog momentum gives us confidence in our guidance moving forward through the remainder of 2009 and 2010. The new management team has hit the ground running and has focused initiatives to close in the areas of gaming, promotions, and education, any one of which could greatly add to the company’s progress and revenue enhancements to the current guidance of $17 to $18 million in 2009 and full year earnings per share guidance of $.14 fully diluted EPS.
With that, I will now open this call up for questions.
22:40
Q&A
TODD EILERS – ROTH CAPITAL PARTNERS
Q. Good afternoon, everyone. Kevin, could you tell us how much of your revenue in the quarter was recorded in U.S. Dollars vs. Pound Sterling and Euro. I know that foreign currency impact was an issue last quarter. I was just wondering how much of an issue it might have been this quarter.
LC. Kevin, do you want me to answer that one because I’m familiar with the European sales?
KD. Yes, if you’d like to do that. Please, Lee.
LC. It was about 30% U.S. Dollar and the rest was in Euros and Pounds.
Q. OK. That’s helpful. And then, Lee, could you also tell us how many game cards were sold in the quarter and then also how much recurring revenue was generated in the quarter, which would include the Sci Games and the Sovereign royalties.
LC It was about – it was just over 1.6 million in cards and it was just over $1 million in recurring revenue.
Q. OK. And then, let’s see, Kevin, I believe you mentioned maybe some sales from your new agreement with FMM - The Moscoe Group possibly late in the fourth quarter but most definitely in the first quarter of 2010. As far as your other deal that you signed with China Lot, the MOU – I guess assuming that you guys can sign a definitive agreement here in the near term, when would you expect to maybe start to ship units into that market?
KD. Thanks, Todd. Let me go back to clarify the question regarding FMM – Moscoe Group. It’s not hitting this year, it’s hitting in late Q1 and Q2 of 2010.
Q. OK. Sorry about that.
KD. And we don’t – that’s OK. And we don’t expect to see any revenues from China Lot Synergy in 2009, or we’re looking at 2010 with some unique opportunities you know if you kind of look at what’s happening in China, growth opportunities in 2010.
LC. I think it’s worth adding as well, Todd, that both of these opportunities are additional to when we spoke on the last conference call. These are incremental new revenues.
Q. Absolutely. On that subject, how is the pipeline with respect to new deals. I guess I mean you mentioned a lot of areas. What are your expectations here over the next quarter. I mean last quarter you said you’d like to sign two deals. What are your expectations I guess for this quarter or for the end of the year?
26
KD. Todd, if you notice in my dissertation I don’t want to lock it to the quarter. And last quarter when I had referenced it I think it actually hurt us in two deals, because of the negotiations process. So I don’t want to commit to a time frame in terms of this quarter. But I do have to admit that our pipeline is very full right now and we’re trying to be very strategic and not give up things and provide strength in terms of the negotiations. So I’d like to comment that we are expecting additional contracts yet this fall.
Q. OK. That’s fair. How about with respect to your agreement with Scientific Games, I believe that comes up or expires in March of next year, if I’m correct. Have you started to talk with them regarding restructuring that agreement? And just you know what are your general I guess comments or thoughts regarding the existing relationship and how maybe some of the things you would like to accomplish with maybe a new agreement I guess going forward without giving away too much of your strategy I guess?
KD. Sure. Well, I think it’s safe to say, Scientific Games is a great company and we don’t want to give away our strategy and at this point we’d like to reserve our comments. So I think unless Lee has anything to add I would like to reserve comments for a little bit later time.
LC. Yeah, I think Kevin’s exactly correct there. We’re very aware of the market and let’s just say we’re looking at ways where we can enhance value for our shareholders with the existing agreement.
Q. And then lastly, just a couple of items on the cash flow. Do you guys have a cash flow from operations number and possibly a capex number in the quarter?
KD. Ah, let’s see here. Cash flow, capex.
LC. There wasn’t much capital expenditure. I think that was minimal. I haven’t got it in front of me.
KD. ____ Lee.
LC. And the cash flows, the free cash flows was about $1 million.
Q. OK. Then maybe we can talk off-line. I’m just trying to get - it looks like you guys did just under $2 million in EBITDA. So I’m just trying to get the delta from that to the million dollars in cash that you ___.
KD. Be happy to do that Todd, afterwards.
Q. Thanks guys. That does it for me.
KD. Thanks so much, Todd.
MICHAEL WEISS – JOSLYNDA CAPITAL
Q. Hi, guys. Congratulations. A couple of questions. One, a follow up from last time. The investments, which is almost 8, $7.5 million. Any progress made during the quarter on monetizing any of that and any input on value above the 7.5 million, or is that what they’re worth?
LC. Yeah, I can answer that one, Kevin. As sort of the majority of these investments extend from our previous strategy and come back from over a year ago or more, obviously we’ve – I’ve been responsible for monetizing them and whereas we thought we could monetize all these investments by the end of 2010 we’re now confident of monetizing them by the middle of next year. So we’ve got no – and while we’ve got no visible improvement this quarter there’s certain things going on in the background which maybe come to fruition next quarter, hopefully by the fourth quarter, but we’re very confident of monetizing all these investments in the next twelve months. And we definitely do not see monetizing those investments at less than cost. So obviously we’re hopeful of creating incremental income but definitely not less than cost.
Q. Also you implemented ability to buy stock at the last quarter. Did the company buy back any stock?
KD. No.
LC. We bought back – we didn’t buy back that much stock because we implemented the policy to buy back stock – initially the Board had implemented it at, to buy at $.60 when the stock was $.40 and unfortunately – or fortunately, the stock ran away.
Q. Now, have you given out 2010’s guidance? Or you have not officially given that out yet?
LC/KD. No.
Q. How much of ’09 is already booked would you say?
LC. Just over 60%.
Q. OK. And those were my questions. Thank you.
KD. Thanks, Michael.
31
IAN CASSEL – INDIVIDUAL INVESTOR
Q. Great quarter, guys.
LD. Thanks, Ian.
Q. My question. I have two questions. The first one: it looks like you’re currently in a $12 million revenue rate. And also it looks like you’re basically on a $.03 per quarter rate. And I was wondering, with the second half of the year now upon us and expectations for 17 to 18 million in revenue and $.14 in earnings, where is that extra bump in revenue and earnings going to come from?
LC. Coming from a new product which we’re shipping third quarter, ___ Quiz Card.
Q. OK. And my next question really pertains to your cash position. Are there any thoughts on how to deploy that cash? Are you looking at acquisitions, primarily going to be used for a buyback? What were your thoughts in that regard?
LC. Acquisitions – where we are at the moment - acquisitions that can add incremental value, add new technologies, _____ increase the business incrementally, like we’re incentivized to do, is what I think the Board’s generally thinking. What do you think, Kevin?
KD. I agree. And Ian we’ve looked at some even last quarter for acquisition, and we didn’t get the deal we wanted so we backed away from it. So we’re looking at technologies, we’re looking at other unique distribution opportunities, and things that can accretively add value to our revenues.
Q. Thank you.
KD. Thank you, Ian.
33
SKIP DAVIDSON – R[?] PARTNERS
Q. Good afternoon, guys. First of all your balance sheet looks like Fort Knox. 22 million assets, a little over 800K in liabilities. Congratulations, that’s unbelievable.
KD. Thank you,, Skip.
Q. Kevin, you’ve given us what’s happening now but having opportunities to chat with you I can see something in your eyes about the future. And is the future of the company really game cards, what we’re talking about now, or is it something bigger, a la what is a CirQ? And what if we have this conference call at this time next year do you think the company will look like vis-à-vis where it is today?
KD. Great. Skip, thank you very much for your questions and assessment and obviously your investment as well. The electronic game card, and I really want to talk about the brand and the company and – it’s really just one platform. And I think when the creators started off in creating electronic game card I think they were just singly focused on the electronic game card. So we still have not scratched the surface [Laughter] of the depth of opportunities within the lottery, gaming, promotions, and that’s why one of the key things is here in the United States and in the Asia Pacific Rim. So game cards is one platform. Quiz cards is a second platform. The third platform is going into our EPlay cards for education, which you can see from the Thomas and Friends. So the game card expansion into these other platforms, which are natural progressions, gives us a wider portfolio.
So CirQ is based on circuitry and there’s also a sense of sophistication and technology associated with that brand. So when we look in the future, a year from now, we’ll be taking in additional technologies both in licensing and acquisition, we’ll be putting them into our pipeline, into our channel with a wide range of products, still controlled within maybe five to six overall. And this will access it from into the mobile phones, into on-line, into the three vertical key markets, and also into the gift card market.
36
So it is evolving. It’s a great story, it is a great company, there’s great colleagues, and I think this company is really based firmly in proprietary technologies and it is an evolving company.
Q. Thank you.
KD. Thank you.
STEVE MADDEN – MADDEN CAPITAL
Q. Hi, guys. Great quarter. Two questions. One was: based on a lot of these new enterprise type relationships that you’ve either announced or and are close to going to contract with or the others you’ve hinted about, meaning larger brands, etc., recurring-type larger-volume deals, can you explain how that business model overlaps with your current model vis-à-vis gross margins. I’d expect them to be a little lower, higher-volume-type deals.
LC. I think that can work one of two ways. It just depends effectively with our current business if we do licensing deals or direct sales. If we do a licensing deal, like the Sci Games agreement, or distributor agreement, then it’s basically all margin, you know, we don’t manufacture, we just take a royalty. But if we manufacture and then we’re going into higher margin – into higher volume mass market retailers then we’re going to take less margin. So I think over the next two quarters you’re going to see which way that goes but whichever way it goes, we’re still going to hit our earnings per share.
Q. Gotcha. So you’ll be able to be more specific on that, and…
LC. Yes, cause with a couple of the big wins that are out there that I know Kevin’s working on, it just depends on whether those wins are license deals or direct sale deals.
37:50
Q. Great. And I guess just pressing on guidance a little bit more. You do have a great ramp ahead of you the next several quarters, which you’ve indicated you can do to meet the guidance, which is fabulous. And then Roth’s got guidance out there basically doubling revenues next year to 27 million and earnings per share of $.20. I think they’re the only analyst that covers the company. Is there anything you can say related to that, whether you’re comfortable with those numbers or anything?
LC. I mean I think Kevin alluded to it in his talk about what just the Moscoe relationship, FMM relationship, does by getting us into the retailers that they’re involved with. That sees[?] a big ramp in revenues, those sorts of relationships. And actually getting from $.14 to $.20 isn’t that substantial when – with the stuff we’ve got in the pipeline.
Q. Yeah, that’s my sense is if you can – you said in getting just 10% of the clients from the Moscoe deal you could meet expectations. That seems pretty easy to do.
KD. That’s correct, Steve. And that doesn’t include lottery, promotions, and all the other distributors.
Q. So you think in that $.20 number, that doesn’t include, does that not include China Lot, anything from there?
LC. No. No.
Q. Wow. OK. Thanks, guys.
KD. Steve, thank you.
JORDAN BENSHIE - GRACIA PARTNERS [?]
Q. Hello, guys. Congratulations. Looks like you guys are doing a great job.
KD. Thank you, Jordan.
Q. I saw your website and I think it looks great. I think the direction it’s going, definitely more modern, and sort of an iPod-ish type deal. Is that the same sort of direction that you guys are going to continue going on for the CirQor is it going to take a different sort of graphic design direction when it goes there?
KD. CirQ will evolve broader, but we – the goal right now is to increase our value. The old website really didn’t accommodate sampling of the card as much as the new one does. And we will take on a different type of look but everything is getting more modernized and more in step with the generation of buyers and consumers.
Q. And when do you expect CirQ to make its grand entrance?
KD. Well, I’d like to accomplish that goal before the end of this year, which would put us at – as we look back let’s say in January of 2010, and we look back at the company’s success over the year – one year since mine and Miss Anna Houssels tenure, as well as what the entire team has done, I think we will have some great success stories and I’d like to conclude with an exclamation point of that brand before the end of this year.
Q. OK. Great. Is it possible for you guys to sort of give a breakdown, and if I need to do this offline that’s fine too, of the different sales percentages for gaming, lotteries, promotion, entertainment, sports, and education, or the main ones and the percentage of sales that those equated to and how you see it increase quarter over quarter specifically in each of those?
KD. Lee do you, I could, do you want to do it off-line or do you want…
LC. We can give you a broad brush, and we can give you more detail off-line, but broad brush it’s about 55% promotions, 20% education, and about 30% gaming.
Q. I’m sorry. You said 55% promotion, 20% education, and what was the last one?
LC. And then the rest – the remainder is gaming.
Q. Remainder is gaming, OK. So those other sections that you have on the website, the lotteries, entertainment, and sports, that’s sort of….
LC. _____ promotions, education, or gaming, depending on the cards.
Q. OK.
KD. Some cards, Jordan, can be used in duality for – in the gaming sector with a promotional value. Or they could be used – the card could be used in the lottery as a prize machine, a terminal prize machine for lotteries as well as promotions for sweepstakes.
LC. Yeah, and as the product’s been evolving we’ve sort of been re-categorizing some of the products as well.
Q. Right. OK. Last question. I think that there’s a conference, a growth conference or something towards the end of August in Southern California. Are you guys attending that or?
KD. I’m not aware of that. Is Yvonne – Yvonne, are you on the line? I don’t know if she is, probably not.
Q. OK. I can give her a call and ask her.
KD. If you could, or email me, that would be great.
Q. OK, wonderful. Thanks guys. You’re doing a great job.
KD. Jordan, thank you so much.
Q. OK. Bye-bye.
KD. Bye-bye.
ANDREW COHEN – TRICADIA
Q. Hey, guys. Great quarter. I’m actually on your website right now playing Thomas the Tank. It’s a lot of fun. Thomas and Friends, I’m sorry.
KD. You have a pre-schooler don’t you? Or actually..
Q. Eight months, so she’s not quite up to this right now. We’re working on Dada. But anyway, do you – are there more opportunities to do these Thomas and Friends type branded Quiz Cards or is the Thomas the Tank an exclusive deal for the technology?
KD. No, again, Andrew, and thanks for your question and observation. We’re about platforms. So the platforms can be customized and skinned…
Q. OK.
KD. …to IP. So brands, if you think about some of the most popular brands in the world that gravitate towards parents and kids across all lines, whether it’s sports or characters on television or comic books. Those are ways to get through to kids and education, and so we’re talking with a variety of those groups.
Q. So you could skin it however you wanted to skin it. I mean I haven’t – my daughter ______ will be into all those at some point but I haven’t heard of Thomas and Friends. I assume it’s a more of a UK type….”
KD. It’s actually global, I think its…
Q. Is it global? OK.
KD. …300 million books worldwide and it’s still popular. It’s a trusted brand. So if you think about the marketplace application for this, FMM-Moscoe, think about this being sold in the stores in the airports. So it’s a on-the-go, parents trust it, it’s a way to get the kids entertained and educated. So it’s a great impulse item at a very low cost, affordable price point.
Q. OK Great. And I know you guys have been working, as you mentioned on the call, with Lord Steinberg’s contacts in his betting parlors throughout Europe. I can understand how that agreement would take some time, getting all the approvals and what-not. But given that it’s his operation, once you get an approval, or state approval for that product, is it a relatively quick roll-out or is it still more along the lines of what we’re doing with FMM, you know in taking six months or so to roll it out.
KD. Yeah, I think it’s – Lee you can comment further – but I really think it’s probably beyond the green light from a – being ready to organize and produce and get installed into the marketplace, it could be four to six months.
LC. And it’s like – and because it’s across Europe you’ve got different regulatory bodies in each different country, so it’s a bit like dealing with different states.
Q. OK. But you think - you mentioned it’s beyond the green light, so we’ve gotten some approvals or…
LC. Yeah, they’re in trials.
KD. Right.
Q. OK. I see. And is that a - just sort of help me, just walk me through what you’re envisioning in terms of how – what the cards would be sold for, would it be sold like a Sovereign Game Card type thing or would it be by sport or what?
LC. No, it’s actually as a sort of – as a betting product…
KD. It’s ____ a terminal.
LC. Device.
Q. OK. I got it. So it would be just like any lottery-type scratch card that we have. And Lee I know last year you were – you’d been working on getting technology where you could get the cards down to a price where you could sell lottery cards of, say for 10, is it $10 lottery cards, retail price? Has that panned out? Is that what you’re thinking of for China Lot Synergy? Or are we still using the same technology that we’ve had?
LC. We’re still using the same technology but with Kevin and some other peoples’ new initiatives and with changes in technology, that technology, you know we’ve reduced – the price of the card is reduced so it’s got nearer to that price we were looking at but we’re still not at that price. That card in particular was going to be the next generation and was relying on a couple of new bits of technology which haven’t come to fruition yet.
Q. OK. But you’re comfortable that you can sell into China with the ______ technology?
KD. Absolutely. And Andrew there are selling strategies that we’re working with with China Lot Synergy based on the uniqueness of all the things that are affordable to them, the channels that they have and the bundling opportunities and right now there’s a certain level of prize package on scratch-and-win, so our interactive component brings a potential higher pool of monies to that, so there’re strategies that we’re working closely with them on.
Q. OK. Well, looking forward to everything. You guys are definitely on a great path so good luck and congrats.
KD. Thank you so much, Andrew. Appreciate your support.
RICK SHELBIN – GLG PARTNERS
Q. Good afternoon.
KD. Hi Rick How are you?
Q. Good, Kevin. How are you?
KD. Good, thanks.
Q. My question is with regard to China Lot Synergy and just how that relationship’s going to evolve over time. And what I mean by that is so can you just walk us through the schedule of what happens when over the next couple of months you sign the deal and then you – do you have a product to already bring to market or do you have to go through a pilot phase and develop some sort of products for that market? How does it work?
KD. Well, we already have a product. So it’s the marketing, the merchandising, and the components of the winnings, and the distribution model. So those are the components that we would be working through. I mean there’s already initial discussions but the finalization of those after the DA is completed. And Lee, do you want to add to that?
LC. Yeah, I mean the interesting thing is that they’re adding features that we haven’t used previously in our thinking of lottery distribution ____ a collectible feature and putting added value onto the card. That was something that came from the guys out there. So, yeah, so I – yeah, that’s just part of the process.
KD. Rick, are you still there? Lee.
LC. Yeah.
KD. We may have lost Rick.
LC. Yeah.
{Operator Instructions.]
CLOSING REMARKS
KD. Well, thank you very much, Latrice. Appreciate it. I would like to personally thank all of you for your interest and support for our company. We are in an enviable position. We have a company that has a solid financial base to address a multi-billion dollar market opportunity with a proprietary product platform that generates high margins with little competition. To this we have added an infrastructure of high-level outstanding executives, high-level joint venture partners, and distributors, and top-quality low-cost manufacturing partners with ample capacity to meet the extraordinary growth we intend to deliver. Looking forward to updating you on our next call when we review the third quarter of 2009.
And if you have any questions in the meantime, please don’t hesitate to contact Yvonne Zappulla through the usual phone number and e-mail address. And that is it. I’d like to thank all my colleagues here in the U.S. and in London and a special note of thanks to our retiring CFO, Mr. Linden Boyne. I want to personally thank each and every one of you from the company. Have a great day.
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