10KSB/A 1 v035071_10-ksba.htm Unassociated Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-KSB/A

(Amendment No.2)
(Mark One)
x
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004
OR
   
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-24269
___________________
INFINIUM LABS, INC.
(Name of small business issuer in its charter)
___________________
 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
65-1048794
(I.R.S. Employer
Identification No.)
 
1191 2nd Avenue, Suite 500,
Seattle, WA 98101
(Address of principal executive offices) (Zip Code)
 
206-393-3000
(Issuer’s telephone number)
 
Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:
 
Common Stock
(Title of each class)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x  Yes o No

Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. o
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes o No x

State issuer’s revenues for its most recent fiscal year: $0

At April 12, 2005, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the average bid and asked price of such common equity, was $30,108,984.67.

The number of shares outstanding of our company’s common stock at April 12, 2005 was 151,829,349.

Transitional Small Business Disclosure Format (check one): o Yes x No
 


 
 
 
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EXPLANATORY NOTE
 
This Amendment No. 2 on Form 10-KSB/A (“Form 10-KSB/A”) to Infinium Labs, Inc.’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004, initially filed with the Securities and Exchange Commission (“SEC”) on April 20, 2005 (the “Original Filing”) and amended by amendment filed on December 20, 2005 ("Amendment No. 1"), is being filed to reflect responses to comments received from the SEC in connection with a review of our filings, as well as additional disclosure revisions deemed appropriate by current management. In addition, Amendment No. 1 was filed to reflect a restatement of our consolidated financial statements as of and for the year ended December 31, 2004, and the notes related thereto, as discussed in Note 3 to the Consolidated Financial Statements of Infinium Labs, Inc. and Subsidiary included in Item 7.

As previously disclosed in a Current Report on Form 8-K filed with the SEC on October 28, 2005, and as disclosed in the Explanatory Note to Amendment No. 1, our Board of Directors determined that our previously issued audited financial statements for the two months ended December 31, 2003 and the year ended December 31, 2004 should not be relied upon because they contain errors. The errors relate to (i) misclassifying employees as independent contractors in the fourth quarter of 2003 and the first quarter of 2004, and (ii) our failure to record sufficient loss contingency accruals in 2004 to cover possible monetary penalties and interest relating to our failure to file certain payroll and withholding tax returns and to satisfy required withholding and payroll tax obligations.

For a further discussion of the restatement and its impact on the Company’s financial statements, see Note 2 to the Consolidated Financial Statements of Infinium Labs, Inc. and Subsidiary in Item 7, as well as its more recent filings.
 
Except as otherwise expressly stated by reference to a specific later date, the disclosure in this Form 10-KSB/A has not been updated to reflect events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events. Accordingly, except as otherwise expressly stated, this Form 10-KSB/A continues to describe conditions as of the date of the Original Filing, and we have not updated the disclosures contained herein to reflect events that occurred at a later date. We have, however, updated the facing page of this report to reflect the address and telephone number of the Company’s current principal executive offices.
 
In addition, pursuant to the rules of the SEC, Item 15 of Part IV of the Original Filing has been amended to include a currently dated consent of our independent registered public accounting firm and currently dated certifications from our Interim Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The consent of the independent registered public accounting firm and the certifications of our Interim Chief Executive Officer, who is also our Interim Chief Financial Officer, are attached to this Form 10-KSB/A as exhibits 23, 31.1and 32.1, respectively.
 
 
 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

THIS ANNUAL REPORT ON FORM 10-KSB, INCLUDING EXHIBITS THERETO, CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENTS ARE TYPICALLY IDENTIFIED BY THE WORDS "ANTICIPATES”, "BELIEVES”, "EXPECTS”, "INTENDS”, "FORECASTS”, "PLANS”, "FUTURE”, "STRATEGY”, OR WORDS OF SIMILAR MEANING. VARIOUS FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS, INCLUDING THOSE DESCRIBED IN "RISK FACTORS" AND ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION IN THIS FORM 10-KSB. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS TO REFLECT ACTUAL RESULTS, CHANGES IN ASSUMPTIONS, OR CHANGES IN OTHER FACTORS, EXCEPT AS REQUIRED BY LAW.


As used in this annual report on Form 10-KSB, "we," "us," "our," "Infinium " and "our Company" refer to Infinium Labs, Inc. and our subsidiaries, unless the context otherwise requires.

 
General Overview

We are developing and seeking to commercialize the Phantom Game Service, a video game delivery system designed to allow consumers to search, preview and play a large selection of video games on demand via a broadband Internet connection.

We have not yet generated any revenue from operations. Our ability to generate revenue in the future is dependent on our ability to successfully develop and commercialize the Phantom Game Service.

Since inception through December 31, 2004, we have incurred aggregate losses of $36,764,861. Our loss from operations for year ended December 31, 2004 was $33,819,787; our loss from operations for the two months ended December 31, 2003 was $674,945. In addition, as of December 31, 2004, we had an accumulated deficit of $36,764,861 and we need immediate additional capital to continue operations. Given our limited resources, and the delays experienced thusfar, we are not in a position to anticipate a completion date for development of our product or a launch date for the Phantom Game Service.

In their report dated April 14, 2005, our independent auditors have expressed substantial doubt about our ability to continue as a going concern in our financial statements for the year ended December 31, 2004. Our ability to continue as a going concern is an issue raised as a result of recurring losses from operations, a stockholders' deficit, and requirement for a significant amount of capital financing to proceed with our business plan.

Corporate History

On January 5, 2004, the Company’s wholly owned subsidiary merged with and into Infinium Labs Operating Corporation, with Infinium Labs Operating Corporation surviving as its wholly owned subsidiary. Infinium Labs Operating Corporation was incorporated in the State of Delaware on December 9, 2002 for the purpose of developing a video game service and system. In connection with the merger and related transactions, the Company changed its name from Global Business Resources, Inc. to Infinium Labs, Inc. Infinium Labs Operating Corporation’s stockholders acquired 82.35% of the Company’s outstanding common stock and its directors and officers became the Company’s directors and officers. Since the completion of the merger, the Company’s business has consisted of the business and operations of Infinium Labs Operating Corporation. When used in this report, references to Phantom and Infinium Labs are references to its trademarks or service marks with respect to which the Company has filed applications for registration with the U.S. Patent and Trademark Office.

 
Phantom Game Service

The Phantom Game Service is comprised of the following key components:
   
·
Phantom Game Receiver - The Phantom Game Receiver is a game console designed to integrate easily into a family’s home entertainment system. It connects to any standard television, as well as A/V receivers. The Phantom Game Receiver accesses the Phantom Game Service by connecting to a broadband Internet connection, such as a cable or DSL line or through existing home networks, including wireless home networks. Its primary components consist of a central processing unit, high-end video processor, high-speed memory, computer motherboard and large hard disk drive. The Phantom Game Receiver is equipped with a “lapboard,” which consists of a custom keyboard and mouse, and can also be used with a console-style game controller. The Phantom Game Receiver features multiple controller ports to enable multi-player gaming and provide flexibility for specialized peripherals. It is derived from existing PC technologies, but differs from PCs in that it is designed for game play, not to perform other functions such as data processing. This dedicated functionality enables the Phantom Game Receiver to simplify the user’s experience. The Phantom Game Receiver is only designed to play content downloaded through the Phantom Game Service. The Phantom Game Receiver does not use discs, cartridges or other external media that can be easily lost, damaged or copied. Instead, content is downloaded in real time over the Internet to the internal hard drive of the Phantom Game Receiver to enable game play. The primary technical characteristics of the Receiver are expected to include:
 
*    Display: Any TV
*    HDTV Compatible
*    Connectivity: Any broadband connection
*    Processor: Advanced Micro Devices (AMD) Sempron family
*    Graphics Processor: NVIDIA 3D graphics accelerator
*    System Memory: 256 Megabyte
*    Dolby digital 5.1 Channel Audio
*    Operating System: Microsoft Windows XP Embedded
*    Hard Disk Drive: 80GigaByte hard drive w/ intelligent cache management
*    Accessories: Wireless Lapboard and game pad controllers to be sold separately
*    Wide variety of input and output connectors
*    Sophisticated security, digital rights management (DRM) and content encryption
*    Transparent patches and upgrades
*    Client updates add new features to the service
*    Content management keeps games fresh and reliable
 
·
Streaming Game Technology - The Phantom Game Receiver and the Phantom Game Service are designed to work in concert to deliver retail quality video games to consumers over standard home broadband Internet connections. A technique has been developed and is continuing to be refined by our company which allows us to take games, traditionally delivered on CD-ROM or DVD media, and convert them into digital streams of data. This technology is designed to allow consumers to start playing most games in less time than it would take to install the game from a CD-ROM or DVD.

·
Game Content - We anticipate offering consumers a wide range of commercial video games. Because the games will be stored digitally on hosted servers there is no investment in warehouse space or physical inventory, either by the game publishers or by our company. We anticipate being able to offer many of the same games that would be found in a typical game retailer. In addition we intend to offer games no longer available at retail and specialty games that can be difficult to locate. Because the Phantom Game Receiver is intended to run the Windows XP Embedded operating system, it should be capable of distributing an extremely wide range of games originally designed for use on personal computers.
 
We anticipate that the Phantom Game Service will be offered to users on a monthly subscription fee basis. Subscribers would have access to a number of free games and would be able to purchase or demo games from a library of titles. We anticipate that the Service will offer access to community features and will enable subscribers to learn about the latest games and try new release titles. If subscribers purchase a game, we anticipate that they will have full access to the title for the life of their subscription, as well as access to any modifications, updates or additional content made available for the game.

We anticipate that the Phantom Game Service will be delivered on a hardware and backend platform that makes it possible to securely deliver games directly to consumers over broadband Internet access networks. We anticipate that the Phantom Game Service will use hosted infrastructure for content servers, which will store games and other content and provide for e-commerce transactions. Games will be stored in a proprietary, compressed, encrypted store and distributed over a secure, encrypted connection from our servers.
 
Currently the Company's business activities are solely dedicated to the development of the Phantom Game Receiver and the Phantom Game Service. At April 2005 the Phantom receiver and hardware were developed to an engineering prototype level.  The Phantom software and service were functionally complete with limited units in the field for user testing.  End to end functionality of the service was shown at 2005 Consumer Electronics Show.
 
Product Benefits

Our Phantom Game Service is designed to provide the following benefits to publishers, retailers and consumers:

Windows-Based Platform

The Phantom Game Receiver is designed to enable consumers to receive games via the Phantom Game Service. The Phantom Game Receiver and Phantom Game Service are compatible with all PC games developed for the Windows operating system - literally thousands of PC games that have been developed over the years.

Unlimited Space For Game Software

The Phantom Game Service is designed to deliver games into customers' living rooms securely over broadband Internet access networks. We anticipate that our content servers will store all of the games and provide for all e-commerce transactions. We believe that this will enable us to potentially store an unlimited number of games for use by our customers. As a result, we intend to offer a robust catalog of both new releases and previously released games.

Increased Profitability

The Phantom Game Service will offer both publishers and developers a content distribution platform that eliminates production, packaging, and retail merchandising costs (including open box returns). In addition, both publishers and developers can continue to earn revenues on games that are no longer on retail shelves, potentially increasing the revenue lifespan for their PC games.

Closed System Prevents Piracy

The Phantom Game Service is designed to be a "private" network that runs over any broadband Internet connection. The Phantom Game Service will only be accessible by subscribers though the Phantom Game Receiver. The Phantom Game Receiver is designed as a "closed box" with no removable media and employs a series of authentication protocols. The Phantom Game Service and the Phantom Game Receiver have been designed to ensure security in order to protect game content from piracy.

Content Strategy

To populate the Phantom Game Service with game content, we have entered into and plan to continue to enter into agreements with game publishers, developers and distributors under which we would have the right to offer the games on a commercial basis through our Service. Our agreements generally provide us with the right on a non-exclusive basis to distribute games through our Phantom Game Service in exchange for royalties on net sales. In some cases, we are required to make upfront payments, which in some cases, can be applied against future royalties. At December 31, 2004, we were party to agreements with a number of distributors, of which six required upfront payments, the amount of which totaled $1,085,000. As of that date, we had made a total of $100,000 in upfront payments and the balance was in default. As a result, these agreements may be terminated by the distributors, although we have not been notified by any distributors of intent to revoke distribution rights. The agreements generally have a duration of a few years, with the earliest expiring in December 2005, and require renegotiation to extend the term beyond the initial expiration date. Unless and until we receive additional financing, we are not planning to seek to enter into additional agreements of this nature. Our past defaults may adversely affect the willingness of these parties to renew the agreements if and when needed. Our inability to secure rights to a sufficient variety of games preferred by consumers, will negatively impact the viability of the Phantom Game Service.

We believe that this arrangement represents an extremely attractive proposition for game publishers because no additional development work or out-of-pocket costs are required of the publishers to distribute a game developed for PCs to our subscriber base via the Phantom Game Service. The Phantom Game Service will offer publishers access a new distribution channel for past, current and future PC games and an opportunity to receive incremental revenues from existing investments.
 
.Distribution Strategy

We intend to market and sell the Phantom Game Service, the Phantom Game Receiver and related accessories primarily through retail channels.

We anticipate establishing a retail partner program designed to generate new recurring revenue streams for retailers from the sale of the Phantom Game Service. Retailers would receive a percentage of the subscription revenue and games purchased over the life of the subscription in addition to their profit margin from sales of the Phantom Game Receiver. In today’s model there is no commitment from the consumer to return to the same retailer for additional purchases nor is there a monthly service fee for the retailer to share revenue from. Under our model the original selling retailer would receive a recurring revenue stream in two forms in respect of Receivers and Service subscriptions sold by them: 1) they would receive a percentage of the monthly service fee and 2) they would receive a percentage of each additional title purchased through the Service.

We do not have a direct sales force. As such, we intend to rely, to a large extent, on third parties to identify and help us secure retail channel distribution for the Phantom Game Service. We anticipate that these third party arrangements will require us to pay commissions in respect of any revenue generated through retail partners identified and covered thereby. In January 2005, we entered into such arrangements with a third party group covering specifically identified retail chains. The agreements are terminable on 45 days’ notice by either party and do not materially obligate either party unless and until sales are generated. As we are not in a position to commercially launch the Phantom Game Service, this relationship is inactive and we are not seeking to enter into similar third party marketing arrangements at this time.

Competition

While we are not aware of any direct competitors to our Phantom Game Service, we face indirect competition from other gaming platforms, game developers and distributors and PC gaming services.

Gaming Platforms

The gaming platforms that are most dominant in the market today are Sony PlayStation2, Microsoft Xbox, Nintendo GameCube and PCs. The following is a summary comparison of the strengths and weaknesses we see in each of these systems:

The Phantom Game Service and Phantom Game Receiver are designed to take advantage of the strengths of the PC platform without being subject to the weaknesses inherent in the platform. We believe that the Phantom Game Service and Phantom Game Receiver will compete with other systems based on the games available for each system, price of the system and games, reputation and convenience. Our ability to compete effectively with these existing platforms will depend heavily on our ability to acquire desirable game content for the Phantom Game Service and Phantom Game Receiver and to achieve attractive price points.
 
Game Developers and Distributors

While we anticipate that the Phantom Game Receiver will compete with other video game consoles, we also anticipate that the Phantom Game Service will compete with other game developers and distributors. While the Phantom Game Service presents an opportunity for distributors of PC games to sell their games through a new channel, we anticipate competing with game developers and distributors whose games are designed for the proprietary platforms of the video game console manufacturers. Because we expect to initially have a small installed base, developers and distributors of games for the dominant video game consoles may be reluctant to alienate the video game console manufacturers by providing content for the Phantom Game Service. Furthermore, although we look at retailers as partners and customers and believe the Phantom Game Service offers them a compelling opportunity, some retailers may view us as a competitor because the Phantom Game Service will sell games directly to subscribers, where otherwise the retailers might enjoy a direct sales relationship with those customers. Once customers have purchased the Phantom Game Receiver and become subscribers to the Phantom Game Service, we believe that to remain competitive, we must maintain a software portfolio that is attractive enough to cause subscribers to continue using the Phantom Game Service rather than switching to another platform.

PC Game Services

The past several years have seen the introduction of on-demand gaming services on the PC. These services include Yahoo! Games, Comcast Games on Demand and RealNetworks' RealArcade, as well as other services from or enabled by such companies as Exent Technologies, Trymedia Systems and Stream Theory. We believe that these services complement our offering and legitimize the category of games-on-demand, but are restricted by the limitations of the PC as an entertainment platform, by concerns over PC-based piracy and by reluctance on the part of game publishers to distribute their newest games online due to perceived channel conflicts with traditional retail.

Intellectual Property Strategy

We will rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our intellectual property rights.

With respect to patents, we intend to protect aspects of technologies associated with the make and use of the Phantom Game Service and Phantom Game Receiver through both design and utility patent applications in the United States and potentially in other countries in which we intend to market our products and services.  As of March 31, 2005, we had a total of 2 pending domestic patent applications, entitled: 
 
(1)      
METHOD AND APPARATUS FOR BACKLIGHTING OF A KEYBOARD FOR USE WITH A GAME DEVICE
 
(2)      
METHOD FOR AUTOMATIC PATCHING OF A SPARSELY STREAMED APPLICATION

The Phantom Game Service and Phantom Game Receiver will also utilize proprietary software that we develop.

We are pursuing federal registration of our trademarks and service marks in the United States with the U.S. Patent and Trademark Office. As of March 31, 2005, we had 2 independent federal trademarks registered and 3 applications pending.
 
Although we do not believe that our claimed intellectual property rights infringe the rights of third parties, third parties have in the past asserted trademark infringement claims, and may in the future assert, patent and/or trademark infringement claims against us which may result in costly litigation or which would require us to either settle or obtain a license to use third-party intellectual property rights.

Number of Total Employees and Number of Full-time Employees

At December 31, 2004, we had 41 full-time employees, three of whom are in marketing, 24 of whom are in research and development and 17 of whom are administrative, marketing and executive personnel. There is no collective bargaining agreement in place.
 
RISK FACTORS

RISKS RELATED TO OUR BUSINESS AND COMPANY

The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements in this annual report. The risks described below are not the only ones facing our Company. Additional risks not presently known to us may also impair our business operations.

WE REQUIRE ADDITIONAL FINANCING IN ORDER TO CONTINUE IN BUSINESS AS A GOING CONCERN, THE AVAILABILITY OF WHICH IS UNCERTAIN. WE MAY BE FORCED BY BUSINESS AND ECONOMIC CONDITIONS TO ACCEPT FINANCING TERMS WHICH WILL REQUIRE US TO ISSUE OUR SECURITIES AT A DISCOUNT, WHICH COULD RESULT IN FURTHER DILUTION TO OUR EXISTING STOCKHOLDERS.

As discussed under the heading, "Management's Discussion and Analysis - Liquidity and Capital Resources," we require additional financing to fund our operations. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. In addition, any additional equity financing may involve substantial dilution to our stockholders. If we fail to raise sufficient financing to meet our immediate cash needs, we will be forced to scale down or perhaps even cease the operation of our business, which may result in the loss of some or all of your investment in our common stock.

In addition, in seeking debt or equity private placement financing, we may be forced by business and economic conditions to accept terms which will require us to issue our securities at a discount from the prevailing market price or face amount, which could result in further dilution to our existing stockholders.

WE HAVE A HISTORY OF OPERATING LOSSES AND FLUCTUATING OPERATING RESULTS, WHICH RAISE SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN, WHICH MAY CAUSE US TO GO UT OF BUSINESS.

Since inception through December 31, 2004, we have incurred aggregate losses of $36,764,861. Our loss from operations for the fiscal year ended December 31, 2004 was $33,819,787. There is no assurance that we will operate profitably or will generate positive cash flow in the future. In addition, our operating results in the future may be subject to significant fluctuations due to many factors not within our control, such as the unpredictability of when, if ever, our product will be launched, when customers will order products, the size of customers' orders, the demand for our products, and the level of competition and general economic conditions.

We also expect an increase in development costs and operating costs. Consequently, we expect to incur operating losses and negative cash flow until our products gain market acceptance sufficient to generate a commercially viable and sustainable level of sales, and/or additional products are developed and commercially released and sales of such products made so that we are operating in a profitable manner.
 
WE WILL REQUIRE ADDITIONAL FUNDING TO LAUNCH OUR PHANTOM GAME SERVICE AND IF WE ARE UNSUCCESSFUL IN OBTAINING ADDITIONAL FUNDING, WE WILL BE UNABLE TO EXECUTE OUR BUSINESS PLAN AND GO OUT OF BUSINESS.

We will need to obtain additional funding in order to:

·
fund the final phases of product development and launch of our Phantom Game Service;

·
finance additional growth and working capital requirements;

·
respond to competitive pressures; and

·
respond to other opportunities or challenges as they arise.

We expect that additional equity financing will result in substantial dilution of our stockholders. Debt financing will result in higher interest expense. The amount of any such debt cannot be predicted at this time, nor can our ability to obtain or service such debt be predicted. Moreover, there is no assurance that future equity or debt financing will be available on terms acceptable to us. Failure to obtain additional financing could cause us to go out of business.
 
 
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, WE ARE UNABLE TO ACCURATELY FORECAST OUR REVENUES, AND A SHORTFALL IN REVENUES COULD CAUSE A MATERIAL ADVERSE EFFECT IN OUR BUSINESS, RESULTS OF OPERATIONS, AND FINANCIAL CONDITION.
 
We currently intend to increase our operating expenses substantially in order to, among other things:

·
expand our current operating expenses;

·
fund sales and marketing activities;

·
manufacture inventory; and

·
incur capital expenditures.

See "PLAN OF OPERATION - Cash Requirements." Our expense levels are based, in part, on our expectations with regard to potential future revenues, and to a large extent such expenses will be fixed, particularly in the short term. To the extent we are not successful in generating such revenues, we may be unable to appropriately adjust spending in a timely manner to compensate for any unexpected revenue shortfall or will have to reduce our operating expenses, causing us to forego potential revenue-generating activities, either of which could cause us to go out of business. In addition, as a strategic response to changes in the competitive environment, we may from time to time make certain pricing or marketing decisions that may adversely affect our revenues. Retail sales revenue is also subject to seasonal fluctuations. These factors add to the difficulty in accurately forecasting revenue.

BECAUSE WE HAVE A LIMITED OPERATING HISTORY AND THE VIDEO GAME INDUSTRY IS RAPIDLY CHANGING, WE ARE UNABLE TO ACCURATELY FORECAST OUR ACTUAL COSTS OF OPERATIONS, AND INCREASED COSTS OF OPERATIONS COULD CAUSE US TO GO OUT FO BUSINESS.

Because we have a limited operating history and because the video game and online gaming markets are characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions, and changing customer demands, our costs may change dramatically over time. For example, in the event that the cost to manufacture the Phantom Game Receiver is higher than projected or our manufacturing costs increase dramatically, we may not be able to generate profit, which may cause us to go out of business. As a further example, in the event that the cost to host and download games on our Phantom Game Service is higher than projected or in the event that those costs increase dramatically over time, we may not be able to generate profit, which may cause us to go out of business.

IF WE ARE NOT ABLE TO OBTAIN DESIRABLE GAME CONTENT, OUR PHANTOM GAME SERVICE WILL NOT BE ATTRACTIVE TO CONSUMERS.

We must obtain access to desirable games to make our Phantom Game Service and Phantom Game Receiver attractive to consumers. We may not be able to obtain adequate desirable games for our Phantom Game Service due to a number of factors, including existing relationships or contracts between game developers and the dominant video game manufacturers, our limited operating history and our limited financial resources. There are some desirable games that are available only on proprietary platforms and to which we will likely never gain access. Even if we are able to obtain desirable game titles, we may not be able to gain access to them when they are first released. If our competitors have access to the most desirable games before we obtain such access, it will be more difficult for us to attract customers to our Phantom Game Service.

As of December 31, 2004, the Company currently had outstanding balances in the sum of $985,000 owed to publishers and developers. Due to the outstanding balances, these content providers may elect to terminate their agreements with the Company and not provide content now or in the future. This would add risk to the success of the Phantom Game Service and to viability of the Company.

WE WILL DEPEND ON A LIMITED NUMBER OF THIRD PARTIES TO MANUFACTURE, DISTRIBUTE, AND SUPPLY CRITICAL COMPONENTS AND SERVICES FOR THE PHANTOM GAME RECEIVER AND OUR PHANTOM GAME SERVICE. WE MAY BE UNABLE TO OPERATE OUR BUSINESS IF THESE PARTIES DO NOT PERFORM THEIR OBLIGATIONS.

Our Phantom Game Service will be enabled through the use of the Phantom Game Receiver, which we expect will be manufactured by a third-party contract manufacturer. We expect to rely on sole suppliers for a number of key components for the Phantom Game Receiver and Phantom Game Service. We will not control the time and resources that these third parties devote to our business. We cannot be certain that these parties will perform their obligations as expected or that any revenue, cost savings, or other benefits will be derived from the efforts of these parties. If any of these parties breaches or terminates its agreement with us or otherwise fails to perform their obligations in a timely manner, we may be delayed or prevented from commercializing our Phantom Game Service. Because our relationships with these parties are expected to be non-exclusive, they may also support products and services that compete directly with us, or offer similar or greater support to our competitors. Any of these events could require us to undertake unforeseen additional responsibilities or devote additional resources to commercialize our Phantom Game Service. This outcome would harm our ability to compete effectively and achieve increased market acceptance and brand recognition.

If our manufacturing relationships are not successful, we may be unable to satisfy demand for our Phantom Game Service and the Phantom Game Receiver. The ability of our manufacturers to reach sufficient production volume of the Phantom Game Receiver to satisfy anticipated demand is subject to delays and unforeseen problems such as defects, shortages of critical components and cost overruns.
 
Moreover, our manufacturers will require substantial lead times to produce anticipated quantities of the Phantom Game Receiver. Delays, product shortages and other problems could impair our retail distribution and brand image and make it difficult for us to attract customers. In addition, the loss of a manufacturer would require us to identify and contract with alternative sources of manufacturing, which we may be unable to do and which could prove time-consuming and expensive.

WE HAVE LIMITED EXPERIENCE IN OVERSEEING MANUFACTURING PROCESSES AND MANAGING INVENTORY AND FAILURE TO DO SO EFFECTIVELY MAY RESULT IN SUPPLY IMBALANCES OR PRODUCT RECALLS.

We intend to contract the production of the Phantom Game Receiver to a third-party manufacturer. We expect to sell these units to retailers and distributors. As part of this effort, we expect to maintain some finished goods inventory of the units throughout the year. Overseeing manufacturing processes and managing inventory are outside of our core business and our experience in these areas is limited. If we fail to effectively oversee the manufacturing process and manage inventory, we may suffer from insufficient inventory to meet consumer demand or excess inventory. Ineffective oversight of the manufacturing process could also result in product recalls.

WE EXPECT TO DEPEND ON RETAIL DISTRIBUTION TO SELL THE PHANTOM GAME RECEIVER AND SUBSCRIPTIONS TO THE PHANTOM GAME SERVICE AND IF RETAILERS ARE NOT SUCCESSFUL OR ARE UNWILLING TO SELL OUR PRODUCTS AND SERVICES, WE MAY BE UNABLE TO SELL TO CONSUMERS.

We plan to distribute the Phantom Game Receiver and sell subscriptions to our Phantom Game Service through traditional brick-and-mortar retailers. In the event that retailers are reluctant to sell our products and services or in the event that their proposed financial terms are unacceptable to us, we would be forced to seek alternative channels of distribution, potentially delaying the introduction of our Phantom Game Service or slowing the growth of our subscriber base, which may cause us to go out of business.

OUR PHANTOM GAME SERVICE AND PHANTOM GAME RECEIVER, WHILE COSTLY TO DEVELOP, MAY FAIL TO GAIN MARKET ACCEPTANCE. IF OUR PRODUCTS AND SERVICES DO NOT GAIN MARKET ACCEPTANCE, WE MAY BE UNABLE TO OPERATE OUR BUSINESS.

Subject to availability of financing, we plan to invest a significant amount of money and resources in the launch of our Phantom Game Service and Phantom Game Receiver. However, our Phantom Game Service and Phantom Game Receiver are unproven and may fail to gain market acceptance. Because the market for our Phantom Game Service and Phantom Game Receiver is new and evolving, it is difficult to predict the size of the market and its rate of growth, if any. We cannot assure you that the market for video game or online gaming entertainment services will continue to develop or be sustainable. If the market for the Phantom Game Service fails to develop, develops more slowly than expected or becomes more competitive than is currently expected, we may no be able to keep up and go out of business.

WE MAY BE UNABLE TO ANTICIPATE CHANGES IN CONSUMER DEMANDS, AND IF WE ARE UNABLE TO EFFECTIVELY MEET CONSUMER DEMAND, WE WILL NOT MAKE SALES AND GO OUT OF BUSINESS.

We anticipate that the Phantom Game Service will appeal primarily to children, teenagers and young adults, whose preferences cannot be predicted with certainty and are subject to rapid change. Our success will depend on our ability to identify gaming and entertainment trends as well as to anticipate, interpret, and react to changing consumer demands in a timely manner.

We cannot provide assurances that we will be able to continue to offer the types of games that appeal to our consumers, or that we will satisfy changing consumer demands in the future. If we misjudge the market for our Phantom Game Service, we may not be successful in achieving meaningful revenue, which may lead us to bankruptcy.

WE WILL FACE COMPETITION FROM A NUMBER OF SOURCES, WHICH MAY IMPAIR OUR REVENUES, INCREASE OUR CUSTOMER ACQUISITION COST, AND HINDER OUR ABILITY TO GENERATE NEW CUSTOMERS.

While we are not aware of any direct competitors to our Phantom Game Service, we will compete indirectly with a large number of hardware manufacturers, Internet sites, media companies, and other companies providing gaming and entertainment services. Our competitors include companies offering gaming and entertainment services either on a stand alone basis or integrated into other products and media properties; vertical markets where competitors may have advantages in expertise, brand recognition, and other factors; and manufacturers of personal computers or game consoles who may develop their own Internet portals to which they would direct their customers.
 
Our competitors generally have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than ours. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products or services to address the needs of our prospective customers. We cannot be certain that we will be able to successfully compete against current or future competitors. In order to compete effectively, we may need to expend significant internal engineering resources or acquire other technologies or companies to provide or enhance such capabilities. Any of these efforts will take resources we may not have, which may force us to go out of business.

WE DEPEND ON A NUMBER OF KEY PERSONNEL, AND THEIR LOSS MAY CAUSE US TO GO OUT OF BUSINESS.

Our success will depend upon our senior management and key sales and technical personnel, particularly Timothy M. Roberts, our Chairman and CEO, and Kevin Bachus, our President and COO. The loss of the services of one or more of these persons may cause us to go out of business. Our success also depends on our ability to attract and retain qualified technical, sales and marketing, customer support, financial and accounting, and managerial personnel. Competition for such personnel in the video game entertainment industry is intense, and we cannot be certain that we will be able to retain our key personnel or that we can attract, integrate or retain other highly qualified personnel in the future.

WE MAY BE UNABLE TO SUCCESSFULLY MANAGE RAPID GROWTH, AND THE FAILURE TO DO SO COULD HARM OUR BUSINESS.

Subject to availability of financing, we plan to dramatically increase the scope of our operations in both sales and marketing as well as technological development. We expect that we will need to expand and improve our financial and managerial controls, reporting procedures and systems. Rapid growth and expansion in operations will place a significant strain on our managerial, operational and financial resources. Subject to availability of financing, we expect the number of our employees to increase in the future. To successfully compete in the evolving gaming industry, we must implement financial and management controls; maintain our reporting systems and procedures; continue to scale our serving systems and upgrade their functional capabilities; and expand, train, retain and manage our work force. We cannot be certain that our systems, procedures or controls will be adequate to support our operations, or that management will be able to respond effectively to growth. Our future results of operations will also depend on the expansion of our sales, marketing and customer support departments.

CONSUMERS WILL NEED A BROADBAND INTERNET CONNECTION TO ACCESS OUR PHANTOM GAME SERVICE, AND IF BROADBAND IS NOT WIDELY ADOPTED BY CONSUMERS, THE POTENTIAL MARKET FOR OUR PRODUCTS AND SERVICES COULD BE LIMITED.

Our anticipated revenues and profits from our Phantom Game Service are dependent upon the widespread acceptance and use of broadband Internet access. Rapid growth in the use of broadband Internet is a recent phenomenon and there can be no assurance that this growth will continue, or that a sufficiently broad base of consumers will adopt broadband as a method of accessing the Internet. For us to be successful, consumers must accept and use broadband as a method of accessing the Internet.

OUR CUSTOMERS WILL ACCESS OUR PHANTOM GAME SERVICE THROUGH A BROADBAND INTERNET CONNECTION, AND IF THEY CANNOT RELIABLY ACCESS THE INTERNET, THEY MAY CANCEL THEIR SUBSCRIPTIONS TO OUR PHANTOM GAME SERVICE, REDUCING OUR REVENUES.

Our success will depend, in large part, upon the maintenance of the Internet infrastructure, such as a reliable network backbone with the necessary speed, data capacity and security, and timely development of enabling products such as high speed modems, for providing reliable Internet access and services and improved content. The Internet infrastructure may not continue to effectively support the demands placed on it as the Internet continues to experience increased numbers of users, frequency of use or increased bandwidth requirements of users. Even if the necessary infrastructure or technologies are developed, we may have to spend considerable amounts to adapt our solutions accordingly. Furthermore, the Internet has experienced a variety of outages and other delays due to damage to portions of its infrastructure. Such outages and delays could negatively impact our customers' use of the Phantom Game Service and could lead to cancellation of subscriptions, which would reduce our revenues.

WE ARE SUBJECT TO U.S. AND FOREIGN GOVERNMENT REGULATION OF THE INTERNET, AND COMPLYING WITH THESE REGULATIONS COULD IMPOSE SIGNIFICANT COSTS.

Our subscribers will require a broadband connection to the Internet in order to access our Phantom Game Service. Existing laws and regulations applicable to the Internet relate to issues such as user privacy, defamation, pricing, advertising, taxation, gambling, sweepstakes, promotions, financial market regulation, content regulation, quality of products and services and intellectual property ownership and infringement. In addition, we may also be subject to new laws and regulations directly applicable to our activities. Any existing or new legislation applicable to us could expose us to substantial liability, including significant expenses necessary to comply with such laws and regulations, and dampen the growth in use of the Internet.
 
Several federal laws could have an impact on our business. The Digital Millennium Copyright Act is intended to reduce the liability of online service providers for listing or linking to third-party Websites that include materials that infringe copyrights or other rights of others. The Children's Online Protection Act and the Children's Online Privacy Protection Act are intended to restrict the distribution of certain materials deemed harmful to children and impose additional restrictions on the ability of online services to collect user information from minors. In addition, the Protection of Children from Sexual Predators Act of 1998 requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances. Such legislation may impose significant additional costs on our business or subject us to additional liabilities.

Due to the global nature of the Internet, it is possible that the governments of other states and foreign countries might attempt to regulate Internet transmissions or prosecute us for violations of their laws. We might unintentionally violate such laws, such laws may be modified and new laws may be enacted in the future. Any such developments (or developments stemming from enactment or modification of other laws) could have a material adverse effect on our business, operating results and financial condition.

OUR SUCCESS WILL DEPEND ON OUR ABILITY TO SECURE AND PROTECT PATENTS, TRADEMARKS AND OTHER PROPRIETARY RIGHTS.

Our success and ability to compete will be substantially dependent on our internally developed technologies and trademarks, which we plan to protect through a combination of patent, copyright, trade secret and trademark law. Our patent applications or trademark applications may not be approved. Even if they are approved, such patents or trademarks may be successfully challenged by others or invalidated. If our trademark registrations are not approved because third parties own such trademarks, our use of such trademarks will be restricted unless we enter into arrangements with such third parties that may be unavailable on commercially reasonable terms.

We generally enter into confidentiality or license agreements with our employees, consultants and corporate partners, and generally control access to and distribution of our technologies, documentation and other proprietary information. Despite our efforts to protect our proprietary rights from unauthorized use or disclosure, parties may attempt to disclose, obtain or use our solutions or technologies. The steps we have taken may not prevent misappropriation of our solutions or technologies, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States.

We may license in the future elements of our trademarks, trade dress and similar proprietary rights to third parties. While we attempt to ensure that the quality of our brand is maintained by these business partners, such partners may take actions that could materially and adversely affect the value of our proprietary rights or our reputation. Our proprietary rights may not be viable or of value in the future since the validity, enforceability and scope of protection of certain proprietary rights in Internet-related industries is uncertain and still evolving.
 
RISKS RELATED TO OUR FINANCING AGREEMENTS

A LARGE NUMBER OF SHARES UNDERLYING THE 8% CONVERTIBLE DEBENTURES AND WARRANTS MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.

As of December 31, 2004, we had 121,090,655 shares of common stock issued and outstanding and an obligation to reserve 46,656,000 shares issuable upon conversion of debentures in the aggregate principal amount of $2,160,000. In addition, at that date we had outstanding options and warrants to purchase 41,014,493 shares of common stock. Under certain circumstances described in the next risk factor, the number of shares of common stock issuable upon conversion of the outstanding debentures may increase if the market price of our stock declines. The sale or potential sale of these shares may adversely affect the market price of our common stock.

IF CERTAIN CONDITIONS ARE MET, THE ADJUSTABLE CONVERSION PRICE FEATURE OF THE 8% CONVERTIBLE DEBENTURES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES, WHICH WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.

The conversion price of the debentures means seventy-five percent of the lowest closing price during the five trading days ending on the trading day before the conversion date; provided, however, that in no event will such price be (x) more than $0.10 or (y) until the earlier of (I) the Scheduled Expiration Date, (II) the date after the closing date on which we file a registration statement on Form SB-2 or (III) the date on which we first issue a mandatory conversion notice, lower than $0.10; provided, however, if a certain events occur then the conversion price is fixed at $0.10. The term "Scheduled Expiration Date" means April 16, 2005, except that, if prior to that date we file with the SEC a definitive proxy statement seeking stockholder authorization at a meeting of stockholders scheduled to be held no later than June 16, 2005 to amend our certificate of incorporation to increase our authorized shares to at least 400 million shares, it means June 16, 2005.

Accordingly, if one of the above triggering events occur, the conversion price will fluctuate with the market price of our common stock and the number of shares we will be required to issue will increase, perhaps substantially.

If we complete the first tranche of a financing of no less than $12 million and in connection with such financing, retire or convert our debt (other than the convertible debentures), the conversion price of the debentures will be fixed at $0.10

The following is an example of the number of shares of our common stock that are issuable, upon conversion of the debentures, based on market prices 25%, 50% and 75% below the current conversion price of $0.10.

       
Number of Shares
 
 
 
 
 
Percentage of % Below Market
 
With Price Per Share
 
Discount of 25%
 
Issuable
 
Outstanding Stock
 
 
 
 
 
 
 
 
 
 
 
25%
 
$
0.075
 
$
0.056
   
38,571,428
   
24.30
%
50%
 
$
0.050
 
$
0.037
   
58,378,378
   
32.70
%
75%
 
$
0.025
 
$
0.018
   
120,000,000
   
49.97
%
 
                 
 
As illustrated, upon a triggering event described above, the number of shares of common stock issuable upon conversion of the debentures will increase if the market price of our stock declines below $0.10, which will cause dilution to our existing stockholders and require us to file a new registration statement to cover the additional shares of common stock because there is no limit on the number of shares that may be issued in connection with a downward spiraling market.

THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF THE 8% CONVERTIBLE DEBENTURES MAY ENCOURAGE INVESTORS TO MAKE SHORT SALES IN OUR COMMON STOCK, WHICH COULD HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.

Upon certain triggering events described above, the debentures are convertible into shares of our common stock at a 25% discount to the trading price of the common stock prior to the conversion. The significant downward pressure on the price of the common stock as the selling stockholder converts and sells material amounts of common stock could encourage short sales by investors. This could place further downward pressure on the price of the common stock. The selling stockholders could sell common stock into the market in anticipation of covering the short sale by converting their securities, which could cause the further downward pressure on the stock price. In addition, even prior to the time of actual conversions, exercises, and public resales, the market "overhang" resulting from the mere existence of our obligation to honor such conversions or exercises could depress the market price of our common stock.
 
THE ISSUANCE OF SHARES UPON ANY CONVERSION OF THE 8% CONVERTIBLE DEBENTURES OR EXERCISE OF OUTSTANDING WARRANTS WILL CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR EXISTING STOCKHOLDERS.

The issuance of shares upon conversion of the debentures and exercise of warrants will result in substantial dilution to the interests of other stockholders since the selling stockholders would likely thereafter sell the shares issued upon such conversion. Although, pursuant to their terms, each selling stockholder individually may not convert their debentures and/or exercise their warrants if such conversion or exercise would cause them to own more than 4.99% of our outstanding common stock at a given point in time, this restriction does not prevent each selling stockholder from converting and/or exercising some of their holdings seriatim. In this way, the selling stockholders could sell more than the 4.99% limit while never owning at any time more than this limit. There is no upper limit on the number of shares that may be issued which will have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock, including investors in this offering.

IF WE ARE REQUIRED FOR ANY REASON TO REPAY THE 8% CONVERTIBLE DEBENTURES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE DEBENTURES, IF REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE OF SUBSTANTIAL ASSETS.

The debentures are due and payable, with 8% interest, one year from the date of issuance, unless sooner converted into shares of our common stock. In addition, any event of default as described in the debentures could require the early repayment of the debentures, including a default interest rate of 18% on the outstanding principal balance of the debentures if the default is not cured with the specified grace period. We also will incur penalties of 2% of the principal amount of the debentures for each month beyond an initial agreed upon periodduring which we fail to cause a registration statement covering resale of the underlying shares to be declared effective. If the debentures are not converted into common stock and we are required to repay the debentures, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the debentures when required, the debenture holders could commence legal action against us and foreclose on all of our assets to recover the amounts due. Any such action would require us to curtail or cease operations.

FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE.

Our stock price may decline by future sales of our shares or the perception that such sales may occur. If we issue additional shares of common stock in private financings under an exemption from the registration laws, then those shares will constitute "restricted shares" as defined in Rule 144 under the Securities Act. The restricted shares may only be sold if they are registered under the Securities Act, or sold under Rule 144, or another exemption from registration under the Securities Act.

Some of our outstanding restricted shares of common stock are eligible for sale pursuant to Rule 144. In addition, our working capital shortages have caused us to rely to a greater extent than we otherwise would on the issuance of common stock to employees and others as compensation for services. We have and expect to continue to rely on the use of Form S-8 for the issuance of these shares in registered transactions, resulting in the . shares being freely tradable without restriction unless held by an “affiliate” of the Company. We are unable to estimate the amount, timing, or nature of future sales of outstanding common stock. Sales of substantial amounts of our common stock in the public market may cause the stock's market price to decline. See "Description of Securities."

OUR STOCK PRICE CAN BE EXTREMELY VOLATILE.

Our common stock is traded on the OTC Bulletin Board. There can be no assurance that an active public market will continue for the common stock, or that the market price for the common stock will not decline below its current price. Such price may be influenced by many factors, including, but not limited to, investor perception of us and our industry and general economic and market conditions. The trading price of the common stock could be subject to wide fluctuations in response to announcements of our business developments or our competitors, quarterly variations in operating results, and other events or factors. In addition, stock markets have experienced extreme price volatility in recent years. This volatility has had a substantial effect on the market prices of companies, at times for reasons unrelated to their operating performance. Such broad market fluctuations may adversely affect the price of our common stock.
 
WE DO NOT EXPECT TO PAY DIVIDENDS.

We have not paid dividends since inception on our common stock, and we do not contemplate paying dividends in the foreseeable future on our common stock in order to use all of our earnings, if any, to finance our business.

IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN THE SECONDARY MARKET.

Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.

Our common stock is subject to the "Penny Stock" rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.

The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:

·
that a broker or dealer approve a person's account for transactions in penny stocks; and

·
the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

In order to approve a person's account for transactions in penny stocks, the broker or dealer must:

·
obtain financial information and investment experience objectives of the person; and

·
make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:

·
sets forth the basis on which the broker or dealer made the suitability determination; and

·
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.


Our corporate headquarters are located in Sarasota, Florida in a 12,112 square foot office. Our lease for this office space expires on November 30, 2009 and our monthly rent expense for this office space is $21,644. In addition, we have leased 22,284 square feet of office in Seattle, Washington from which we oversee product development. Our lease for this space expires on August 30, 2006 and our monthly rent expense for this office space is $25,070. Due to shortages in working capital, we have from time to time defaulted in our obligation to make timely monthly rental payments. At December 31, 2004, we were current in our Sarasota rental payments and were approximately three months in arrears on our Seattle rental payments.

We believe that the facilities are well maintained. We also believe that these leased facilities are not unique and could be replaced, if necessary, at the end of the term of the existing leases.
 

On October 27, 2003, SensAble Technologies, Inc. filed a complaint against Infinium in the U.S. District Court for the District of Delaware, alleging federal trademark infringement, federal trademark dilution, federal unfair competition, and Delaware common law unfair competition regarding the trademark "Phantom". The complaint sought damages, injunctive relief against Infinium's use of the name "Phantom", surrender of the Company's website www.phantom.com withdrawal of trademark applications for the "Phantom" mark and other unspecified damages. The complaint was settled in full via a $150,000 payment to SensAble Technologies on January 10, 2005 per the Second Amendment to Concurrent Use and Settlement Agreement dated May 28, 2004. As a condition of the Second Amendment to Concurrent Use and Settlement Agreement dated May 28, 2004, Sensable Technologies subsequently returned their 120,000 shares of common stock after receipt of the $150,000 payment in 2005.

On or around November 24, 2004, SBI-USA, LLC, filed suit against us and our chief executive officer, Timothy M. Roberts, in United States District Court, Central District of California. The suit alleges breach of contract and fraud and seeks to recover damages of approximately $600,000 under a contract that we terminated with plaintiff, as well as punitive damages and attorney's fees. In connection with the breach of contract claim, the plaintiff alleges that, since March 6, 2004, we raised more than $30 million in financing and owe plaintiff 2% of all amounts received. In connection with the fraud claim, plaintiff claims that we represented that plaintiff would be our exclusive investment banker during the term of the agreement with plaintiff, and that we hired a competing firm. Prior to filing suit, plaintiff demanded that we pay approximately $66,000 in unpaid expenses as full compensation for amounts due under the agreement. Shortly following our refusal to do so absent documentation of the claimed expenses, plaintiff initiated this suit.
 
The parties entered into a settlement agreement whereby we agreed to pay SBI $55,000. To date this amount has not been made and as a result SBI has brought a new action in the Superior Court of California, Orange County, for breach of the settlement agreement and seeking damages of $58,000.00. The action was filed in November 2005 and served in February 2006.

KB Networks, Inc., Kyle Bennett and Steve Lynch v. Infinium Labs, Inc. and Timothy Roberts was filed on February 27, 2004 in the United States District Court for the Northern District of Texas, Dallas Division. The case bore the Cause Number 3:04-CV-423-D.

The parties to the proceeding are identified in the style set forth above. The Complaint asserted only claims for declaratory relief. The Complaint did not seek compensatory damages. The subject matter of the Complaint arose out of the publication by the Plaintiffs of an article about the Defendants on a website maintained by the Plaintiffs. That publication took place on September 17, 2003. Defendants sent the Plaintiffs cease and desist letters asserting that the article was defamatory in a number of respects. Defendants also asserted that the use of Infinium Labs, Inc.’s registered marks constituted a violation of the Lanham Act and otherwise constituted trademark infringement. The Original Declaratory Judgment Complaint was filed in order to obtain a declaratory judgment that the publication of the article was not defamatory and that the Plaintiffs’ use of Infinium Labs, Inc.’s trademarks in connection with the article did not constitute infringement and was an act of fair use.

Defendants filed a Motion to Dismiss the Complaint asserting that the Court lacked both subject matter and personal jurisdiction. Defendents consented to the question of personal jurisdiction. Consented to the exercise of personal jurisdiction and answered the Complaint. The District Court entered a declaratory judgment declaring that the Plaintiffs were not liable to the Defendants as a result of the publication of the article.

During the dismissal process, the Plaintiffs asserted a right to recover sanctions against the Defendants for their conduct during the discovery phase of the litigation. The Plaintiffs asserted a sanction claim in the approximate amount of $100,000. The Company agreed to pay the Plaintiffs the sum of $50,000 to completely terminate the litigation. As a result, the final declaratory judgment was ultimately entered terminating the litigation with prejudice. In this regard, the Agreed Declaratory Judgment terminating the litigation in all respects was entered by the Court on February 16, 2005. As of December 31, 2004, the Company has accrued expenses of $50,000 for this settlement. 

Infinium Labs, Inc., Timothy M. Roberts and Robert Shambro v. Digital Interactive Streams, Inc. and Royal O'Brien, No. 2004 CA 8193 NC. Plaintiffs have sued Defendants alleging breach of a settlement agreement ("Settlement Agreement") and conversion, and are seeking damages in an amount to be determined by the Court. Defendants have counterclaimed alleging breach of the Settlement Agreement and are seeking $500,000, warrants to purchase Infinium common stock and a declaratory judgment that they materially complied with the Settlement Agreement. The parties currently are conducting discovery and no amounts have been accrued as of December 31, 2004.

Sue Bohle & Associates d/b/a The Bohle Company v. Infinium Labs, Inc. , No. 2005 CA 003604 NC. The Bohle Company has sued Infinium in the Circuit Court for Sarasota County, Florida, alleging breach of contract and seeking damages in the amount of $262,151.63 plus interest. Infinium expects to enter into a negotiated settlement with The Bohle Company. The Company has recorded $285,939.12 in accounts payable related to vendor payments due The Bohle Company as of December 31, 2004.
 
A confidential, non-public SEC investigation entitled “In re Certain Fax Blasts” is ongoing. The Company has provided documents in response to SEC subpoenas, and two Company employees, including the CEO, have testified in the investigation concerning, among other things, events at the Company. The Company’s response to the SEC subpoenas is continuing.

Except as described above and as of December 31, 2004, we are not a party to any litigation other than litigation arising in the ordinary course of its business, which is not expected to have a material adverse effect on its financial condition or results of operations.


There was no matter submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.

NONE
 


Market for Common Stock

Our common stock is quoted on the OTC Bulletin Board under the symbol "IFLB.OB".

The following quotations obtained from Yahoo Finance (http://finance.yahoo.com) reflect the high and low bids for our common stock based on inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The high and low bid prices of our common stock for the periods indicated below are as follows:

Quarter Ended
 
High
 
Low
 
 
 
 
 
 
 
12/31/2004
 
$
1.45
 
$
0.19
 
09/30/2004
 
$
1.81
 
$
0.31
 
06/30/2004
 
$
2.02
 
$
0.92
 
03/31/2004
 
$
2.50
 
$
0.30
 
12/31/2003
 
$
0.01
 
$
0.01
 
09/30/2003
 
$
1.56
 
$
0.00
 
06/30/2003
 
$
1.26
 
$
0.01
 
03/31/2003
   
n/a
   
n/a
 
 
         
Our common shares are issued in registered form. Corporate Stock Transfer, Inc. is the registrar and transfer agent for our common shares.

As of April 12, 2005, we had 151,829,349 shares of common stock outstanding and approximately 315 stockholders of record.

Dividend Policy

We have never declared or paid dividends on our common stock, and we do not anticipate that we will do so in the foreseeable future. We intend to retain future earnings, if any, for use in our operations.

Recent Unregistered Sales of Securities

Unless otherwise stated all of the below-referenced securities were issued in a transaction exempt from the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder (“Rule 506 Conditions”).   With respect to Rule 506 Conditions:   (i) the securities were sold only to accredited investors; (ii) the securities were not offered by any form of general solicitation or general advertising; (iii) each investor had represented that such investor was acquiring the securities for such investor's own account for investment; and (iv) the securities were issued with restrictive legends.
 
During 2004, the Company issued 750,000 shares of common stock with a fair value of $430,000 as additional consideration for notes payable ($0.57 per share).

During 2004, the Company issued 1,650,000 shares of common stock to employees with a fair value of $507,500 ($0.31 per share).

During 2004, the Company issued 500,000 shares of common stock to a consultant with a fair value of $130,000 ($0.26 per share).

During 2004, the Company issued 375,000 shares to note payable holders for accrued interest on the notes with a fair value of $67,500 ($0.18 per share).


The following discussion should be read in conjunction with the audited financial statements and the notes thereto included elsewhere herein. Our consolidated financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.

Overview

We are developing and seeking to commercialize the Phantom Game Service, a video game delivery system designed to allow consumers to search, preview and play a large selection of video games on demand via a broadband Internet connection.

We have not yet generated any revenue from operations and we are in immediate need of additional capital to continue our operations. Our ability to generate revenue in the future is dependent on our ability to successfully develop and commercialize the Phantom Game Service.

Given our limited resources, and the delays experienced thus far, we are not in a position to anticipate a completion date for development of our product or a launch date for the Phantom Game Service.

Liquidity and Plan of Operations

We have incurred recurring losses from operations since inception. Our loss from operations for the year ended December 31, 2004 was $33,819,787. At December 31, 2004, we had a working capital deficit of $12,988,409 and an accumulated deficit of $36,764,861. In their report on our audited financial statements for the year ended December 31, 2004, our independent auditors expressed substantial doubt about our ability to continue as a going concern.
 
Our activities to date have been funded by equity and debt investments. As of December 31, 2004, we had received approximately $3.6 million in equity investments and $11.2 million in debt and convertible debt financings. At December 31, 2004, we were in default on payment of a promissory note with a principal amount of $350,000. Our outstanding debt for borrowed money has generally been provided on a short-term basis, bears interest at rates ranging from 8% to 17% and, in many cases, was accompanied by the grant of common stock or warrants to purchase common stock, which contributed to the costs of the financings. As of December 31, 2004, we have recorded an aggregate of $4,979,500 in debt discount, of which $2,175,588 was amortized as interest expense. In connection with financings aggregating $2.16 million in December 2004, we committed to pay penalties of 2% per month for each month after an agreed upon period (approximately three months) during which we fail to cause a resale registration statement covering the underlying shares to be declared effective by the Securities and Exchange Commission.
 
We do not have sufficient cash to continue operations for the next 12 months and are in immediate need of additional capital to fund our plan of operation. We presently have no commitments for additional financing and may not be able to obtain such financing. To support our working capital needs pending receipt of sufficient financing, we are seeking to settle outstanding liabilities through issuance of equity, and have and anticipate continuing to grant common stock to fund payroll and certain other ongoing costs. During the year ended December 31, 2004, we issued an aggregate of 19,215,321 shares of common stock in settlement of payroll and certain other ongoing costs, of which 12,118,601 shares were issued under a registration statement and are freely tradable. Unless and until we receive sufficient financing, we expect to continue to be forced to rely on issuances of common stock under similar arrangements in settlement of payroll and such other costs. Issuances of equity will dilute existing stockholder’s ownership and will have a depressive effect on our stock price, which will result in greater dilution for subsequent equity issuances and further downward pressure on our stock price. If we are unable to obtain additional financing as and when needed, we will need to scale back and/or reprioritize our planned operations, our assets may be foreclosed upon by secured lenders and we may be forced to cease operations completely.
 
 
Our development activities have been and continue to be constrained by shortages in working capital. As a result, we have experienced delays in bringing our Phantom Game Service to market, which in turn has triggered the need for additional efforts to address changing design and engineering standards, as well as the need for renegotiation of arrangements with game content providers as existing arrangements lapse in advance of commercial launch. Subject to obtaining sufficient financing, we anticipate focusing our efforts over the next 12 months on the following principal activities:
 
Completing Development of the Phantom Game Receiver and Streaming Game Technology - The Phantom Game Receiver was originally intended for retail launch in 2004 and its design was based upon that premise. We are currently in the process of revising and updating the hardware to take advantage of newer technology to ensure that the product is technically compelling and that we are able to have an adequate supply of components. We have engaged third parties to assist with product engineering and design work. Due to working capital shortages, efforts by these groups on our behalf have been delayed. At December 31, 2004, the Company owed Biostar and Walter Dorwin Teague Associates, two of such firms, $311,532 and $61,660, respectively, which amounts continue to be outstanding.. In addition, we plan to refine and improve upon our streaming techniques in order to reduce download times, enhance our user interface that allows customers to browse through lists of games and make purchases, and continue our modifications and enhancements to the Windows XP Embedded operating system.
 
Acquiring Rights to Game Content - As a consequence of our capital shortfalls, we have defaulted in payment on some of our agreements with game publishers. Our agreements with game distributors generally provide us with the right on a non-exclusive basis to distribute games through our Phantom Game Service in exchange for royalties on net sales. In some cases, we are required to make upfront payments, which in some cases, can be applied against future royalties. At December 31, 2004, we were party to agreements with a number of distributors, of which six required upfront payments, the amount of which totaled $1,085,000. As of December 31, 2004, we had made a total of $100,000 in upfront payments and the balance was in default. We have not been notified by any publishers of intent to revoke distribution rights. The agreements generally have a duration of a few years, with the earliest expiring in December 2005, and require renegotiation to extend the term beyond the initial expiration date. Unless and until we receive additional financing, we are not planning to seek to enter into additional agreements of this nature. Our past defaults may adversely affect the willingness of these parties to renew the agreements if and when needed.
 
Completing Development of the Content (Video Game) Distribution Network - Working with our partner, Limelight, we intend to finalize the design, testing and roll-out of our content (video game) distribution network and focus on the development, testing and launch of our billing system, respectively.

Prior to the commercial launch of the Phantom Game Service, we will need to enter into arrangements with third party manufacturers which we anticipate would entail investing in pre-manufacturing activities, including the purchase of tooling and components, as well as ancillary operations around the manufacturing and distribution of the Phantom Game Receiver such as logistics, service and support.
 
The commercial launch of the Phantom Game Service will require investment in marketing and sales activities. If and when we reach that stage, we anticipate securing distribution agreements with retail partners as well as promoting consumer awareness of the Phantom Game Service through typical marketing channels: advertising, public relations, and in-store promotions.

APPLICATION OF CRITICAL ACCOUNTING POLICIES
 
STOCK-BASED COMPENSATION

We believe that stock-based compensation is a critical accounting policy that affects our financial condition and results of operations. Statement of Financial Account Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation defines a fair-value based method of accounting for stock-based employee compensation plans and transactions in which an entity issues its equity instruments to acquire goods or services from non-employees, and encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25) and related interpretations.
 
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R “Share-Based Payment”, which addresses the accounting for share-based payment transactions. SFAS 123R eliminates the ability to account for share-based compensation transactions using APB 25, and instead, generally requires that such transactions be accounted and recognized in the statement of operations based on their fair value. SFAS No. 123R will be effective for small business issuers as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. SFAS No. 123R offers the Company alternative methods of adopting this standard. The Company has not yet determined which alternative method it will use. Depending upon the number and terms of options that may be granted in future periods, the implementation of this standard could have a material impact on the Company’s financial position and results of operations.

IMPAIRMENT OF GOODWILL AND LONG-LIVED ASSETS

In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142”), and Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), the Company reviews its non-amortizable long-lived assets, including intangible assets and goodwill for impairment annually, or sooner whenever events or changes in circumstances indicate the carrying amounts of such assets may not be recoverable. Other depreciable or amortizable assets are reviewed when indications of impairment exist. Upon such an occurrence, recoverability of these assets is determined as follows. For long-lived assets that are held for use, the Company compares the forecasted undiscounted net cash flows to the carrying amount. If the long-lived asset is determined to be unable to recover the carrying amount, then it is written down to fair value. For long-lived assets held for sale, assets are written down to fair value. Fair value is determined based on discounted cash flows, appraised values or management’s estimates, depending upon the nature or the assets. Intangibles with indefinite lives are tested by comparing their carrying amounts to fair value. Impairment within goodwill is tested using a two step method. The first step is to compare the fair value of the reporting unit to its book value, including goodwill. If the fair value of the unit is less than its book value, the Company then determines the implied fair value of goodwill by deducting the fair value of the reporting unit’s net assets from the fair value of the reporting unit. If the book value of the goodwill is greater than its implied fair value, the Company writes down goodwill to its implied fair value.
 
INCOME TAXES

Income taxes are provided for using the liability method whereby future tax assets and liabilities are recognized using current tax rates on the difference between the financial statement carrying amounts and the respective tax basis of the assets and liabilities. The Company provides a valuation allowance on future tax assets when it is more likely than not that such assets will not be realized.

RESEARCH AND DEVELOPMENT COSTS

Research costs are expensed as incurred. Development costs are also generally expensed as incurred unless such costs meet the criteria necessary for deferral and amortization. To qualify for deferral, the costs must related to a technically feasible, identifiable product that the Company intends to produce and market, there must be a clearly defined market for the product and Company must have the resources, or access to the resources, necessary to complete the development. The Company has not deferred any development costs to date.
 

Our consolidated financial statements including an index are included beginning on page F-1 immediately following the signature page to this report.
 

PREVIOUS INDEPENDENT ACOUNTANTS

(i)    On January 5, 2004, Baumann, Raymondo & Company PA resigned as the independent accountants of Infinium Labs, Inc.

(ii)    The Board of Directors approved the decision to change independent accountants.

(iii)    The report of Baumann, Raymondo & Company PA on the financial statements for the fiscal year ended October 31, 2003 of the Company contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.

(iii)    The Board of Directors approved the decision to change independent accountants.

(iv)    In connection with its audit for the most recent fiscal year ended October 31, 2003, there were no disagreements with Baumann, Raymondo & Company PA on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Baumann, Raymondo & Company PA would have caused Baumann, Raymondo & Company PA to make reference thereto in their report on the financial statements for such years.

(v)    During the most recent fiscal year ended October 31, 2003 and through January 5, 2004 there were no reportable events as that term is defined in Item 304(a)(l)(v) of Regulation S-X.

(vi)    The Company has requested, and Baumann, Raymondo & Company PA has furnished, a letter addressed to the Commission stating that Baumann, Raymondo & Company PA agrees with subparagraphs (a)(ii), (iv) and (v) above. A copy of such letter, dated January 5, 2004, is filed as Exhibit 16 of this Form 8-K.
 
NEW INDEPENDENT ACOUNTANTS

On January 5, 2004, the Company engaged Webb & Company PA as its new principal independent accountant. The engagement was approved by the Board of Directors on January 5, 2004

(i)    The Company has not consulted with Webb & Company PA on the application of any accounting principles or proposed transactions, the type of audit opinion that might be given, any matter that was either the subject of a disagreement, as that term is defined in Item 304(a)(l)(iv) of Regulation S-K, or a reportable event, as that term is defined in Item 304(a)(l)(v) of Regulation S-K.


As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief 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 this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective 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 Commission's rules and forms. There was no change in our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Evaluation of Disclosure Controls and Procedures

The interim chief executive officer who is also the interim chief financial officer, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e); collectively, "Disclosure Controls") as of the end of the period covered by this annual report (the "Evaluation Date") has concluded that as of the Evaluation Date, our Disclosure Controls were not effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information relating to our company and any consolidated subsidiaries is made known to management, including the interim chief executive officer and chief financial officer, particularly during the period when our periodic reports are being prepared to allow timely decisions regarding required disclosure.

Our Disclosure Controls as of the Evaluation Date were not effective in enabling us to record and properly report sufficient loss contingency accruals to cover possible monetary penalties and interest relating to our failure to file certain payroll and withholding tax returns and to satisfy required withholding and payroll tax obligations. As noted in the Explanatory Note at the beginning of this report, this amended report is being filed to, among other things, correctly reflect these events in the financial statements contained herein. While new management is focused on improving our company’s Disclosure Controls to ensure timely and proper reporting, there can be no assurance that other items do not currently exist, or will not occur in the future, that reflect ineffective Disclosure Controls as of the Evaluation Date.

In connection with the evaluation referred to in the foregoing paragraph, we have identified no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

The Company's management, including the interim chief executive officer and chief financial officer, who are the same person, does not expect that our Disclosure Controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company 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. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
 
Item 8B. OTHER INFORMATION

None.
 


The following table sets forth the names, ages and positions held with respect to each Director and Executive Officer of our Company during fiscal 2004.

Name
Position Held with Our Company
Age
Date First
Elected or Appointed
 
Directors
 
 
 
 
Timothy M. Roberts
Chairman, Chief Executive Officer and Director
34
January 5, 2004
Richard Angelotti
Director
59
January 5, 2004
 
 
 
 
Executive Officers Who Are Not Directors
 
 
 
 
Kevin Bachus
President and Chief Operating Officer
35
January 5, 2004
Richard S. Skoba
Executive Vice President of Sales and Business Development
40
February 9, 2004
Tyrol R. Graham
Vice President of Product Development
41
February 9, 2004
 
 
 
 

The directors of our Company are elected at each annual general meeting and hold office until the next annual general meeting or until their successors are appointed.
 
Business Experience
 
The following is a brief account of the education and business experience during at least the past five years of each director, executive officer and key employee, indicating the principal occupation during that period, and the name and principal business of the organization in which such occupation and employment were carried out.
 
Directors and Executive Officers

TIMOTHY M. ROBERTS was the founder of our predecessor, Infinium Labs Operating Corporation, and has been our Chairman and Chief Executive Officer and a member of our board of directors since the merger of our subsidiary into Infinium Labs Operating Corporation. Prior to founding Infinium Labs in December 2002, Mr. Roberts was Chairman and Chief Executive Officer for Broadband Investment Group from 1999 through 2000. Broadband Investment Group was a holding company which owned a portfolio of service companies which handled technology layers 1-7. Prior to that, he was Chairman and Chief Executive Officer for Intira Corporation from 1997 through 1999 of which Mr. Roberts was a co-founder, which provided network-based computing and communication services on an outsourced basis for its customers. Mr. Roberts was also a co-founder of broadband services provider Savvis Communications (NASDAQ SVVS). Mr. Roberts co-founded Savvis in 1995 and left Savvis 2 years later to start Intira Corporation.
 
RICHARD ANGELOTTI was a director of our predecessor, Infinium Labs Operating Corporation, since its formation and has been a member of our board of directors since the merger. Mr. Angelotti has been the CEO of Angelotti & Rosenberg Financial Group from March 2004 through the present. Mr. Angelotti served as the Principal of Global Financial Asset Management from August 2003 through February 2004 and was a Senior Vice President of Morgan Keegan from February 1999 through August 2003. He has over 12 years of experience as a financial advisor, and has held executive positions for major investment firms such as Northern Trust Bank of Sarasota, Bank of Boston in Florida, UBS Paine Webber, and Morgan Keegan. Mr. Angelotti holds Series 6, 7, 63, 65 Insurance and Annuity licenses.
 
 
Executive Officers Who Are Not Directors
 
KEVIN BACHUS became our President and Chief Operating Officer in January 2004. From 1999 through September 2003, Mr. Bachus was Vice President, Publishing of Capital Entertainment Group, of which he was a co-founder. Capital Entertainment Group provided funding and guidance to video game developers for development projects, as well as, selling complete or near-complete projects to publishers. From 1997 through 2001 Mr. Bachus held various positions at Microsoft Corporation including as a founding member of the Xbox project team. Mr. Bachus previously served as the group product manager for DirectX, where he was responsible for promoting Windows as an entertainment vehicle and ensuring that the DirectX suite of tools became the primary choice for games and multimedia developers.  
 
RICHARD S. SKOBA became our Executive Vice President of Sales and Business Development in February 2004. Prior to joining us, Mr. Skoba was a HP Services from December 2002 through December 2003 where he served as a Director of Sales and a Director of Business Development. Mr. Skoba was a founder and corporate vice president at Intira Corporation, where he also held the positions of vice president of business development and vice president of sales from February 1998 through February 2001. Mr. Skoba's career includes his role as one of the founders of Direct Connect Systems, an enterprise storage management company
 
TYROL R. GRAHAM became our Vice President of Product Development in February 2004. Prior to joining us, Mr. Graham was at Microsoft Corporation from 1991 through 1999. While at Microsoft, Ty worked on projects such as the Windows Hardware Quality Labs and DirectX.  In 2000 Ty was a founder of Wildseed Ltd., a technology start-up funded in part by Ignition Partners.
 
Key Employees
 
ANDREW SCHNEIDER became our Senior Vice President of Marketing in May 2004. Prior to joining us, Mr. Schneider served as Senior Vice President/General Manager for Sony Pictures Digital Entertainment (SPDE) from 1996-2003, where he was responsible for developing media software products and online broadband entertainment based on Columbia TriStar Television Group and Sony Pictures Entertainment brands. Schneider's career includes serving as Director of Marketing for Columbia TriStar Interactive and as senior producer for NBC Marketing Interactive from 1994-1996, NBC's Network Television Marketing division.
 
JAMES J. ROBERTS is our Vice President of Corporate Development. Mr. Roberts joined Infinium Labs after serving from May 2001 to July 2003 as Director of Corporate Marketing and Regional Manager for Interactive Services, Inc., a nationwide provider of telecommunications and broadband services. James served from January 2000 to January 2001 as Vice President of Marketing at Phoenix Networks, a nationwide Internet services provider. James was a founder and Vice President of Marketing at Intira Corporation and Senior Account Manager at UNICOM Group. 

Family Relationships
 
There are no family relationships between any of our Company's directors or executive officers.
 
Involvement In Certain Legal Proceedings
 
None of our directors, executive officers, promoters or control persons have been involved in any of the following events during the past five years:
 
 
1.
any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
 
 
2.
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences);
 
 
3.
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
 
 
4.
being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

SECTION 16(a) REPORTING

To our knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that during the year ended December 31, 2004, its officers, directors and 10% shareholders complied with all Section 16(a) filing requirements, except for the following:

With respect to our Directors or Executive Officers, we are aware that personal obligations to file Form 4s during 2004 existed, but no Form 4s were filed.
 
BOARD COMMITTEES

To date, none of our Directors is an “audit committee financial expert” within the meaning of Item 401(e) of Regulation S-B. The Company lacks the financial resources to form audit and nominating committees. Notwithstanding, the Company is seeking to add new outside directors including a financial expert, as defined by Item 401(e) of Regulation S-B. 

CODE OF ETHICS

Our Company’s board of directors adopted a Code of Business Conduct and Ethics and Compliance Program that applies to, among other persons, our Company’s President and Chief Executive Officer (being our principal executive officer), our Company’s Chief Financial Officer and principal accounting officer, as well as persons performing similar functions. As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote:

 
(1)
honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

 
(2)
full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us;

 
(3)
compliance with applicable governmental laws, rules and regulations;

 
(4)
the prompt internal reporting of violations of the Code of Business Conduct and Ethics to an appropriate person or persons identified in the Code of Business Conduct and Ethics; and

 
(5)
accountability for adherence to the Code of Business Conduct and Ethics.

Our Code of Business Conduct and Ethics requires, among other things, that all of our Company’s personnel shall be accorded full access to our Chief Financial Officer with respect to any matter which may arise relating to the Code of Business Conduct and Ethics. Further, all of our Company’s personnel are to be accorded full access to our Company’s Audit Committee if any such matter involves an alleged breach of the Code of Business Conduct and Ethics by the Chief Financial Officer or by any person who would be considered an “insider” for the purposes of our Company’s Insider Trading Compliance Policy by virtue of such person’s relationship to the Chief Financial Officer.

In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly managers and/or supervisors, have a responsibility for maintaining financial integrity within our Company, consistent with generally accepted accounting principles, and federal, provincial and state securities laws. Any employee who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to his or her immediate supervisor or to our Company’s Chief Financial Officer. If the incident involves an alleged breach of the Code of Business Conduct and Ethics by the Chief Financial Officer, the incident must be reported to any member of our Company’s Audit Committee. Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe disciplinary matter. It is against our Company policy to retaliate against any individual who reports in good faith the violation or potential violation of our Company’s Code of Business Conduct and Ethics by another.


SUMMARY OF EXECUTIVE COMPENSATION

Particulars of compensation awarded to, earned by or paid to:

 
(a)
our Company's chief executive officer (the "CEO");

 
(b)
each of our Company's four most highly compensated executive officers who were serving as executive officers at the end of the most recently completed fiscal year and whose total salary and bonus exceeds $100,000 per year; and

 
(c)
any additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as an executive officer of our Company at the end of the most recently completed fiscal year;
 
 
 
(all such persons are referred to as the "Named Executive Officers") are set out in the summary compensation table below.

SUMMARY COMPENSATION TABLE
 
 
Annual Compensation
Long Term Compensation
 
 
 
 
 
 
Awards
Payouts
 
Name and Principal Position
Year
 
Salary
 
Bonus
 
Other Annual Compen-sation(1)
Securities Underlying Options/ SARs Granted (#)
Restricted Shares or Restricted Share Units
 
LTIP
Payouts
All Other Compen-sation
Timothy M. Roberts Chairman, Chief Executive Officer and Director
2004
2003
2002
$250,0001
$2,500
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Kevin Bachus President and Chief Operating Officer
2004
2003
2002
$250,0002
$16,667
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
2,100,000
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Richard S. Skoba Executive Vice President of Sales and Business Development
2004
2003
2002
$207,9653
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Andrew Schneider Senior Vice President of Marketing
2004
2003
2002
$190,0004
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Tyrol R. Graham Vice President of Product Development
2004
2003
2002
$150,0005
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
 

1
includes 500,000 shares of S-8 stock issued in lieu of cash compensation.
2
includes 500,000 shares of S-8 stock issued in lieu of cash compensation.
3
includes 224,574 shares of S-8 stock issued in lieu of cash compensation.
4
includes 203,400 shares of S-8 stock issued in lieu of cash compensation.
5
includes 265,966 shares of S-8 stock issued in lieu of cash compensation.

The following table sets forth for each of the Named Executive Officers certain information concerning stock options granted to them during fiscal 2004. Our Company has never issued stock appreciation rights. Our Company grants options that generally vest immediately at an exercise price equal to the fair market value of a share of common stock as determined by its closing price on the OTC Bulletin Board. The term of each option granted is generally five years from the date of grant. Options may terminate before their expiration dates if the optionee’s status as an employee is terminated or upon the optionee’s death or disability. All options granted in the table were granted pursuant to a plan that is subject to shareholder approval.

OPTION/SAR GRANTS IN THE LAST FISCAL YEAR

Name
 
Number of Securities Underlying Options/ SARs Granted (#)
 
% of Total Options/ SARs Granted to Employees in Fiscal Year(1)
 
Exercise Price
($/Share)(2)
 
Expiration Date
 
 
 
 
 
 
 
 
 
 
 
Timothy Roberts
   
4,000,000
   
28
%
$
1.43
   
June 1, 2009
 
Kevin Bachus
   
4,000,000
   
28
%
$
0.53
   
June 1, 2009
 
Richard S. Skoba
   
1,500,000
   
11
%
$
0.53
   
June 1, 2009
 
Andrew Schneider
   
1,000,000
   
7
%
$
1.43
   
June 1, 2009
 
Tyrol R. Graham
   
1,000,000
   
7
%
$
0.53
   
June 1, 2009
 
 
                 

(1)
The percentages are based on 14,155,000 total options granted to current employees
(2)
Determined based on the fair market value of the underlying shares on the date of a grant.
 
The percentages are based on 14,155,000 total options granted to current employees
 
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES

No options were exercised during 2004.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS

On September 17, 2004, Infinium Labs, Inc. entered into an employment agreement with Timothy M. Roberts, Chief Executive Officer. The agreement is for a one year term and sets Mr. Roberts’ salary at $150,000 per year, automatically increasing to $250,000 per year when the Company’s stockholders’ equity equals or exceeds $5,000,000.
 
On November 1, 2003, Infinium Labs, Inc. entered into an employment agreement with Kevin Bachus, President and Chief Operating Officer. Per the agreement, Mr. Bachus’ salary is $200,000 per year from November 1, 2003 through April 30, 2004 and, thereafter, increased to $250,000 per year.

On June 1, 2004, Infinium Labs, Inc. entered into a revised employment agreement with Richard S. Skoba, Executive Vice President of Sales and Business Development, that supersedes in its entirety an original employment agreement with Infinium Labs Corporation dated January 3, 2003. The revised agreement sets January 3, 2004 as the effective date of hire and the initial salary is $125,000 per year. Effective February 4, 2004, Mr. Skoba's salary automatically increased to $175,000 per year. Effective June 1, 2004, Mr. Skoba received monthly increases to his salary for five months, in equal installments, until reaching $225,000 per year. Upon termination by us without cause, Mr. Skoba will be entitled to six months' salary and benefits.

On January 15, 2004, Infinium Labs, Inc. entered into an employment agreement with Tyrol Graham, Vice President of Product Development. Per the agreement, Mr. Graham’s salary is $150,000 per year and grants Mr. Graham the option to purchase 150,000 shares of the Company’s common stock pursuant to the Company’s stock option plan and the eligibility to participate in the Company’s MBO Plan for a maximum of 400,000 additional shares of common stock to be awarded pursuant to the Company’s Incentive Stock Option Plan.

On May 24, 2004, Infinium Labs, Inc. entered into an employment agreement with Andrew Schneider, Senior Vice President of Marketing. Per the agreement, Mr. Schneider’s salary is $190,000 per year and grants Mr. Schneider the option to purchase 300,000 shares of the Company’s common stock, of which, 20% vested on Mr. Schneider’s first day of employment.
 
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
 
Directors and executive officers receive, on an annual basis, incentive stock options to purchase shares of our common stock as awarded by our Board of Directors in consultation with the compensation committee. Issuances, if any, pursuant to the Company’s stock incentive plan are subject to shareholder consent which, to date, has not been provided. 
 
Our Board of Directors may award special remuneration to any director undertaking any special services on our behalf other than services ordinarily required of a director. Other than indicated herein, no director received and/or accrued any compensation for his services as a director, including committee participation and/or special assignments.
 
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers.
 
Other than the management agreements, the advisory agreements and the stock incentive plans discussed herein, we presently have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers.


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Principal Stockholders

The following table sets forth, as of April 12, 2005 certain information with respect to the beneficial ownership of our common stock by each stockholder known by us to be the beneficial owner of more than 5% of our common stock and by each of our current directors and executive officers. Each person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated.

Name and Address of Beneficial Owner
 
Amount and Nature of
Beneficial
Ownership(1)
 
Percentage
of Class(2)
 
 
 
 
 
 
 
Timothy M. Roberts
   
19,442,276
   
12.28
%
Kevin Bachus
   
4,655,556
   
2.94
%
Richard S. Skoba
   
583,333
   
0.37
%
Tyrol R. Graham
   
388,889
   
0.25
%
Richard Angelotti
2080 Ringling Blvd
Sarasota, Florida 34237
   
1,064,000
   
0.67
%
All Officers and Directors as a group (5 persons)
   
26,134,054
   
16.51
%
 
         

*
Represents less than 1% of our Company’s outstanding stock
(1)
Shares inclusive of vested stock options.
(2)
Based on 151,829,349 shares of common stock issued and outstanding and 6,351,529 vested stock options as of April 12 , 2005. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Except as otherwise indicated, we believe that the beneficial owners of the common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable.
 
 

We are unaware of any contract or other arrangement the operation of which may at a subsequent date result in a change of control of Infinium, other than the conversion of our outstanding convertible debentures in certain circumstances.


Other than as listed below, we have not been a party to any transaction, proposed transaction, or series of transactions in which the amount involved exceeds $60,000, and in which, to our knowledge, any of our directors, officers, five percent beneficial security holders, or any member of the immediate family of the foregoing persons has had or will have a direct or indirect material interest.

TRANSACTIONS WITH CERTAIN OFFICERS

On January 5, 2004, our wholly owned subsidiary merged with and into Infinium Labs Operating Corporation, with Infinium Labs Operating Corporation surviving as our wholly-owned subsidiary. In connection with such merger, Timothy M. Roberts, our Chief Executive Officer and one of our directors, received 36,199,220 shares of our common stock as merger consideration based on the shares he owned in Infinium Labs Operating Corporation immediately prior to the merger. Also in connection with the merger, Mr. Roberts' mother, sister and brother received, respectively, 3,141,660, 31,400 and 31,400 shares of our common stock as merger consideration.

On July 28, 2004, the Company issued a director 800,000 shares of common stock as consideration for the director's personal guaranty of a promissory note payable secured by a real estate mortgage encumbering the director's residence.   The note, effective on July 28, 2004 and expiring on July 27, 2005, is payable to Stephen A. Witzer, Trustee U/A dated February 7, 1985.  The principal is for $500,000 with interest calculated at fifteen percent (15%) per annum, plus a five percent (5%) penalty, if applicable, for any late payment.  In the event of an uncured default, the interest increases to eighteen percent (18%) per annum. 

On June 21, 2004, the Company compensated the Chief Executive Officer $50,000 as consideration for the Chief Executive Officer's personal guaranty at that time of a commercial promissory note payable secured by a real estate mortgage encumbering the Chief Executive Officer's residence.  The note is for $1,500,000 with interest calculated at fifteen percent (15%) per annum up to the maximum amount allowed by law in the event of default.  The note also permits a late charge in the amount of five percent (5%). 

TRANSACTIONS WITH PROMOTER

Immediately prior to the merger described above, Peter Goldstein surrendered to us 10,000,000 shares of our common stock in exchange for all of the issued and outstanding of our wholly-owned subsidiary Global Business Resources, Inc., a Florida corporation. The operations of such subsidiary were not material to us and were not desired to be retained following the merger.

The promoters of our Company are our directors and officers.
 
 
(a)
Exhibits.
 
Exhibit No.
 
Exhibit Description
 
Location
 
 
 
 
 
2-1
 
Agreement and Plan of Merger dated as of Filed herewith
 
Incorporated by Reference to Exhibit
 
 
December 24, 2003 by and among Global Business
 
2-1 to Form 8-K filed with the SEC on
 
 
Resources, Inc., Global Infinium Merger Sub, Inc.,
 
January 20, 2004
 
 
Infinium Labs Corporation and Peter J. Goldstein
 
 
 
 
 
 
 
3-1
 
Certificate of Incorporation
 
Incorporated by Reference to Exhibit
 
 
 
 
3-0 to Form SB-2 (Registration No.
 
 
 
 
333-67990) filed with the SEC on
 
 
 
 
August 20, 2001
         
 3-2
 
Certificate of Amendment of Certificate of Incorporation
 
Incorporated by reference to Exhibit
 
 
 
 
3-2 to the Company's Form 10-KSB for
 
 
 
 
the year ended December 31, 2003 (the
 
 
 
 
"Form 10-KSB")
 
 
 
 
 
3-3
 
Certificate of Amendment of Certificate of Incorporation
 
Incorporated by reference to Exhibit
 
 
 
 
3-3 to the Company's Form 10-KSB for
 
 
 
 
the year ended December 31, 2003 (the
 
 
 
 
"Form 10-KSB")
 
 
 
 
 
3-4
 
By-laws
 
Incorporated by reference to Exhibit
 
 
 
 
3-4 to the Company's Form 10-KSB for
 
 
 
 
the year ended December 31, 2003 (the
 
 
 
 
"Form 10-KSB")
 
 
 
 
 
4-1
 
Stock Purchase Agreement dated as of January 22, 2004
 
Incorporated by reference to Exhibit
 
 
between Infinium Labs, Inc. and SBI Brightline VI, LLC
 
4-1 to Form 8-K filed with the SEC on
 
 
 
 
January 26, 2004
 
 
 
 
 
4-2
 
Stock Purchase Agreement dated as of January 22, 2004
 
Incorporated by reference to Exhibit
 
 
between Infinium Labs, Inc. and Infinium Investment
 
4-2 to Form 8-K filed with the SEC on
 
 
Partners, LLC
 
January 26, 2004
 
 
 
 
 
4-3
 
Form of Subscription Agreement between Infinium Labs,
 
Incorporated by reference to Exhibit
 
 
Inc. and certain stockholders of Infinium Labs, Inc.
 
4-3 to the Form 10-KSB
 
 
 
 
 
10-1
 
12% Secured Subordinated Debenture between the Company
 
Incorporated by reference to Exhibit
 
 
and Contare Ventures, LLC, dated February 23, 2004
 
10-12 to the Form 10-QSB filed with the
 
 
 
 
SEC on August 23, 2004
 
 
 
 
 
10-2
 
12% Secured Subordinated Debenture between the Company
 
Incorporated by reference to Exhibit
 
 
and Gary Kurfirst, dated February 23, 2004
 
10-9 to the Form 10-QSB filed with the
 
 
 
 
SEC on August 23, 2004
 
 
 
 
 
10-3
 
15% Secured Debenture between the Company and James
 
Incorporated by reference to Exhibit
 
 
Beshara, dated March 29, 2004
 
10-4 to the Form 10-QSB filed with the
 
 
 
 
SEC on August 23, 2004
 
 
 
 
 
10-4
 
15% Secured Debenture between the Company and Ronald
 
Incorporated by reference to Exhibit
 
 
Westman, dated April 7, 2004
 
10-11 to the Form 10-QSB filed with the
 
 
 
 
SEC on August 23, 2004
 
 
 
 
 
10-5
 
15% Secured Subordinated Debenture between the Company
 
Incorporated by reference to Exhibit
 
 
and James Beshara, dated May 3, 2004
 
10-3 to the Form 10-QSB filed with the
 
 
 
 
SEC on August 23, 2004
 
 
 
 
 
 
 
 
10-6
 
15% Secured Debenture between the Company and Ronald
 
Incorporated by reference to Exhibit
 
 
Westman, dated May 7, 2004
 
10-1 to the Form 10-QSB filed with the
 
 
 
 
SEC on August 23, 2004
         
10-7
 
Pledge Agreement between Robert F. Shambro in favor of
 
Incorporated by reference to Exhibit
 
 
Phoenix Capital Opportunity Fund, dated May 12, 2004
 
10-6 to the Form 10-QSB filed with the
 
 
 
 
SEC on August 23, 2004
 
 
 
 
 
10-8
 
Promissory Note between the Company and Sharon M.
 
Incorporated by reference to Exhibit
 
 
Beshara, dated May 18, 2004
 
10-5 to the Form 10-QSB filed with the
 
 
 
 
SEC on August 23, 2004
 
 
 
 
 
10-9
 
15% Secured Subordinated Debenture between the Company
 
Incorporated by reference to Exhibit
 
 
and SBI USA, LLC, dated May 28, 2004
 
10-10 to the Form 10-QSB filed with the
 
 
 
 
SEC on August 23, 2004
 
 
 
 
 
10-11
 
Amended and restated convertible secured promissory note
 
Incorporated by reference to Exhibit
 
 
dated, June 16, 2004, between the Company and Phantom
 
10-2 to the Form 10-QSB filed with
 
 
Investors, LLC
 
the SEC on August 23, 2004
 
 
 
 
 
10-12
 
Commercial Promissory Note between the Company and
 
Incorporated by reference to Exhibit
 
 
Video Associates, LLC, dated June 2004
 
10-8 to the Form 10-QSB filed with
 
 
 
 
the SEC on August 23, 2004
 
 
 
 
 
10-13
 
Employee Stock Ownership
 
Incorporated by reference to Exhibit
 
 
 
 
10-13 to the Form 10-QSB filed with
 
 
 
 
the SEC on August 23, 2004
 
 
 
 
 
10-14
 
Promissory Note between the Company and Stephen
 
Incorporated by reference to Exhibit
 
 
A. Witzer, dated July 28, 2004
 
10-14 to the Form SB-2/A filed with
 
 
 
 
the SEC on February 14, 2005
 
 
 
 
 
10-15
 
10% Secured Promissory Note between the Company and
 
Incorporated by reference to Exhibit
 
 
Hazinu Ltd., dated October 20, 2004
 
4-2 to Form 8-K filed with the SEC on
 
 
 
 
October 29, 2004
 
 
 
 
 
10-16
 
10% Secured Promissory Note between the Company and JM
 
Incorporated by reference to Exhibit
 
 
Investors, LLC, Fenmore Holdings, LLC, Viscount
 
4-6 to Form 8-K filed with the SEC on
 
 
Investments Limited and Congregation Mishkan Sholom,
 
October 29, 2004
 
 
dated October 27, 2004
 
 
 
 
 
 
 
10-17
 
Securities Purchase Agreement between the Company and
 
Incorporated by reference to Exhibit
 
 
Hazinu Ltd., JM Investors, LLC, Fenmore Holdings, LLC,
 
4-1 to Form 8-K filed with the SEC on
 
 
Viscount Investments Limited and Congregation Mishkan
 
December 22, 2004
 
 
Sholom, dated December 13, 2004
 
 
 
 
 
 
 
10-18
 
Registration Rights Agreement between the Company and
 
Incorporated by reference to Exhibit
 
 
Hazinu Ltd., JM Investors, LLC, Fenmore Holdings, LLC,
 
4-2 to Form 8-K filed with the SEC on
 
 
Viscount Investments Limited and Congregation Mishkan
 
December 22, 2004
 
 
Sholom, dated December 13, 2004
 
 
 
 
 
 
 
10-19
 
8% Convertible Debenture between the Company and Hazinu
 
Incorporated by reference to Exhibit
 
 
Ltd., JM Investors, LLC, Fenmore Holdings, LLC, Viscount
 
4-3 to Form 8-K filed with the SEC on
 
 
Investments Limited and Congregation Mishkan Sholom,
 
December 22, 2004
 
 
dated December 13, 2004
 
 
 
 
 
 
 
 
 
 
10-20
 
8% Convertible Debenture between the Company and
 
Incorporated by reference to Form 8-K
 
 
accredited investors, dated December 23, 2004
 
filed with the SEC on January 5, 2005
 
 
 
 
 
10-21
 
Employment agreement between the Company and Richard
Skoba dated January 3, 2003
 
Incorporated by reference to Exhibit 10-21 to the
Form 10-KSB filed with the SEC on April 20, 2005
 
 
 
 
 
10-22
 
Pinnacle Marketing agreement to serve as manufacturing
 
Incorporated by reference to Exhibit
 
 
Representatives
 
10-22 to the Form SB-2/A filed with
 
 
 
 
the SEC on February 14, 2005
 
 
 
 
 
10-23
 
Summit Marketing agreement to serve as manufacturing
 
Incorporated by reference to Exhibit
 
 
Representatives
 
10-23 to the Form SB-2/A filed with
 
 
 
 
the SEC on February 14, 2005
 
 
 
 
 
10-24
 
Limelight Networks agreement to provide digital
 
Incorporated by reference to Exhibit
 
 
delivery network services
 
10-24 to the Form SB-2/A filed with
 
 
 
 
the SEC on February 14, 2005
 
 
 
 
 
10-25
 
Chicony agreement to manufacture system hardware
 
Incorporated by reference to Exhibit
 
 
 
 
10-25 to the Form SB-2/A filed with
 
 
 
 
the SEC on February 14, 2005
 
 
 
 
 
10-26
 
Saitek agreement to manufacture system hardware
 
Incorporated by reference to Exhibit
 
 
 
 
10-26 to the Form SB-2/A filed with
 
 
 
 
the SEC on February 14, 2005
 
 
 
 
 
10-27
 
BIOSTAR® Microtech International Corp. agreement for
 
Incorporated by reference to Exhibit
 
 
engineering, industrial design and manufacturing
 
10-27 to the Form SB-2/A filed with
 
 
 
 
the SEC on February 14, 2005
 
 
 
 
 
10-28
 
Teague agreement for engineering and industrial design
 
Incorporated by reference to Exhibit
 
 
 
 
10-28 to the Form SB-2/A filed with
 
 
 
 
the SEC on February 14, 2005
 
 
 
 
 
10-29
 
Employment agreement between the Company and Richard
Skoba dated June 1, 2004
 
Incorporated by reference to Exhibit 10-29 to the
Form 10-KSB filed with the SEC on April 20, 2005
 
 
 
 
 
10-30
 
Employment agreement between the Company and Timothy
M. Roberts dated September 17, 2004
 
Incorporated by reference to Exhibit 10-30 to the
Form 10-KSB filed with the SEC on April 20, 2005
 
 
 
 
 
10-31
 
Employment agreement between the Company and Kevin
Bachus dated November 1, 2003
 
Incorporated by reference to Exhibit 10-31 to the
Form 10-KSB filed with the SEC on April 20, 2005
 
 
 
 
 
10-32
 
Employment agreement between the Company and Tyrol
Graham dated January 15, 2004
 
Incorporated by reference to Exhibit 10-32 to the
Form 10-KSB filed with the SEC on April 20, 2005
 
 
 
 
 
10-33
 
Employment agreement between the Company and Andrew
Schneider dated May 24, 2004
 
Incorporated by reference to Exhibit 10-33 to the
Form 10-KSB filed with the SEC on April 20, 2005
  
10-34
 
Distribution Agreement between the Company and Riverdeep, Inc. dated October 20, 2003
 
Filed herewith
         
10-35
 
Distribution Agreement between the Company and Codemasters Software Company Ltd. Dated December 3, 2004
 
Filed herewith
         
10-36
 
Distribution Agreement between the Company and Atari, Inc. dated September 14, 200 4
 
Filed herewith
         
10-37
 
Distribution Agreement between the Company and Eidos, Inc. dated September 21, 2004
 
Filed herewith
         
10-38
 
Letter of Inter between the Company and Vivendi Universal Games, Inc. dated September 20, 2004
 
Filed herewith
         
31-1
 
Certificate of Chief Executive Officer and Interim Chief Financial Officer dated February 10,
 
Filed herewith
         
32-1
 
Certification by Chief Executive Officer and Interim Chief Financial Officer dated February 10, 2006
 
Filed herewith

Audit Fees. The aggregate fees billed by our auditors, for professional services rendered for the audit of the Company's annual financial statements for the year ended December 31, 2004 and for the two months ended December 31, 2003 and for the reviews of the financial statements included in the Company's Quarterly Reports on Form 10-QSB during those fiscal years were $53,625 and $18,988 respectively. The aggregate fees billed by our former auditors, for professional services rendered for the audit of the Company's annual financial statements for the period from December 9, 2002 (Inception) to October 31, 2003 was $23,280.

Audit-related Fees. None.

Tax Fees. The Company incurred fees to our former auditors of $44,764 and $5,000 for tax compliance matters during the year ended December 31, 2004 and the two months ended December 31, 2003, respectively.

All Other Fees. There were no fees billed by our auditors for the above-referenced periods, for other non-audit professional services, other than those services listed above.
 
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS
 
The Company currently does not have a designated Audit Committee, and accordingly, the Company's Board of Directors' policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Company's Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis.
 
SIGNATURES
 
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this Amendment No. 2 on Form 10-KSB/A to its Annual Report on Form 10-KSB for the year ended December 31, 2004 to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
INFINIUM LABS, INC.
 
 
 
 
 
 
Date: February 10, 2006
By:  
/s/ Greg Koler
 
 
 
Name:   Greg Koler
Title:     Chief Executive Officer and Interim Chief Financial Officer
 
 

 
INFINIUM LABS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 CONSOLIDATED (RESTATED) AND 2003 (RESTATED)
 
 
 
 
 
 
 
 
INFINIUM LABS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

     
PAGES
 
 
 
PAGE
 
 
 
PAGE
 
 
 
PAGES
 
 
 
PAGES
 
 
 
PAGES
 
 
 
 


 

To the Board of Directors of:
Infinium Labs, Inc.
(A Development Stage Company)

We have audited the accompanying balance sheets of Infinium Labs, Inc. and subsidiary (A Development Stage Company) as of December 31, 2004 (consolidated) and 2003, and the related statements of operations, changes in stockholders’ deficiency and cash flows for the year ended December 31, 2004 (consolidated), for the two months ended December 31, 2003 and for the period from December 9, 2002 (inception) to December 31, 2004 (consolidated). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Infinium Labs Corporation as of October 31, 2003, were audited by other auditors whose report dated December 11, 2003, except for Note F as to which the date is January 26, 2004, expressed an unqualified opinion on those statements.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly in all material respects, the financial position of Infinium Labs, Inc. and subsidiary (A Development Stage Company) as of December 31, 2004 (consolidated) and 2003 and the results of its operations and its cash flows for the year ended December 31, 2004 (consolidated), for the two months ended December 31, 2003 and for the period from December 9, 2002 (inception) to December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 9 to the consolidated financial statements, the Company has had recurring losses from inception of $36,764,861, has a working capital deficiency of $12,988,409, a stockholders deficiency of $12,251,352 and used cash in operations from inception of $11,996,783. This raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning this matter are also described in Note 10. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 2, the Company restated its Financial Statements for the two months ended December 31, 2003 and the year ended December 31, 2004 (consolidated).


WEBB & COMPANY, P.A.

Boynton Beach, Florida
April 14, 2005, except for Note 2, 7, 8(G), 9, 10 as to which date is December 16, 2005.


INFINIUM LABS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
 
ASSETS
 
Restated - Note 2
 
   
December 31,
2004
(Consolidated) 
 
December 31, 2003
 
Current Assets:
 
 
 
 
 
Cash
 
$
4,102
 
$
45,852
 
Restricted Cash
   
894,910
   
 
Prepaid Expenses
   
66,589
   
 
Other Receivable
   
407
   
3,350
 
Total Current Assets
   
966,008
   
49,202
 
 
         
Property and Equipment, Net
   
475,122
   
162,763
 
 
         
Other Assets:
         
Deposits
   
5,440
   
7,490
 
Intangible asset, net (Note 3)
   
256,495
   
300,000
 
Total Other Assets
   
261,935
   
307,490
 
 
         
Total Assets
   
1,703,065
   
519,455
 
 
         
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
 
         
Current Liabilities:
         
Accounts payable
 
$
3,598,885
 
$
349,005
 
Due to developers
   
985,000
   
 
Accrued interest expense
   
301,415
   
6,781
 
Other accrued expense
   
105,000
   
120,850
 
Accrued payroll and payroll taxes (Note 8(G))
   
1,665,769
   
75,997
 
Promissory notes (Note 5)
   
7,298,348
   
366,154
 
 
         
Total Current Liabilities
   
13,954,417
   
918,787
 
 
         
Commitments and Contingencies
   
   
 
 
             
Stockholders’ Deficiency:
         
Preferred stock, $0.001 par value, 10,000,000 shares authorized, none issued and outstanding
   
   
 
Common stock, $0.0001 par value, 200,000,000 shares authorized, 121,090,655 and 69,115,900 shares issued and outstanding, respectively (Note 6)
   
12,109
   
6,911
 
Additional paid-in capital (Note 6)
   
24,523,917
   
2,702,348
 
Subscription receivable
   
(22,517
)
 
(163,517
)
Accumulated deficit during development stage
   
(36,764,861
)
 
(2,945,074
)
 
         
Total Stockholders’ Deficiency
   
(12,251,352
)
 
(399,332
)
 
         
Total Liabilities and Stockholders’ Deficiency
   
1,703,065
   
519,455
 


See accompanying Notes to Financial Statements.


INFINIUM LABS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
 
   
For the Year Ended December 31, 2004
(Consolidated)
 
For the Two Months Ended December 31, 2003
 
For the Period
from
December 9, 2002 (Inception) to
October 31, 2003
 
For the Period from
December 9, 2002
(Inception to December 31, 2004)
(Consolidated)
 
 
 
Restated - Note 2
 
Restated - Note 2
 
 
 
Restated - Note 2
 
Operating Expenses:
 
 
 
 
 
 
 
 
 
Development costs
 
$
3,130,854
 
$
145,943
 
$
259,407
 
$
3,536,204
 
Advertising
   
1,380,377
   
55,141
   
153,038
   
1,588,556
 
Salary expense
   
6,985,422
   
172,484
   
   
7,157,906
 
Professional fees
   
2,808,733
   
58,133
   
837,737
   
3,704,603
 
Consultants
   
9,082,345
   
75,816
   
783,860
   
9,942,021
 
Impairment of assets
   
352,299
   
   
   
352,299
 
General and administrative
   
3,864,787
   
130,032
   
236,087
   
4,230,906
 
Total Operating Expenses
   
27,604,817
   
637,549
   
2,270,129
   
30,512,495
 
Net Loss from Operations
   
(27,604,817
)
 
(637,549
)
 
(2,270,129
)
 
(30,512,495
)
 
                 
Other Income (Expense):
                 
Other income
   
1,897
   
37
   
   
1,934
 
Loss on sale of equipment
   
(448
)
 
   
   
(448
)
IRS penalty and interest expense
   
(528,377
)
 
(19,437
)
 
   
(547,814
)
Interest expense
   
(5,688,042
)
 
(17,996
)
 
   
(5,706,038
)
Total Other Income (Expense)
   
(6,214,970
)
 
(37,396
)
 
   
(6,252,366
)
 
                 
Loss before Income Taxes
   
(33,819,787
)
 
(674,945
)
 
(2,270,129
)
 
(36,764,861
)
 
                 
Income Taxes
   
   
   
   
 
 
                 
Net Loss
 
$
(33,819,787
)
$
(674,945
)
$
(2,270,129
)
$
(36,764,861
)
 
                 
Per Common Share
                 
 
                 
Loss per common share - basic and diluted
 
$
(0.34
)
$
(0.01
)
$
(0.04
)
$
(0.46
)
 
                 
Weighted average - basic and diluted
   
100,688,617
   
67,745,088
   
57,420,568
   
79,230,175
 

See accompanying Notes to Financial Statements.


INFINIUM LABS, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
For the Period from December 9, 2002 (Inception) to December 31, 2004
 
 
 
Preferred Stock
 
Common Stock
 
Additional Paid-In
 
Accumulated Deficit During Development
 
Stock Subscriptions
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Stage
 
Receivable
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock issued to founders ($0.0004 per share)
   
 
$
   
58,189,728
 
$
5,819
 
$
12,703
 
$
 
$
(18,517
)
$
5
 
 
                                 
Stock issued for cash ($0.12 per share)
   
   
   
4,423,012
   
442
   
526,261
   
   
   
526,703
 
 
                                 
Stock issued for services ($0.3775 per share)
   
   
   
2,957,376
   
296
   
1,112,709
   
   
   
1,113,005
 
 
                                 
Net loss for the period from December 9, 2002 (inception) to October 31, 2003
   
   
   
   
   
   
(2,270,129
)
 
   
(2,270,129
)
 
                                 
Balance, October 31, 2003
   
   
   
65,570,116
   
6,557
   
1,651,673
   
(2,270,129
)
 
(18,517
)
 
(630,416
)
 
                                 
Stock issued for cash ($0.28 per share)
   
   
   
2,169,148
   
217
   
612,172
   
   
(145,000
)
 
467,389
 
 
                                 
Stock issued for signage rights ($0.3175 per share)
   
   
   
942,600
   
94
   
299,906
   
   
   
300,000
 
 
                                 
    Stock issued for services ($0.3175 per share)
   
   
   
434,036
   
43
   
138,597
   
   
   
138,640
 
 
                                 
Net loss for the two months ended December 31, 2003
   
   
   
   
   
   
(674,945
)
 
   
(674,945
)
 
                                 
Balance, December 31, 2003 (Restated - Note 2)
   
   
   
69,115,900
   
6,911
   
2,702,348
   
(2,945,074
)
 
(163,517
)
 
(399,332
)
 
                                 
Recapitalization of Global Business Resources
   
   
   
16,156,000
   
1,615
   
(1,615
)
 
   
   
 
 
                                 
Shares issued for cash ($0.25 per share)
   
   
   
6,650,000
   
665
   
1,661,835
   
   
   
1,662,500
 
 
                                 
Stock issued for cash ($0.257 per share)
   
   
   
   
   
   
   
141,000
   
141,000
 
 
                                 
Shares issued with note payable ($0.78 per share)
   
   
   
560,000
   
56
   
433,944
   
   
   
434,000