10QSB 1 games10q110106woex.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER: 0-29113 GAMEZNFLIX, INC. (Exact Name of Company as Specified in its Charter) Nevada 90-0224051 (State or Other Jurisdiction of Incorporation (I.R.S. Employer or Organization) Identification No.) 1535 Blackjack Road, Franklin, Kentucky 42134 (Address of Principal Executive Offices) (270) 598-0385 (Company's Telephone Number) ______________________________________________________________ (Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes No X . As of September 30, 2006, the Company had 4,496,642,368 shares of common stock issued and outstanding. Transitional Small Business Disclosure Format (check one): Yes No X TABLE OF CONTENTS PART I - FINANCIAL INFORMATION PAGE ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) CONSOLIDATED BALANCE SHEET (UNAUDITED) AS OF SEPTEMBER 30, 2006 3 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005 5 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 7 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 ITEM 3. CONTROLS AND PROCEDURES 25 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 26 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 26 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 26 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26 ITEM 5. OTHER INFORMATION 26 ITEM 6. EXHIBITS 26 SIGNATURES 27 PART I - FINANCIAL INFORMATION ITEM 1. FINANCAL STATEMENTS. GAMEZNFLIX, INC. CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2006 (Unaudited) ASSETS Current assets Cash $ 317,821 Certificates of deposit 3,070,276 Accounts receivable 62,500 Note receivable 770,000 Inventory 27,828 Prepaid expenses 829,342 Other assets 793,000 Total current assets 5,870,767 DVD's and video games library, net 2,608,535 Fixed assets, net 621,040 Other assets 47,162 Total assets $ 9,147,504 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 959,290 Deferred revenue 57,772 Note payable - related party 175,000 Customer deposits -- Convertible debenture, net of unamortized debt discounts of $10,756 18,182 Total current liabilities 1,210,244 Long-term liabilities -- Total liabilities 1,210,244 Commitments and contingencies -- Stockholders' equity Common stock; $0.001 par value; 25,000,000,000 shares authorized, 4,496,642,368 issued and outstanding 4,496,642 Additional paid-in capital 36,957,320 Stock subscriptions receivable (4,150,000) Accumulated deficit (29,366,702) Total stockholders' equity 7,937,260 Total liabilities and stockholders' equity $ 9,147,504 See Accompanying Notes to Consolidated Financial Statements GAMEZNFLIX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months For the Nine Months Ended September 30, Ended September 30, 2006 2005 2006 2005 Revenues $ 472,960 $ 130,607 $ 1,248,869 $ 536,362 Cost of revenues 145,303 73,952 535,561 353,495 Gross profit 327,657 56,655 713,308 182,867 Operating expenses Advertising 933,210 76,388 1,627,023 243,301 Consulting and professional fees 603,006 454,122 1,622,231 1,059,005 Depreciation and amortization 728,305 233,520 1,714,147 664,475 Selling, general and administrative 837,059 512,721 2,494,683 1,073,968 Total operating expenses 3,101,580 1,276,751 7,458,084 3,040,749 Loss from operations (2,773,923) (1,220,096) (6,744,776) (2,857,882) Other income (expense) Interest expense (2,088) (3,171) (8,136) (7,606) Interest income 43,477 137 126,438 378 Other income (expense) -- (405) 2,438 (19,124) Total other income (expense) 41,389 (3,439) 120,740 (26,352) Loss before provision for income taxes (2,732,534) (1,223,535) (6,624,036) (2,884,234) Provision for income taxes -- -- -- -- Net loss $(2,732,534) $(1,223,535) $(6,624,036) $(2,884,234) Loss per common share - basic and diluted $ (0.00) $ (0.00) $ (0.00) $ (0.00) Weighted average common shares outstanding - basic and diluted 4,400,595,426 1,028,688,409 4,083,917,485 599,363,307
See Accompanying Notes to Consolidated Financial Statements GAMEZNFLIX, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
Stock Prepaid Total Common Stock Additional Subscriptions Consulting Accumulated Stockholders' Shares Amount Paid-in Receivable Expenses Deficit Equity Capital Balance, December 31, 2005 3,291,733,490 $ 3,291,733 $ 29,776,675 $(3,187,500) $ (95,833) $(22,742,666) $ 7,042,409 Issuance of common stock for services, weighted average price of $0.005 27,000,000 27,000 116,900 -- -- -- 143,900 Issuance of stock options for services, 206,519,559 shares of common stock with a weighted exercise price of $0.008 -- -- 672,604 -- -- -- 672,604 Issuance of common stock related to exercise of options, weighted average price of $0.008 206,519,559 206,520 1,574,981 (1,000,000) -- -- 781,501 Issuance of common stock related to debt conversion totaling $53,090 and exercise of related stock warrants at $1.09 per share - Golden Gate Investors, Inc. 981,389,319 981,389 4,806,160 -- -- -- 5,787,549 Proceeds from stock subscriptions receivable -- -- -- 37,500 -- -- 37,500 Current period expense of prepaid consulting expenses -- -- -- -- 95,833 -- 95,833 Cancellation of common stock issued in previous years (10,000,000) (10,000) 10,000 -- -- -- - Net loss -- -- -- -- -- (6,624,036) (6,624,036) Balance, September 30, 2006 4,496,642,368 $4,496,642 $36,957,320 $ (4,150,000) $ -- $(29,366,702) $ 7,937,260
See Accompanying Notes to Consolidated Financial Statements GAMEZNFLIX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months Ended September 30, 2006 2005 Cash flows from operating activities: Net loss $ (6,624,036) $(2,884,234) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 816,504 450,735 Debt discount amortization related to convertible debenture 40,184 -- Depreciation and amortization 1,714,147 664,475 Changes in operating assets and liabilities: Change in accounts receivable -- (56,343) Change in stock subscription receivable 37,500 -- Change in inventory 44,658 (68,327) Change in prepaid expenses (699,488) 202,402 Change in other assets (700,647) (18,781) Change in accounts payable and accrued expenses 759,539 209,416 Change in deferred revenue 1,279 -- Net cash used in operating activities (4,610,360) (1,500,657) Cash flows from investing activities: Purchase of DVD's & games library (3,440,643) (581,069) Purchase of fixed assets (209,255) (206,187) Investment in certificates of deposit (3,070,276) -- Investment in note receivable (770,000) -- Net cash used in investing activities (7,490,174) (787,256) Cash flows from financing activities: Payments on notes payable (53,090) -- Proceeds on notes payable -- 165,000 Proceeds from related party notes payable -- 13,977 Proceeds from stock issuances 6,569,050 2,084,511 Net cash provided by investing activities 6,515,960 2,263,488 Net change in cash and cash equivalents (5,584,574) (24,425) Cash, beginning of period 5,902,395 63,295 Cash, end of period $ 317,821 $ 38,870 See Accompanying Notes to Consolidated Financial Statements GAMEZNFLIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of GameZnFlix, Inc. ("Company") have been prepared in accordance with Securities and Exchange Commission requirements for interim financial statements. Therefore, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The financial statements should be read in conjunction with the Form 10-KSB of the Company for the year ended December 31, 2005. The interim financial statements present the balance sheet, statements of operations, stockholders' equity, and cash flows of the Company. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The interim financial information is unaudited. In the opinion of management, all adjustments necessary to present fairly the financial position as of September 30, 2006 and the results of operations, stockholders' equity, and cash flows presented herein have been included in the financial statements. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results of operations for the full year. The Company provides online digital video disk ("DVD") movie and video game rentals to subscribers through its Internet website www.gameznflix.com. Aside from having a comprehensive movie library of titles, the Company also provides subscribers with access to a comprehensive games library of Xbox, Playstation 2, Playstation, and Nintendo Gamecube titles. Subscribers of the Company are located within the United States of America. The Company serves its members via nine distribution centers located in Colorado, Kentucky, Massachusetts, Washington, Maryland, Texas, Florida and two in California. These distribution centers are strategically located to service the subscriber base in each of their respective regions. Each center has a full inventory of movies and video game titles for shipment. 2. SIGNIFICANT ACCOUNTING POLICIES Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. DVD's and Video Games Library - DVD's and video games are recorded at historical cost and depreciated using the straight-line method over a twelve month period. The Company has no immediate plans to have any part of its DVD's and video games library sold and accordingly no salvage value is provided. However if the Company does sell any of its DVD's and video games library, the Company will re-evaluate its depreciation policy in terms of the salvage value. Because of the nature of the business, the Company experiences a certain amount of loss, damage, or theft of its DVD's and video games. This loss is shown in the cost of sales section of the accompanying consolidated statement of operations. Any accumulated depreciation associated with this item is accounted for on a first- in-first-out basis and treated as a reduction to depreciation expense in the month the loss is recognized. Inventory - Inventory consists of DVD and video game products for sale. All inventory items are stated at the lower of cost (first-in, first-out) or market value. Revenue Recognition and Cost of Revenue - Subscription revenues are recognized ratably during each subscriber's monthly subscription period. Refunds to subscribers are recorded as a reduction of revenues. Revenues from sales of DVD's and video games are recorded upon shipment. Cost of subscription revenues consists of referral expenses, fulfillment expenses, and postage and packaging expenses related to DVD's and video games provided to paying subscribers. Revenue sharing expenses are recorded as DVD's subject to revenue sharing agreements are shipped to subscribers. Cost of DVD sales include the net book value of the DVD's sold and, where applicable, a contractually specified percentage of the sales value for the DVD's that are subject to revenue share agreements. Revenue from proprietary software sales that does not require further commitment from the Company is recognized upon shipment. Consulting revenue is recognized when the services are rendered. License revenue is recognized ratably over the term of the license. The cost of services, consisting of staff payroll, outside services, equipment rental, communication costs and supplies, is expensed as incurred. 3. NOTE RECEIVABLE Note receivable totaling $770,000 at September 30, 2006, is from an unrelated third party business entity with interest rate of 12% , secured with assets of the third party business entity, and both principal and interest due in January 2007. 4. STOCK SUBSCRIPTIONS RECEIVABLE During the nine months ended September 30, 2006, the Company issued 100,000,000 shares of common stock in exchange for a receivable totaling $1,000,000 or $0.01 per share. As of September 30, 2006, stock subscriptions receivable totaled $4,150,000. The Company's management has reviewed and evaluated these receivable balances and believes there is no collectibility issue with regards to such receivable. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following management's discussion and analysis of financial condition and results of operations is based upon, and should be read in conjunction with, our unaudited financial statements and related notes included elsewhere in this Form 10-QSB, which have been prepared in accordance with accounting principles generally accepted in the United States. Overview. Our company, through our website www.gameznflix.com, is an online DVD movie and video game rental business dedicated to providing subscribers a quality rental experience. We offer subscribers a reliable, web-based alternative to traditional store- based DVD and video game rentals on a national scale with an extensive library of approximately 50,000 DVD and video game titles. We offer subscribers several different subscription plans ranging from $8.99 per month to $16.99 per month. Our more popular subscription plan of $16.99 per month allows subscribers to have up to three DVD and video game titles out at the same time with no due dates, late fees or shipping charges. Subscribers select titles at our website which are then sent via U.S mail with a prepaid return mailer. Our service is an alternative to store- based video game rentals as we offer a high level of customer service, quality titles, and superior product availability. In March 2004, we launched our website, http://www.gameznflix.com, and became fully operational in September 2004. In conjunction with the website the Company runs ad campaigns designed to create awareness among our target consumers and to generate traffic to the website. In October 2005, we entered into an agreement with Circuit City that provided for a pilot program in 27 retail stores and on the Circuit City website to promote services offered by us. On March 24, 2006, we entered into a definitive co-marketing agreement with Circuit City that calls for a scheduled rollout of our services to all the Circuit City Stores beginning in May 2006 with an anticipated complete rollout to all the stores by the end of December 2006. Although the overall number of subscribers obtained from the initial pilot program Circuit City service agreement was not considered significant in relation to the number of new subscribers added during the quarter ended 2005 and first quarter ended 2006, we believe that our relationship with Circuit City brought more prominence and recognition to our company. In August 2006, we entered into an agreement with the Army & Air Force Exchange ("AAFES") to provide video game and movie rentals to all current and retired members of the Army and Air Force personnel through the AAFES website. Our agreement with AAFES will give us access to more than 11 million military personnel, retirees and their families. We will continue to seek similar partnerships with nationally known companies or agencies to further brand our company name. In September 2006, we launched a cross-country tour visiting 12 cities in a motor coach wrapped in GameZnFlix advertisements (mobile advertising). We believe this cross-country tour provided us a successful grass roots marketing campaign of GameZnFlix around the country. Our increasing growth will require us in the future to make more significant capital investment in library content, distribution infrastructure and technology. Our current infrastructure will allow us to service approximately 150,000 monthly subscribers before significant investment as mentioned previously would be required. We currently monitor our monthly growth rate to ensure we properly anticipate the timing of making additional investment in our library content, distribution infrastructure and technology. We serve our members via nine distribution centers located in Colorado, Kentucky, Massachusetts, Washington, Maryland, Texas, Florida and two in California. These distribution centers are strategically located to service the subscriber base in each of their respective regions. Each center has a full inventory of movies and video game titles for shipment. As our subscriber base grows, we may seek opening additional distribution centers. We have evaluated and continue to evaluate our operations and operational needs. During 2005, we were able to favorably negotiate a new mailer envelope with the United States Postal Office ("USPS") that reduced our overall postage cost and increased the delivery turnaround time from 7 to 2 days. We believe that our planned growth and profitability will depend in large part on our ability to promote our services, gain subscribers and expand our relationship with current subscribers. Accordingly, we intend to focus our attention and investment of resources in marketing, strategic partnerships and development of our subscriber base. If we are not successful in promoting our services and expanding our subscriber base, this may have a material adverse effect on our financial condition and the ability to continue to operate the business. Results of Operations. (a) Revenues. We reported gross revenues of $472,960 and $1,248,869 for the three and nine months ended September 30, 2006 compared with $130,607 and $536,362 for the same periods in the prior year, increases of $342,353 and $712,507 or approximately 262% and 133%, respectively. Gross revenues increased significantly during the three and nine months ended September 30, 2006 compared to the prior periods primarily due to a greater increase in our subscriber base compared to same period in 2005 fueled by more market awareness of our services. During the three and nine months ended September 30, 2006, our subscriber base averaged approximately 9,300 and 8,200 subscribers per month as compared with 2,600 and 3,500 in the same periods of the prior year. As the end of September 30, 2006, we had approximately 11,800 total subscribers. We continue to focus on growing our subscriber base through marketing and an affiliate partnership program whereby a referral fee is paid for each new subscriber signed. Our churn rate is approximately 12.4% and 15.7% for the three and nine months ended September 30, 2006 as compared with the same periods of the prior year of 33.8% and 49.6%. Churn rate is a monthly measure defined as customer cancellations in the period divided by the sum of beginning subscribers and gross subscriber additions, then divided by the number of months in the period. Customer cancellations in the three and nine months ended September 30, 2006, includes cancellations from gross subscriber additions, which is included in the gross subscriber additions in the denominator. (b) Cost of Revenues. We reported cost of revenues of $145,303 and $535,561 for the three and nine months ended September 30, 2006 compared with $73,952 and $353,495 for the same periods in the prior year, increases of $71,351 and $182,066 or approximately 96% and 52%, respectively. Cost of revenues decreased as a percentage to gross revenues during the first nine months of 2006 compared to the same period in 2005 primarily due to a decrease in our mail delivery expense and providing the fulfillment services internally rather than having it outsourced in the prior year. In October 2005, we changed our USPS mailer to better make use of the first class mail rates and have overall reduced our postage costs. During the third quarter of 2005, we terminated our outsourced fulfillment services and internalized it, and that provided us better management of costs and fulfilling our subscribers order requests. (c) Advertising. We reported advertising expenses of approximately $933,210 and $1,627,023 for the three and nine months ended September 30, 2006 compared with $76,388 and $243,301 for the same periods in the prior year, increases of $856,822 and $1,383,722, or approximately 1,122% and 570%, respectively. Such advertising consisted of direct marketing through print, radio and online Internet advertising. We believe advertising expenses will continue to increase by at least 15% during 2006, and that has contributed to our increase in subscribers. (d) Selling, General and Administrative Expenses. We reported selling, general and administrative expenses of approximately $837,059 and $2,494,683 for the three and nine months ended September 30, 2006 compared with $512,721 and $1,073,968 the same periods in the prior year, increases of $324,338 and $1,420,715 or approximately 63% and 132%, respectively. Increase in selling, general and administrative expenses was principally due to an increase in related payroll expenses and contract services. The increase in related payroll and contract services will continue to increase as our overall growth of our business increase. (e) Consulting and Professional Fees. We reported consulting and professional fees of approximately $603,006 and $1,622,231 for the three and nine months ended September 30, 2006 compared with $454,122 and $1,059,005 the same periods in the prior year, increases of $148,884 and $563,226 or approximately 33% and 53%, respectively. Increase in consulting and professional fees during the three and nine months ended September 30, 2006 compared to the same periods in 2005 was primarily a result of additional business consultants utilized during 2006 to aid in developing a more effective marketing program. (f) Net Loss. We reported a net loss of approximately $2,732,534 and $6,624,036 for the three and nine months ended September 30, 2006 compared with $1,223,535 and $2,884,234 the same periods of the prior year, increases of $1,508,999 and $3,739,802 or approximately 123% and 130%, respectively. These increases in net losses are the result of the factors mentioned above. We anticipate having a recurring net loss during the remaining months of 2006. Factors That May Affect Our Operating Results. Our operating results can vary significantly depending upon a number of factors, many of which are outside our control. General factors that may affect our operating results include: - market acceptance of and changes in demand for services; - a small number of customers account for, and may in future periods account for, substantial portions of our revenue, and revenue could decline because of delays of customer orders or the failure to retain customers; - gain or loss of clients or strategic relationships; - announcement or introduction of new services by us or by our competitors; - price competition; - the ability to upgrade and develop systems and infrastructure to accommodate growth; - the ability to introduce and market services in accordance with market demand; - changes in governmental regulation; and - reduction in or delay of capital spending by clients due to the effects of terrorism, war and political instability. We believe that our planned growth and profitability will depend in large part on the ability to promote our services, gain clients and expand our relationship with current clients. Accordingly, we intend to invest in marketing, strategic partnerships, and development of our customer base. If we are not successful in promoting our services and expanding our customer base, this may have a material adverse effect on our financial condition and our ability to continue to operate our business. We are also subject to the following specific factors that may affect our operations: (a) Our Ability to Attract and Retain Subscribers Will Affect Our Business. We must continue to attract and retain subscribers. To succeed, we must continue to attract subscribers who have traditionally used video and game retailers, video and game rental outlets, cable channels, such as HBO and Showtime and pay-per-view. Our ability to attract and retain subscribers will depend in part on our ability to consistently provide our subscribers a high quality experience for selecting, viewing or playing, receiving and returning titles. If consumers do not perceive the service offering to be of quality, or if we introduce new services that are not favorably received by them, we may not be able to attract or retain subscribers. If the efforts to satisfy our existing subscribers are not successful, we may not be able to attract new subscribers, and as a result, revenues will be affected adversely. We must minimize the rate of loss of existing subscribers while adding new subscribers. Subscribers cancel their subscription to our service for many reasons, including a perception that they do not use the service sufficiently, delivery takes too long, the service is a poor value and customer service issues are not satisfactorily resolved. We must continually add new subscribers both to replace subscribers who cancel and to grow the business beyond the current subscriber base. If too many subscribers cancel our service, or if we are unable to attract new subscribers in numbers sufficient to grow the business, operating results will be adversely affected. Further, if excessive numbers of subscribers cancel the service, we may be required to incur significantly higher marketing expenditures than currently anticipated to replace these subscribers with new subscribers. Subscribers to the service can view as many titles and/or play games as they want every month and, depending on the service plan, may have out between three and six titles at a time. With our use of nine shipping centers and the associated software and procedural upgrades, we have reduced the transit time of DVD's and games. As a result, subscribers have been able to exchange more titles each month, which has increased operating costs. As we establish additional planned shipping centers and further refine our distribution process, we may see a continued increase in usage by subscribers. If subscriber retention does not increase or operating margins do not improve to an extent necessary to offset the effect of increased operating costs, operating results will be adversely affected. Subscriber demand for titles may increase for a variety of other reasons beyond our control, including promotion by studios and seasonal variations in movie watching. Subscriber growth and retention may be affected adversely if we attempt to increase monthly subscription fees to offset any increased costs of acquiring or delivering titles and games. The "GameZnFlix" brand is young, and we must continue to build strong brand identity. To succeed, we must continue to attract and retain a number of owners of DVD's and video game players who have traditionally relied on store-based rental outlets and persuade them to subscribe to our service through our website. We may be required to incur significantly higher advertising and promotional expenditures than currently anticipated to attract numbers of new subscribers. We believe that the importance of brand loyalty will increase with a proliferation of DVD and game subscription services and other means of distributing titles. If our efforts to promote and maintain our brand are not successful, our operating results and ability to attract and retain subscribers will be affected adversely. (b) Our Inability to Use Current Marketing Channels May Affect Our Ability to Attract New Subscribers. We may not be able to continue to support the marketing of our services by current means if such activities are no longer available or are adverse to the business. In addition, we may be foreclosed from certain channels due to competitive reasons. If companies that currently promote our services decide to enter our line of business or a similar business, we may no longer be given access to such channels. If the available marketing channels are curtailed, our ability to attract new subscribers may be affected adversely. (c) Selection of Certain Titles by Subscribers May Affect Our Costs. Certain titles cost us more to acquire depending on the source from whom they are acquired and the terms on which they are acquired. If subscribers select these titles more often on a proportional basis compared to all titles selected, DVD or game acquisition expenses could increase, and gross margins could be adversely affected. (d) Mix of Acquisition Sources May Affect Our Subscriber Levels. We utilize a mix of incentive-based and fixed-cost marketing programs to promote our service to potential new subscribers. We obtain a portion of our new subscribers through online marketing efforts, including third party banner ads, direct links and an active affiliate program. While we opportunistically adjust our mix of incentive-based and fixed-cost marketing programs, we attempt to manage the marketing expenses to come within a prescribed range of acquisition cost per subscriber. To date, we have been able to manage our acquisition cost per subscriber; however, if we are unable to maintain or replace sources of subscribers with similarly effective sources, or if the cost of existing sources increases, subscriber levels may be affected adversely and the cost of marketing may increase. (e) Competition May Affect Our Business. The market for on-line rental of DVD's and games is competitive and we expect competition to continue to increase. In addition, the companies with whom we have relationships could develop products or services, which compete with our services. Also, some competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, and greater brand recognition than we do. We also expect to face additional competition as other established and emerging companies enter the market for on-line rentals. To be competitive, we believe that we must, among other things, invest resources in developing new products, improving current services and maintaining customer satisfaction. Such investment will increase our expenses and may affect our profitability. In addition, if we fail to make this investment, we may not be able to compete successfully with our competitors, which may have a material adverse effect on our revenue and future profitability. (f) Any Significant Disruption in Service on Our Website Could Result in a Loss of Our Subscribers. Subscribers and potential subscribers access our service through our website, where the title selection process is integrated with the delivery processing systems and software. Our reputation and ability to attract, retain and serve our subscribers is dependent upon the reliable performance of the website, network infrastructure and fulfilment processes. Interruptions in these systems could make the website unavailable and hinder our ability to fulfil selections. Service interruptions or the unavailability of the website could diminish the overall attractiveness of the subscription service to existing and potential subscribers. Our servers utilize a number of techniques to track, deter and thwart attacks from computer viruses, physical or electronic break- ins and similar disruptions, which could lead to interruptions and delays in the service and operations as well as loss, misuse or theft of data. We currently use both hardware and software to secure our systems, network and, most importantly, our data from these attacks; this includes several layers of security in place for our protection and that of our members' data. We also have procedures in place to ensure that the latest security patches and software are running on our servers - thus maintaining another level of security. Any attempts by hackers to disrupt the website service or the internal systems, if successful, could harm the business, be expensive to remedy and damage our reputation. We do not have an insurance policy that covers expenses related to direct attacks on our website or internal systems. Any significant disruption to the website or internal computer systems could result in a loss of subscribers and adversely affect the business and results of operations. (g) Potential Delivery Issues Could Result in a Loss of Our Subscribers. We rely exclusively on the USPS to deliver DVD's and games from our shipping centers and to return DVD's and games from subscribers. We are subject to risks associated with using the public mail system to meet our shipping needs, including delays caused by bioterrorism, potential labor activism and inclement weather. Our DVD's and games are also subject to risks of breakage during delivery and handling by the USPS. The risk of breakage is also impacted by the materials and methods used to replicate DVD's and games. If the entities replicating DVD's and games use materials and methods more likely to break during delivery and handling or we fail to timely deliver DVD's and games to subscribers, subscribers could become dissatisfied and cancel the service, which could adversely affect operating results. In addition, increased breakage rates for DVD's and games will increase our cost of acquiring titles. (h) There May be a Change in Government Regulation of the Internet or Consumer Attitudes Toward Use of the Internet. The adoption or modification of laws or regulations relating to the Internet or other areas of our business could limit or otherwise adversely affect the manner in which we currently conduct our business. In addition, the growth and development of the market for online commerce may lead to more stringent consumer protection laws, which may impose additional burdens on us. If we are required to comply with new regulations or legislation or new interpretations of existing regulations or legislation, this compliance could cause us to incur additional expenses or alter our business model. The manner in which Internet and other legislation may be interpreted and enforced cannot be precisely determined and may subject either us or our customers to potential liability, which in turn could have an adverse effect on the business, results of operations and financial condition. The adoption of any laws or regulations that adversely affect the popularity or growth in use of the Internet could decrease the demand for the subscription service and increase the cost of doing business. In addition, if consumer attitudes toward use of the Internet change, consumers may become unwilling to select their entertainment online or otherwise provide us with information necessary for them to become subscribers. Further, we may not be able to effectively market our services online to users of the Internet. If we are unable to interact with consumers because of changes in their attitude toward use of the Internet, subscriber acquisition and retention may be affected adversely. (i) Any Required Expenditures by Us as a Result of Indemnification Will Result in Increased Costs to Us. The Company's bylaws include provisions to the effect that it may indemnify any director, officer, or employee. In addition, provisions of Nevada law provide for such indemnification, as well as for a limitation of liability of the Company's directors and officers for monetary damages arising from a breach of their fiduciary duties. Any limitation on the liability of any director or officer, or indemnification of any director, officer, or employee, could result in substantial expenditures being made by the Company in covering any liability of such persons or in indemnifying them. (j) Our Inability to Issue Shares Upon Conversion of Debentures Would Require Us to Pay Penalties to Golden Gate. If we are unable to issue common stock, or fail to timely deliver common stock on a delivery date, we are required to: - pay late payments to Golden Gate for late issuance of common stock upon conversion of the convertible debenture, in the amount of $100 per business day after the delivery date for each $10,000 of convertible debenture principal amount being converted or redeemed. - at the election of Golden Gate, we must pay Golden Gate a sum of money determined by multiplying up to the outstanding principal amount of the convertible debenture designated by Golden Gate by 130%, together with accrued but unpaid interest thereon - if ten days after the date we are required to deliver common stock to Golden Gate pursuant to a conversion, Golden Gate purchases (in an open market transaction or otherwise) shares of common stock to deliver in satisfaction of a sale by Golden Gate of the common stock which it anticipated receiving upon such conversion (a "Buy-In"), then we are required to pay in cash to Golden Gate the amount by which its total purchase price (including brokerage commissions, if any) for the shares of common stock so purchased exceeds the aggregate principal and/or interest amount of the convertible debenture for which such conversion was not timely honored, together with interest thereon at a rate of 15% per annum, accruing until such amount and any accrued interest thereon is paid in full. In the event that we are required to pay penalties to Golden Gate or redeem the convertible debentures held by Golden Gate, we may be required to curtail or cease our operations. (k) Repayment of Debentures, If Required, Would Deplete Our Available Capital. The convertible debenture issued to Golden Gate is due and payable, with 4_% interest, three years from the date of issuance, unless sooner converted into shares of common stock. In addition, any event of default could require the early repayment of the convertible debentures at a price equal to 125% of the amount due under the debentures. We anticipate that the full amount of the convertible debentures, together with accrued interest, will be converted into shares of our common stock, in accordance with the terms of the debenture. If we were required to repay the debenture, we would be required to use our limited working capital and/or raise additional funds. If we were unable to repay the debentures when required, the debenture holder could commence legal action against us and foreclose on assets to recover the amounts due. Any such action may require us to curtail or cease operations. Operating Activities. The net cash used in operating activities was $4,610,360 for the nine months ended September 30, 2006 compared with $1,500,657 for the nine months ended September 30, 2005, an increase of $3,109,703. This increase is attributed to many changes from period to period, including the payment of stock based compensation and an increase in depreciation and amortization. Investing Activities. Net cash used in investing activities was $7,490,174 for the nine months ended September 30, 2006 compared with $787,256 for the nine months ended September 30, 2005, an increase of $6,702,918. This increase resulted from increased investments of cash that we had as a result of the recent additional funds provided by Golden Gate Investors, Inc. as a result of the Addendum to Convertible Debenture and Warrant to Purchase Common Stock, between that firm and us (as discussed below). Liquidity and Capital Resources. As of September 30, 2006, we had total current assets of $5,870,767 and total current liabilities of $1,210,244, resulting in a working capital surplus of $4,660,523. Our cash and certificates of deposit balance as of September 30, 2006 totaled $317,821 and $3,070,276, respectively. Our cash flow from financing activities for the nine months ended September 30, 2006 resulted in a surplus of $6,515,960. Overall, our cash and cash equivalents for the nine months ended September 30, 2006 decreased by $5,584,574. Our current cash and cash equivalents balance will be sufficient to fund our operations for the next twenty four months. However, we will continue to raise capital through either debt or equity instruments that will allow us the resources to increase our library content, distribution infrastructure and technology. We currently have approximately $4,150,000 in stock subscriptions receivable that we believe we will be able to collect in the next six months. We currently have filed a registration statement under Form SB-2 during the first quarter of 2006 related to exercisable warrants being registered in behalf of Golden Gate Investors, Inc. to purchase 20,300,000 shares of our common stock at $1.09 per share providing future funding of approximately $16,000,000. Our continued operations, as well as the implementation of our business plan (including allocating resources to increase our library content, distribution infrastructure and technology) will depend upon our ability to raise additional funds through bank borrowings and equity or debt financing. In connection with our need for funding, we have entered into a financing arrangement with Golden Gate Investors. We entered into a Securities Purchase Agreement with Golden Gate on November 11, 2004 for the sale of (i) $150,000 in convertible debentures and (ii) warrants to buy 15,000,000 shares of our common stock. The debentures bear interest at 4 3/4%, mature three years from the date of issuance, and are convertible into our common stock, at the selling stockholder's option. The convertible debentures are convertible into the number of our shares of common stock equal to the principal amount of the debentures being converted multiplied by 110, less the product of the conversion price multiplied by 100 times the dollar amount of the debenture. The conversion price for the convertible debentures is the lesser of (i) $0.20, (ii) eighty two percent of the average of the three lowest volume weighted average prices during the twenty (20) trading days prior to the conversion or (iii) eighty two percent of the volume weighted average price on the trading day prior to the conversion. Accordingly, there is in fact no limit on the number of shares into which the debenture may be converted. However, in the event that our market price is less than $0.015, we will have the option to prepay the debenture at 150% rather than have the debenture converted. If we elect to prepay the debenture, Golden Gate may withdraw its conversion notice. In addition, the selling stockholder is obligated to exercise the warrant concurrently with the submission of a conversion notice by the selling stockholder. The warrant is exercisable into 15,000,000 shares of common stock at an exercise price of $1.09 per share. As of the end of September 30, 2006, a total of 11,600,000 shares were issued related to the warrant providing us approximately $12,100,000. On January 17, 2006, we entered into an Addendum to Convertible Debenture and Warrant to Purchase Common Stock with Golden Gate in connection with the above discussed financing. Under the terms of this Addendum, the principal amount of the debenture was increased by $150,000 to $300,000 (upon the execution of the Addendum, $150,000 was sent to us). In connection with this addition of principal to the debenture, we granted to Golden Gate a warrant to purchase 15,000,000 shares of our common stock on the same terms and conditions as the original warrant. Golden Gate has contractually agreed to restrict its ability to convert the debentures and/or exercise its warrants and receive shares of our common stock such that the number of shares of common stock held by its and its affiliates after such conversion or exercise does not exceed 9.99% of our then issued and outstanding shares of common stock. We filed a registration statement under Form SB-2/A during 2005 related to exercisable warrants being registered in behalf of Golden Gate Investors, Inc. to purchase 15,000,000 shares of our common stock at $1.09 per share of which approximately 3,400,000 shares still remain as of September 30, 2006 providing future funding of approximately $3,700,000. Additionally, we filed another registration statement under Form SB-2 during the first quarter of 2006 related to exercisable warrants being registered in behalf of Golden Gate Investors, Inc. to purchase 20,300,000 shares of our common stock at $1.09 per share providing future funding of approximately $22,000,000. As of the end of September 30, 2006, a total of 11,600,000 shares were issued related to the warrant providing us approximately $12,600,000. Whereas we have been successful in the past in raising capital, no assurance can be given that these sources of financing will continue to be available to it and/or that demand for our equity/debt instruments will be sufficient to meet our capital needs, or that financing will be available on terms favorable to us. If funding is insufficient at any time in the future, we may not be able to take advantage of business opportunities or respond to competitive pressures, or may be required to reduce the scope of our planned product development and marketing efforts, any of which could have a negative impact on our business and operating results. In addition, insufficient funding may have a material adverse effect on our financial condition, which could require it to: - curtail operations significantly; - sell significant assets; - seek arrangements with strategic partners or other parties that may require us to relinquish significant rights to products, technologies or markets; or - explore other strategic alternatives including a merger or sale of us. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities may result in dilution to our existing stockholders. If additional funds are raised through the issuance of debt securities, these securities may have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on our operations. Regardless of whether our cash assets prove to be inadequate to meet our operational needs, we may seek to compensate providers of services by issuance of stock in lieu of cash, which may also result in dilution to our existing shareholders. Inflation. The impact of inflation on our costs and the ability to pass on cost increases to our customers over time is dependent upon market conditions. We are not aware of any inflationary pressures that have had any significant impact on our operations over the past quarter, and we do not anticipate that inflationary factors will have a significant impact on our future operations. Off-Balance Sheet Arrangements. We do not maintain off-balance sheet arrangements nor does it participate in non-exchange traded contracts requiring fair value accounting treatment. Critical Accounting Policies. The SEC has issued Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"), suggesting companies provide additional disclosure and commentary on their most critical accounting policies. In FRR 60, the SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of a company's financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our most critical accounting policies include: (a) use of estimates in the preparation of financial statements; (b) non-cash compensation valuation; (c) revenue recognition; and (d) impairment of long-lived assets. The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results we reports in our financial statements. (a) Use of Estimates in the Preparation of Financial Statements. The preparation of these financial statements requires our company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to revenue recognition and concentration of credit risk. We base our estimates on historical experience and on various other assumptions that are 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. Actual results may differ from these estimates under different assumptions or conditions. (b) DVD's and Video Games Library. As of September 2006, the Company has invested over $4,475,000 in our DVD and video game library resulting in approximately 50,000 DVD and video game titles available for rental. We acquire DVD's and video games from distributors through a direct purchase agreement. Such purchases are recorded at the historical cost. We depreciate our DVD's and video games library on a straight-line basis over a twelve month period. We currently have not assigned a salvage value since it is our intention to not sell our library. In the event that we do sell a portion of our library as result of slow moving title rentals, we will re-evaluate our policy of depreciation in relation to the salvage value. (c) Revenue Recognition and Cost of Revenue. Subscription revenues are recognized ratably during each subscriber's monthly subscription period. Refunds to subscribers are recorded as a reduction of revenues. Revenues from sales of DVD's and video games are recorded upon shipment. Cost of subscription revenues consists of fulfillment expenses, and postage and packaging expenses related to DVD's and video games provided to paying subscribers. Revenue sharing expenses are recorded as DVD's subject to revenue sharing agreements are shipped to subscribers. Cost of DVD sales include the net book value of the DVD's sold and, where applicable, a contractually specified percentage of the sales value for the DVD's that are subject to revenue share agreements. (d) Non-Cash Compensation Valuation. We intend to issue shares of common stock to various individuals and entities for management, legal, consulting and marketing services. These issuances will be valued at the fair market value of the services provided and the number of shares issued is determined, based upon the open market closing price of common stock as of the date of each respective transaction. These transactions will be reflected as a component of selling, general and administrative expenses in our statement of operations. Forward Looking Statements. Information in this Form 10-QSB contains "forward looking statements" within the meaning of Rule 175 of the Securities Act of 1933, as amended, and Rule 3b-6 of the Securities Act of 1934, as amended. When used in this Form 10-QSB, the words "expects," "anticipates," "believes," "plans," "will" and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include, but are not limited to, statements regarding the adequacy of cash, expectations regarding net losses and cash flow, statements regarding growth, the need for future financing, dependence on personnel, and operating expenses. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, those discussed above as well as the risks set forth above under "Factors That May Affect Our Operating Results." These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. ITEM 3. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, management carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon the evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. In addition, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be or have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, and/or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, and/or the degree of compliance with the policies and procedures may deteriorate. Because of the inherent limitations in a cost-effective internal control system, misstatements due to error or fraud may occur and not be detected. Changes in Disclosure Controls and Procedures. There were no changes in our disclosure controls and procedures, or in factors that could significantly affect those controls and procedures since their most recent evaluation. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. There were no unregistered sales of the Company's equity securities during the three months ended on September 30, 2006. There were no purchases of our common stock by our affiliates or us during the three months ended September 30, 2006. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS. Exhibits included or incorporated by reference herein are set forth in the Exhibit Index. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GameZnFlix, Inc. Dated: November 1, 2006 By: /s/ John Fleming John Fleming, Chief Executive Officer Dated: November 1, 2006 By: /s/ Arthur DeJoya Arthur DeJoya, Chief Financial Officer EXHIBIT INDEX Number Description 2.1 Agreement and Plan of Merger between the Company and Syconet.com, Inc., a Delaware corporation, dated December 1, 2001 (incorporated by reference to Exhibit 2.1 of the Form 10-KSB filed on April 15, 2003). 2.2 Acquisition Agreement between the Company and shareholders of AmCorp Group, Inc., dated September 13, 2002 (incorporated by reference to Exhibit 2 of the Form 8-K filed on September 23, 2002). 2.3 Acquisition Agreement between the Company and shareholders of Naturally Safe Technologies, Inc., dated October 31, 2002 (incorporated by reference to Exhibit 2 of the Form 8- K filed on November 13, 2002). 2.4 Acquisition Agreement between the Company and shareholders of Veegeez.com, LLC, dated September 25, 2003 (incorporated by reference to Exhibit 2 of the Form 8-K filed on October 9, 2003). 3.1 Articles of Incorporation, dated December 19, 2001 (incorporated by reference to Exhibit 3.1 of the Form 10- KSB filed on April 15, 2003). 3.2 Certificate of Amendment to Articles of Incorporation, dated November 21, 2002 (incorporated by reference to Exhibit 3.2 of the Form 10-KSB filed on April 15, 2003). 3.3 Certificate of Amendment to Articles of Incorporation, dated March 5, 2003 (incorporated by reference to Exhibit 3.3 of the Form 10-KSB filed on April 15, 2003). 3.4 Certificate of Amendment to Articles of Incorporation, dated July 11, 2003 (incorporated by reference to Exhibit 3.4 of the Form 10-QSB filed on August 20, 2003). 3.5 Certificate of Amendment to Articles of Incorporation, dated January 26, 2004 (incorporated by reference to Exhibit 3.5 of the Form 10-KSB filed on April 19, 2004). 3.6 Certificate of Amendment to Articles of Incorporation, dated December 16, 2004 (incorporated by reference to Exhibit 3 of the Form 8-K filed on December 21, 2004) 3.7 Certificate of Amendment to Articles of Incorporation, dated July 19, 2005 (incorporated by reference to Exhibit 3 of the Form 8-K filed on July 22, 2005). 3.8 Certificate of Amendment to Articles of Incorporation, dated March 21, 2006 (incorporated by reference to Exhibit 3 of the Form 8-K filed on March 27, 2006). 3.9 Bylaws (incorporated by reference to Exhibit 3.2 of the Form 10-SB filed on January 25, 2000). 4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4 of the Form 10-SB/A filed on March 21, 2000). 4.2 1997 Incentive Compensation Program, as amended (incorporated by reference to Exhibit 10.1 of the Form SB-2 POS filed on August 28, 2000). 4.3 Common Stock Purchase Warrant issued to Alliance Equities, Inc., dated May 21, 2000 (incorporated by reference to Exhibit 4.1 to the Form SB-2 filed on June 2, 2000). 4.4 Form of Redeemable Common Stock Purchase Warrant to be issued to investors in the private placement offering, dated January 27, 2000 (incorporated by reference to Exhibit 4.2 to the Form SB-2/A filed on June 27, 2000). 4.5 Redeemable Common Stock Purchase Warrant issued to Diversified Leasing Inc., dated May 1, 2000 (incorporated by reference to Exhibit 4.3 of the Form SB-2/A filed on June 27, 2000). 4.6 Redeemable Common Stock Purchase Warrant issued to John P. Kelly, dated August 14, 2000 (incorporated by reference to Exhibit 4.4 of the Form SB-2 POS filed on August 28, 2000). 4.7 Redeemable Common Stock Purchase Warrant for Frank N. Jenkins, dated August 14, 2000 (incorporated by reference to Exhibit 4.5 of the Form SB-2 POS filed on August 28, 2000). 4.8 Redeemable Common Stock Purchase Warrant for Ronald Jenkins, dated August 14, 2000 (incorporated by reference to Exhibit 4.6 of the Form SB-2 POS filed on August 28, 2000). 4.9 Non-Employee Directors and Consultants Retainer Stock Plan, dated July 1, 2001 (incorporated by reference to Exhibit 4.1 of the Form S-8 filed on February 6, 2002). 4.10 Consulting Services Agreement between the Company and Richard Nuthmann, dated July 11, 2001 (incorporated by reference to Exhibit 4.2 of the Form S-8 filed on February 6, 2002). 4.11 Consulting Services Agreement between the Company and Gary Borglund, dated July 11, 2001 (incorporated by reference to Exhibit 4.3 of the Form S-8 filed on February 6, 2002). 4.12 Consulting Services Agreement between the Company and Richard Epstein, dated July 11, 2001 (incorporated by reference to Exhibit 4.4 of the Form S-8 filed on February 6, 2002). 4.13 Amended and Restated Non-Employee Directors and Consultants Retainer Stock Plan, dated July 1, 2002 (incorporated by reference to Exhibit 4 of the Form S-8 filed on July 30, 2002). 4.14 Amended and Restated Non-Employee Directors and Consultants Retainer Stock Plan (Amendment No. 2), dated April 25, 2003 (incorporated by reference to Exhibit 4.1 of the Form S-8 filed on May 12, 2003). 4.15 Stock Incentive Plan, dated April 25, 2003 (incorporated by reference to Exhibit 4.2 of the Form S-8 filed on May 12, 2003). 4.16 Amended and Restated Non-Employee Directors and Consultants Retainer Stock Plan (Amendment No. 3), dated August 17, 2003 (incorporated by reference to Exhibit 4 of the Form S- 8 POS filed on September 3, 2003). 4.17 Amended and Restated Non-Employee Directors and Consultants Retainer Stock Plan (Amendment No. 4), dated November 17, 2003 (incorporated by reference to Exhibit 4 of the Form S- 8 POS filed on December 9, 2003). 4.18 Amended and Restated Non-Employee Directors and Consultants Retainer Stock Plan (Amendment No. 5), dated May 20, 2004 (incorporated by reference to Exhibit 4 of the Form S-8 POS filed on May 25, 2004). 4.19 Amended and Restated Stock Incentive Plan, dated August 23, 2004 (incorporated by reference to Exhibit 4 of the Form S- 8 POS filed on August 31, 2004). 4.20 Securities Purchase Agreement between the Company and Golden Gate Investors, Inc., dated November 11, 2004 (incorporated by reference to Exhibit 4.1 of the Form 8-K filed on November 30, 2004). 4.21 4 3/4 % Convertible Debenture issued to Golden Gate Investors, Inc., dated November 11, 2004 (incorporated by reference to Exhibit 4.25 of The Form SB-2 filed on May 5, 2005). 4.22 Warrant to Purchase Common Stock issued in favor of Golden Gate Investors, Inc., dated November 11, 2004 (incorporated by reference to Exhibit 4.2 of the Form 8-K filed on November 30, 2004). 4.23 Registration Rights Agreement between the Company and Golden Gate Investors, Inc., dated November 11, 2004 (incorporated by reference to Exhibit 4.3 of the Form 8-K filed on November 30, 2004). 4.24 Addendum to Convertible Debenture and Securities Purchase Agreement between the Company and Golden Gate Investors, Inc., dated November 17, 2004 (incorporated by reference to Exhibit 4.4 of the Form 8-K filed on November 30, 2004). 4.25 Addendum to Convertible Debenture and Securities Purchase Agreement between the Company and Golden Gate Investors, Inc., dated December 17, 2004 (incorporated by reference to Exhibit 4.5 of the Form 8-K/A filed on January 18, 2005). 4.26 Amended and Restated Non-Employee Directors and Consultants Retainer Stock Plan (Amendment No. 6), dated January 28, 2005 (incorporated by reference to Exhibit 4.1 of the Form S-8 POS filed on February 2, 2005). 4.27 Amended and Restated Stock Incentive Plan (Amendment No. 2), dated January 28, 2005 (incorporated by reference to Exhibit 4.2 of the Form S-8 POS filed on February 2, 2005). 4.28 Amended and Restated Stock Incentive Plan (Amendment No. 3), dated April 15, 2005 (incorporated by reference to Exhibit 4 of the Form S-8 POS filed on April 18, 2005 ). 4.29 Amended and Restated Non-Employee Directors and Consultants Retainer Stock Plan (Amendment No. 7), dated July 13, 2005 (incorporated by reference to Exhibit 4.1 of the Form S-8 POS filed on July 21, 2005 ). 4.30 Amended and Restated Stock Incentive Plan (Amendment No. 4), dated July 13, 2005 (incorporated by reference to Exhibit 4.2 of the Form S-8 POS filed on July 21, 2005 ). 4.31 2006 Non-Employee Directors and Consultants Retainer Stock Plan, dated January 6, 2006 (incorporated by reference to Exhibit 4.1 of the Form S-8 fled on January 17, 2006. 4.32 2006 Stock Incentive Plan, dated January 6, 2006 (incorporated by reference to Exhibit 4.2 of the Form S-8 filed on January 17, 2006). 4.33 Addendum to Convertible Debenture and Warrant to Purchase Common Stock, dated January 17, 2006 (incorporated by reference to Exhibit 4.26 of the Form SB-2 filed on March 30, 2006). 10.1 Consulting Services Agreement between the Company and De Joya & Company, Inc., dated July 9, 2004 (incorporated by reference to Exhibit 10.1 of the Form 10-KSB filed on February 1, 2006). 10.2 Employment Agreement between the Company and Gary Hohman, dated October 1, 2004 (incorporated by reference to Exhibit 10 of the Form 8-K filed on October 8, 2004). 10.3 Consulting Services Agreement between the Company and De Joya & Company, Inc., dated August 1, 2005 (incorporated by reference to Exhibit 10 of the Form 8-K filed on February 1, 2006). 10.4 Employment Agreement between the Company and John J. Fleming, dated September 25, 2005 (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on September 28, 2005). 10.5 Employment Agreement between the Company and Donald N. Gallent, dated September 25, 2005 (incorporated by reference to Exhibit 10.2 of the Form 8-K filed on September 28, 2005). 10.6 Services Agreement between the Company and Circuit City Stores, Inc., dated October 4, 2005 (including Exhibit A: Standard Terms and Conditions; and Exhibit C: Test Locations) (excluding Exhibit B: Service and Fee Schedule) (incorporated by reference to Exhibit 10 of the Form 8-K filed on October 6, 2005). 10.7 Amendment #1 to Services Agreement between the Company and Circuit City Stores, Inc., dated December 28, 2005 (incorporated by reference to Exhibit 10.2 of the Form 8- K/A filed on January 5, 2006). 10.8 Co-Marketing Agreement between the Company and Circuit City Stores, Inc., dated March 22, 2006 (including Exhibit B: Rollout Schedule) (excluding Exhibit A: Description of Services and Fee Schedule; Exhibit C: GNF Licensed Marks; and Exhibit D: Circuit City Licensed Marks) (incorporated by reference to Exhibit 10 of the Form 8-K filed on March 27, 2006). 16.1 Letter on Change in Certifying Accountant (incorporated by reference to Exhibit 16 of the Form 8-K/A filed on August 24, 2001). 16.2 Letter on Change in Certifying Accountant (incorporated by reference to Exhibit 16 of the Form 8-K/A filed on March 7, 2002). 16.3 Letter on Change in Certifying Accountant (incorporated by reference to Exhibit 16 of the Form 8-K/A filed on November 5, 2002). 16.4 Letter on Change in Certifying Accountant (incorporated by reference to Exhibit 16 of the Form 8-K/A filed on April 29, 2003). 16.5 Letter on Change in Certifying Accountant (incorporated by reference to Exhibit 16 of the Form 8-K/A filed on January 21, 2004). 16.6 Letter on Change in Certifying Accountant, dated January 2, 2006 (incorporated by reference to Exhibit 16 of the Form 8-K filed on January 5, 2006). 21 Subsidiaries of the Company (incorporated by reference to Exhibit 21 of the Form 10-KSB filed on April 1, 2005). 23 Consent of independent registered public accounting firm (incorporated by reference to Exhibit 23 of the Form 10-KSB filed on February 1, 2006). 31.1 Rule 13a-14(a)/15d-14(a) Certification of John Fleming (filed herewith). 31.2 Rule 13a-14(a)/15d-14(a) Certification of Arthur DeJoya (filed herewith). 32 Section 1350 Certification of John Fleming and Arthur DeJoya (filed herewith). 99.1 Patent issued to Donald V. Duffy, Jr., dated October 17, 2000 (incorporated by reference to Exhibit 99.2 of the Form 10-KSB filed on April 15, 2003). 99.2 Press Release Issued by the Company, dated September 30, 2004 (incorporated by reference to Exhibit 99 of the Form 8-K filed on October 8, 2004). 99.3 Press Release Issued by the Company, dated February 4, 2005 (incorporated by reference to Exhibit 99 of the Form 8-K filed on February 7, 2005). 99.4 Press Release issued by the Company, dated October 5, 2005 (incorporated by reference to Exhibit 99 of the Form 8-K filed on October 6, 2005). 99.5 Press Release issued by the Company, dated March 24, 2006 (incorporated by reference to Exhibit 99 of the Form 8-K filed on March 27, 2006).