** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

----

**FORM 10-Q**

| **(Mark  One)**                                        | ** ** | ** **                                                                                    |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| **x**                                                  | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|                                                   |       |                                                                                          |
| **For the  quarterly period ended September 30, 2007** |
|                                                   |       |                                                                                          |
| **OR**                                                 |
|                                                   |       |                                                                                          |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                        |            |                                                                                               |  |  |

 

**For the transition period from                                  to**

**CommissionFile No. 0-24993**

**WPTENTERPRISES, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                     | ** ** | **77-0639000**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                             |       |                                  |
| **5700  Wilshire Boulevard**                                     | ** ** | ** **                            |
| **Suite  350**                                                   | ** ** | ** **                            |
| **Los  Angeles, California**                                     | ** ** | **90036**                             |
| (Address of principal  executive offices)                        |       | (Zip Code)                            |
|                                                             |       |                                  |
| **(323) 330-9900**                                          |
| (Registrant’s telephone  number, including area code)       |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. 

| Yes x | No o |
|-------|------|

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer  o | Accelerated filer x | Non-accelerated filer o |
|----------------------------|---------------------|-------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct).   Yes o   No x

Asof November 8, 2007 there were 20,491,993 shares of Common Stock, $0.001 parvalue per share, outstanding.

 

 

 

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**WPT ENTERPRISES, INC.**

**INDEX**
| ** ** | ** **            | ** **                                                                                                                                                                    | ** ** | ** ** | ** **              |
|------------|-----------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-------------------------|
| ** ** | ** **            | ** **                                                                                                                                                                    | ** ** | ** ** | **Page of   Form 10-Q** |
| PART I.    | FINANCIAL INFORMATION |                                                                                                                                                                          |       |       |
|       |                  |                                                                                                                                                                          |       |       |                    |
|       | ITEM 1.               | FINANCIAL STATEMENTS                                                                                                                                                          |       |
|       |                  |                                                                                                                                                                          |       |       |                    |
|       |                  | Condensed Consolidated  Balance Sheets as of September 30, 2007 (unaudited) and December 31, 2006                                                                             | 3          |
|       |                  |                                                                                                                                                                          |       |       |                    |
|       |                  | Unaudited Condensed  Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss)  for the three and nine months ended September 30, 2007 and October 1, 2006 | 4          |
|       |                  |                                                                                                                                                                          |       |       |                    |
|       |                  | Unaudited Condensed  Consolidated Statements of Stockholders’ Equity for the nine months ended  September 30, 2007 and October 1, 2006                                   | 5          |
|       |                  |                                                                                                                                                                          |       |       |                    |
|       |                  | Unaudited Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2007 and October 1, 2006                                                  | 6          |
|       |                  |                                                                                                                                                                          |       |       |                    |
|       |                  | Notes to Unaudited  Condensed Consolidated Financial Statements                                                                                                               | 7          |
|       |                  |                                                                                                                                                                          |       |       |                    |
|       | ITEM 2.               | MANAGEMENT’S DISCUSSION  AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                                                   | 12         |
|       |                  |                                                                                                                                                                          |       |       |                    |
|       | ITEM 3.               | QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                                                                   | 21         |
|       |                  |                                                                                                                                                                          |       |       |                    |
|       | ITEM 4.               | CONTROLS AND PROCEDURES                                                                                                                                                       | 21         |
|       |                  |                                                                                                                                                                          |       |       |                    |
| PART II.   | OTHER INFORMATION     |                                                                                                                                                                          |       |       |
|       |                  |                                                                                                                                                                          |       |       |                    |
|       | ITEM 1.               | LEGAL PROCEEDINGS                                                                                                                                                             | 22         |
|       |                  |                                                                                                                                                                          |       |       |                    |
|       | ITEM 1A.              | RISK FACTORS                                                                                                                                                                  | 22         |
|       |                  |                                                                                                                                                                          |       |       |                    |
|       | ITEM 5.               | OTHER INFORMATION                                                                                                                                                             | 23         |
|       |                  |                                                                                                                                                                          |       |       |                    |
|       | ITEM 6.               | EXHIBITS                                                                                                                                                                      | 24         |
|       |                  |                                                                                                                                                                          |       |       |                    |
| SIGNATURES |                  |                                                                                                                                                                          |       |       | 25                      |

 

2

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**WPTENTERPRISES, INC.**

**CondensedConsolidated Balance Sheets**

 
| ** **                                                                                                                 | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                 | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| ** **                                                                                                                 | ** ** | **(In thousands)**     | ** ** |
| **Assets**                                                                                                                 | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current assets:                                                                                                            |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                 |       | $                      | 4,486      |                  | $          | 8,360 |   |
| Investments in  marketable securities                                                                                      |       | 21,447                 |       | 24,301                |       |
| Accounts  receivable, net of allowances of $18                                                                             |       | 2,020                  |       | 2,353                 |       |
| Deferred  television costs                                                                                                 |       | 1,665                  |       | 1,722                 |       |
| Other                                                                                                                      |       | 1,095                  |       | 735                   |       |
|                                                                                                                       |       | 30,713                 |       | 37,471                |       |
|                                                                                                                       |       |                   |       |                  |       |
| Investments in  marketable securities                                                                                      |       | 9,004                  |       | 6,962                 |       |
| Property and equipment,  net                                                                                               |       | 1,603                  |       | 3,375                 |       |
| Restricted cash                                                                                                            |       | 347                    |       | 453                   |       |
| Investment in  unconsolidated investee                                                                                     |       | 2,923                  |       | 2,923                 |       |
| Other                                                                                                                      |       | 156                    |       | 156                   |       |
| ** **                                                                                                                 |       | 44,746                 |       | $                     | 51,340     |   |
| ** **                                                                                                                 | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Liabilities  and Stockholders’ Equity**                                                                             | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                      |       |                   |       |                  |       |
| Accounts payable                                                                                                           |       | $                      | 647        |                  | $          | 674 |   |
| Accrued payroll  and related                                                                                               |       | 1,070                  |       | 1,205                 |       |
| Other accrued  expenses                                                                                                    |       | 1,306                  |       | 1,076                 |       |
| Deferred revenue                                                                                                           |       | 4,458                  |       | 4,740                 |       |
| Income taxes  payable                                                                                                      |       | —                 |       | 394                   |       |
|                                                                                                                       |       | 7,481                  |       | 8,089                 |       |
|                                                                                                                       |       |                   |       |                  |       |
| **Commitments  and Contingencies**                                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| ** **                                                                                                                 | ** ** | ** **             | ** ** | ** **            | ** ** |
| Stockholders’  equity:                                                                                                |       |                   |       |                  |       |
| Preferred stock,  $0.001 par value; authorized 20,000 shares; none issued and outstanding                                  |       | —                 |       | —                |       |
|                                                                                                                       |
| Common stock,  $0.001 par value; authorized 100,000 shares; 20,492 and 20,378 shares issued  and outstanding, respectively |       | 20                     |       | 20                    |       |
| Additional  paid-in capital                                                                                                |       | 43,533                 |       | 41,719                |       |
| Retained  earnings (deficit)                                                                                               |       | (6,269                 | )          | 1,561                 |       |
| Accumulated  other comprehensive loss                                                                                      |       | (19                    | )          | (49                   | )          |
|                                                                                                                       |       | 37,265                 |       | 43,251                |       |
| ** **                                                                                                                 |       | $                      | 44,746     |                  | $          | 51,340 |   |
|                                                                                                                       |       |                   |       |                  |       |

 

See notes to unaudited condensed consolidatedfinancial statements

 

3

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**WPTENTERPRISES, INC.**

**CondensedConsolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss)**

**(unaudited)**

 
| ** **                                                         | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** **             | ** ** | ** **          | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|------------------------|------------|---------------------|------------|
| ** **                                                         | ** ** | **Three months ended**                     | ** ** | **Nine months ended**                      | ** ** |
| ** **                                                         | ** ** | **September 30, 2007**                     | ** ** | **October 1, 2006**                        | ** ** | **September 30, 2007** | ** ** | **October 1, 2006** | ** ** |
|                                                               | ** ** | **(In  thousands, except per share data)** | ** ** | **(In  thousands, except per share data)** | ** ** |
| **Revenues:**                                                      | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** **             | ** ** | ** **          | ** ** |
| License fees:                                                      |       |                                       |       |                                       |       |                   |       |                |       |
| Domestic  television                                               |       | $                                          | 1,424      |                                       | $          | 3,163                  |       | $                   | 8,132      |   | $ | 13,467 |   |
| International  television                                          |       | 490                                        |       | 623                                        |       | 1,709                  |       | 2,191               |       |
| Product  licensing                                                 |       | 759                                        |       | 861                                        |       | 2,618                  |       | 2,378               |       |
| ** **                                                         |       | 2,673                                      |       | 4,647                                      |       | 12,459                 |       | 18,036              |       |
| ** **                                                         | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** **             | ** ** | ** **          | ** ** |
| Online gaming                                                      |       | 119                                        |       | 912                                        |       | 929                    |       | 2,644               |       |
| Event hosting  and sponsorship fees                                |       | 1,575                                      |       | 249                                        |       | 3,058                  |       | 2,458               |       |
| Other                                                              |       | 38                                         |       | 60                                         |       | 171                    |       | 212                 |       |
| **Total  Revenues**                                                |       | 4,405                                      |       | 5,868                                      |       | 16,617                 |       | 23,350              |       |
|                                                               |       |                                       |       |                                       |       |                   |       |                |       |
| **Cost of  revenues**                                              |       | 1,355                                      |       | 1,737                                      |       | 6,594                  |       | 8,333               |       |
|                                                               |       |                                       |       |                                       |       |                   |       |                |       |
| **Gross  profit**                                                  |       | 3,050                                      |       | 4,131                                      |       | 10,023                 |       | 15,017              |       |
| ** **                                                         | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** **             | ** ** | ** **          | ** ** |
| **Selling,  general and administrative expense**                   |       | 5,709                                      |       | 4,549                                      |       | 16,942                 |       | 14,058              |       |
| **Loss on  abandonment of online gaming assets**                   |       | —                                     |       | —                                     |       | 2,270                  |       | —              |       |
|                                                               |       |                                       |       |                                       |       |                   |       |                |       |
| **Earnings  (loss) from operations**                               |       | (2,659                                     | )          | (418                                       | )          | (9,189                 | )          | 959                 |       |
|                                                               |       |                                       |       |                                       |       |                   |       |                |       |
| **Other  income:**                                                 | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** **             | ** ** | ** **          | ** ** |
| Gain on sale of  investment                                        |       | —                                     |       | 4,541                                      |       | —                 |       | 10,216              |       |
| Interest                                                           |       | 448                                        |       | 431                                        |       | 1,359                  |       | 1,175               |       |
| **Earnings  (loss) before income taxes**                           |       | (2,211                                     | )     | 4,554                                      | )          | (7,830                 | )          | 12,350              |       |
| ** **                                                         | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** **             | ** ** | ** **          | ** ** |
| **Income  taxes**                                                  |       | —                                     |       | 1,862                                      |       | —                 |       | 3,501               |       |
|                                                               |       |                                       |       |                                       |       |                   |       |                |       |
| **Net  earnings (loss)**                                           |       | (2,211                                     | )          | 2,692                                      | )          | (7,830                 | )          | 8,849               |       |
| ** **                                                         | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** **             | ** ** | ** **          | ** ** |
| **Unrealized  gains (loss) on securities**                         |       | 24                                         |       | 110                                        |       | 30                     |       | (300                | )          |
|                                                               |       |                                       |       |                                       |       |                   |       |                |       |
| **Comprehensive  earnings (loss)**                                 |       | $                                          | (2,187     | )                                          | $          | 2,802                  |       | $                   | (7,800     | ) | $ | 8,549 |   |
|                                                               |       |                                       |       |                                       |       |                   |       |                |       |
| **Net  earnings (loss) per common share — basic and diluted** |       | $                                          | (0.11      | )                                          | $          | 0.13                   |       | $                   | (0.38      | ) | $ | 0.43 |   |
| ** **                                                         | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** **             | ** ** | ** **          | ** ** |
| **Weighted-average  common shares outstanding — basic**       |       | 20,603                                     |       | 20,603                                     |       | 20,603                 |       | 20,408              |       |
| ** **                                                         | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** **             | ** ** | ** **          | ** ** |
| Dilutive effect  of common stock equivalents                       |       | —                                     |       | —                                     |       | —                 |       | 7                   |       |
|                                                               |       |                                       |       |                                       |       |                   |       |                |       |
| **Weighted-average  common shares outstanding — diluted**     |       | 20,603                                     |       | 20,603                                     |       | 20,603                 |       | 20,415              |       |
| ** **                                                         | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** **             | ** ** | ** **          | ** ** |
|                                                                    |            |                                            |            |                                            |            |                        |            |                     |            |  |  |  |  |  |  |  |  |  |  |

 

See notes to unaudited condensed consolidatedfinancial statements

 

4

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**WPTENTERPRISES, INC.**

**CondensedConsolidated Statements of Stockholders’ Equity**

**NineMonths ended September 30, 2007 and October 1, 2006**

**(unaudited)**

 
| ** **                                      | ** ** | ** **        | ** ** | ** **  | ** ** | ** **     | ** ** | ** **    | ** ** | ** **          | ** ** | ** **          | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|-------------|------------|----------------|------------|---------------|------------|---------------------|------------|---------------------|------------|------------|------------|
| ** **                                      | ** ** | ** **        | ** ** | ** **  | ** ** | ** **     | ** ** | ** **    | ** ** | ** **          | ** ** | **Accumlated**      | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | ** **        | ** ** | ** **  | ** ** | **Additional** | ** ** | **Retained**  | ** ** | ** **          | ** ** | **Other**           | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Common  Stock** | ** ** | **Paid-in** | ** ** | **Earnings**   | ** ** | **Deferred**  | ** ** | **Comprehensive**   | ** ** | ** **          | ** ** |
| ** **                                      | ** ** | **Shares**        | ** ** | **Dollars** | ** ** | **Capital**    | ** ** | **(Deficit)** | ** ** | **Compensation**    | ** ** | **Earnings/(Loss)** | ** ** | **Total**  | ** ** |
| ** **                                      | ** ** | ** **        | ** ** | ** **  | ** ** | ** **     | ** ** | ** **    | ** ** | **(in  thousands)** | ** ** | ** **          | ** ** | ** ** | ** ** |
| **2007**                                        | ** ** | ** **        | ** ** | ** **  | ** ** | ** **     | ** ** | ** **    | ** ** | ** **          | ** ** | ** **          | ** ** | ** ** | ** ** |
| **BALANCES  AT JANUARY 1, 2007**                | ** ** | 20,378            |       | $           | 20         |           | $          | 41,719        |       | $                   | 1,561      |                | $          | —     |       | $ | (49 | ) | $ | 43,251 | ** ** |
| Common stock  issued                            |       | 114               |       |        |       | 1              |       |          |       |                |       |                |       | 1          |       |
| Share-based  compensation                       |       |              |       |        |       | 1,813          |       |          |       |                |       |                |       | 1,813      |       |
| Other  comprehensive earnings                   |       |              |       |        |       |           |       |          |       |                |       | 30                  |       | 30         |       |
| Net loss                                        |       |              |       |        |       |           |       | (7,830        | )          |                |       |                |       | (7,830     | )          |
| **BALANCES  AT SEPTEMBER 30, 2007**             | ** ** | 20,492            |       | $           | 20         |           | $          | 43,533        |       | $                   | (6,269     | )                   | $          | —     |       | $ | (19 | ) | $ | 37,265 | ** ** |
| ** **                                      | ** ** |              |       |        |       |           |       |          |       |                |       |                |       |       | ** ** |
| **2006**                                        | ** ** |              |       |        |       |           |       |          |       |                |       |                |       |       | ** ** |
| **BALANCES  AT JANUARY 2, 2006**                | ** ** | 20,158            |       | $           | 20         |           | $          | 34,113        |       | $                   | (6,208     | )                   | $          | (1         | )          | $ | 10,449 |   | $ | 38,373 | ** ** |
| Reduction of  deferred compensation             |       |              |       |        |       |           |       |          |       | 1                   |       |                |       | 1          |       |
| Common stock issued                             |       | 220               |       |        |       | 1              |       |          |       |                |       |                |       | 1          |       |
| Share-based  compensation                       |       |              |       |        |       | 3,046          |       |          |       |                |       |                |       | 3,046      |       |
| Income tax  benefit from stock option exercises |       |              |       |        |       | 3,169          |       |          |       |                |       |                |       | 3,169      |       |
| Realized gain on  sale of investment            |       |              |       |        |       |           |       |          |       |                |       | (10,216             | )          | (10,216    | )          |
| Other comprehensive  loss                       |       |              |       |        |       |           |       |          |       |                |       | (300                | )          | (300       | )          |
| Net earnings                                    |       |              |       |        |       |           |       | 8,849         |       |                |       |                |       | 8,849      |       |
| **BALANCES  AT OCTOBER 1, 2006**                | ** ** | 20,378            |       | $           | 20         |           | $          | 40,329        |       | $                   | 2,641      |                | $          | —     |       | $ | (67 | ) | $ | 42,923 | ** ** |
| ** **                                      | ** ** | ** **        | ** ** | ** **  | ** ** | ** **     | ** ** | ** **    | ** ** | ** **          | ** ** | ** **          | ** ** | ** ** | ** ** |
|                                                 |            |                   |            |             |            |                |            |               |            |                     |            |                     |            |            |            |  |  |  |  |  |  |  |  |  |

 

See notes to unauditedcondensed consolidated financial statements

 

 

5

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**WPTENTERPRISES, INC.**

**CondensedConsolidated Statements of Cash Flows**

**(unaudited)**

 
| ** **                                                                                             | ** ** | ** **              | ** ** | ** **           | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                                                                                             | ** ** | **Nine months ended**   | ** ** |
|                                                                                                   |       | **September  30, 2007** | ** ** | **October  1, 2006** | ** ** |
|                                                                                                   |       | **(In  thousands)**     | ** ** |
| ** **                                                                                             | ** ** | ** **              | ** ** | ** **           | ** ** |
| **OPERATING  ACTIVITIES:**                                                                             | ** ** | ** **              | ** ** | ** **           | ** ** |
| Net earnings  (loss)                                                                                   |       | $                       | (7,830     | )                    | $          | 8,849 |   |
| Adjustments to  reconcile net earnings (loss) to net cash provided by (used in operating  activities:) |       |                    |       |                 |       |
| Depreciation                                                                                           |       | 540                     |       | 421                  |       |
| Share-based  compensation                                                                              |       | 1,813                   |       | 3,154                |       |
| Realized gain on  sale of investment                                                                   |       | —                  |       | (10,216              | )          |
| Income taxes                                                                                           |       |                    |       | 3,169                |       |
| Loss on  abandonment of online gaming assets                                                           |       | 2,270                   |       | —               |       |
| Increase in  operating (assets liabilities:)                                                           |       |                    |       |                 |       |
| Accounts  receivable                                                                                   |       | 333                     |       | 493                  |       |
| Income taxes  payable                                                                                  |       | (394                    | )          | —               |       |
| Deferred television  costs                                                                             |       | 57                      |       | 50                   |       |
| Other                                                                                                  |       | (601                    | )          | (79                  | )          |
| Accounts payable                                                                                       |       | (27                     | )          | (713                 | )          |
| Accrued expenses                                                                                       |       | 52                      |       | 1,282                |       |
| Deferred revenue                                                                                       |       | (282                    | )          | (12                  | )          |
| Net cash  provided by (used in) operating activities                                                   |       | (4,069                  | )          | 6,398                |       |
|                                                                                                   |       |                    |       |                 |       |
| **INVESTING  ACTIVITIES:**                                                                             | ** ** | ** **              | ** ** | ** **           | ** ** |
| Purchase of  property and equipment                                                                    |       | (754                    | )          | (2,216               | )          |
| Investment in  unconsolidated investee                                                                 |       | —                  |       | (2,923               |       |
| Purchases of  marketable securities                                                                    |       | (45,336                 | )          | (34,102              | )          |
| Sales/redemptions  of marketable securities                                                            |       | 46,178                  |       | 30,101               |       |
| Proceeds from  sale of investment                                                                      |       | —                  |       | 10,236               |       |
| Net cash  provided by investing activities                                                             |       | 88                      |       | 1,096                |       |
|                                                                                                   |       |                    |       |                 |       |
| **FINANCING  ACTIVITIES:**                                                                             | ** ** | ** **              | ** ** | ** **           | ** ** |
| Decrease  (increase) in restricted cash                                                                |       | 106                     |       | (202                 | )          |
| Proceeds from  stock option exercises                                                                  |       | 1                       |       | 1                    |       |
| Net cash  provided by (used in) financing activities                                                   |       | 107                     |       | (201                 | )          |
|                                                                                                   |       |                    |       |                 |       |
| Net increase  (decrease) in cash and cash equivalents                                                  |       | (3,874                  | )          | $                    | 7,293      |   |
| Cash and cash  equivalents — beginning of period                                                  |       | 8,360                   |       | 1,737                |       |
| **Cash  and cash equivalents — end of period**                                                    |       | $                       | 4,486      |                 | $          | 9,030 |   |
|                                                                                                   |       |                    |       |                 |       |
|                                                                                                        |            |                         |            |                      |            |  |  |  |

 

See notes to unauditedcondensed consolidated financial statements

 

6

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**WPTENTERPRISES, INC.Notes to Unaudited Condensed Consolidated Financial Statements**

**1. BASISOF PRESENTATION**

These condensedconsolidated financial statements have been prepared by the Company pursuant tothe rules and regulations of the Securities and Exchange Commission (the “SEC”)applicable to interim financial information. Accordingly, certain informationnormally included in the annual financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahas been condensed or omitted.  Forfurther information, please refer to the annual audited financial statements ofthe Company, and the related notes, included in the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2006, previously filed withthe SEC, from which the information as of that date is derived.

In theopinion of management, all adjustments considered necessary for a fairpresentation have been included. The results for the current interim period arenot necessarily indicative of the results to be expected for the full year.

The Company has reclassified $7.0 million ofinvestments in marketable securities previously reported erroneously as currentassets to non-current assets as of December 31, 2006. In addition, certainother minor reclassifications to amounts previously reported have been made toconform to the current period presentation. These reclassifications had noeffect on net earnings (loss) or stockholders’ equity as previously presented.

**2. EARNINGS (LOSS) PER SHARE**

Basic earnings (loss) percommon share is calculated by dividing net earnings (loss) by theweighted-average number of common shares outstanding during the period. Sharesfor certain stock options granted to employees and consultants of the Companyare included in the computation after the options have vested when the sharesare issuable for relatively minimal cash consideration in relation to the fairvalue of the options (Note 3). Diluted earnings per common share is calculatedby adjusting weighted-average outstanding shares, assuming conversion of allpotentially dilutive stock options and awards (common stock equivalents).However, common stock equivalents, which are immaterial are not considered inthe calculation for loss periods because to do so would be anti-dilutive.  

**3. SHARE-BASED COMPENSATION**

The Company uses theBlack-Scholes option-pricing model to estimate the fair value and compensationcost associated with employee incentive stock options in accordance with SFAS123(R).  The bases for the keyassumptions included in the model are as follows:

•                  Expectedvolatility — As the Company has a relatively short operating history and nodefinitive peer or peer groups, expected volatility was based on historicalvolatility of the Company’s stock since it began trading in August 2004.

•                  Forfeiture rate— The Company uses historical data to estimate employee departure behavior inestimating future forfeitures.

•                  Expected term —Due to the Company’s limited operating history including stock option exercisesand forfeitures, the Company calculated expected term using the “SimplifiedMethod” in accordance with SAB 107.

•                  Risk freeinterest rate - For periods within the expected term of the share option, riskfree interest rate is based on the U.S. Treasury yield curve in effect at thetime of grant.

Following is a summary ofthe assumptions used to estimate the weighted-average fair value of the stockoptions granted during the periods presented using the Black-Scholes option-pricingmodel:

 

7

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| ** **                   | ** ** | **Three months ended  September 30, 2007** | ** ** | **Three months ended  October 1, 2006** | ** ** | **Nine months ended  September 30, 2007** | ** ** | **Nine months ended  October 1, 2006** | ** ** |
|------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| Risk free  interest rate     |       | 4.07                                                      | %          | 4.62                                                   | %          | 4.46                                                | %          | 4.65                                             | %          |
| Expected term                |       | 6 years                                                   |       | 6.5 years                                              |       | 6 years                                             |       | 6.5 years                                        |       |
| Expected  dividend yield     |       | 0                                                         | %          | 0                                                      | %          | 0                                                   | %          | 0                                                | %          |
| Expected  volatility         |       | 69.89                                                     | %          | 77.31                                                  | %          | 71.98                                               | %          | 79.44                                            | %          |
| Forfeiture rate              |       | 16.71                                                     | %          | 4.13                                                   | %          | 16.71                                               | %          |                                             | 4.13       | % |
| Weighted-average  fair value |       | $                                                         | 2.29       |                                                   | $          | 2.96                                                |       | $                                                | 2.87       |   | $ | 3.60 |   |
|                              |            |                                                           |            |                                                        |            |                                                     |            |                                                  |            |  |  |  |  |

 

The table below summarizes share-based compensationexpense, net of tax, related to employee stock options under SFAS 123(R), whichwas allocated as follows (in thousands):
| ** **                                                 | ** ** | **Three months ended  September 30, 2007** | ** ** | **Three months ended  October 1, 2006** | ** ** | **Nine months ended  September 30, 2007** | ** ** | **Nine months ended  October 1, 2006** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| Total cost of  share-based payment plans                   |       | $                                                         | 563        |                                                   | $          | 638                                                 |       | $                                                | 1,813      |   | $ | 2,918 |   |
| Amounts  capitalized in deferred television costs          |       | —                                                    |       | 9                                                      |       | —                                              |       | 9                                                |       |
| Amounts charged  against income, before income tax benefit |       | $                                                         | 563        |                                                   | $          | 629                                                 |       | $                                                | 1,813      |   | $ | 2,909 |   |

 

No income tax benefit wasrecognized in the statement of earnings (loss) for share-based compensationarrangements for the nine-month periods ended September 30, 2007 and October 1,2006 (Note 4).  Management assessed thelikelihood that the deferred tax assets relating to future tax deductions fromshare-based compensation will be recovered from future taxable income anddetermined that a valuation allowance is necessary to the extent thatmanagement currently believes it is more likely than not that tax benefits willnot be realized. Management’s determination is based primarily on historicalearnings volatility, the Company’s relatively short operating history andexpected taxable losses for fiscal 2007.

The following tablesummarizes stock option activity through the nine-month periods ended September30, 2007 and October 1, 2006:
| ** **                         | ** ** | ** **                    | ** ** | **Number of Common Shares** | ** ** |
|------------------------------------|------------|-------------------------------|------------|--------------------------------------------|------------|
| ** **                         | ** ** | **Options  outstanding** | ** ** | **Exercisable**                            | ** ** | **Available  for grant** | ** ** | **Weighted- avg.  exercise price** | ** ** |
| **2007**                           | ** ** | ** **                    | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance  at January 1, 2007**    |       | 2,318,166                     |       | 1,050,200                                  |       | 983,501 |   | $ | 6.76 |   |
|                               |       |                          |       |                                       |       |   |   |   |   |
| Granted                            |       | 287,000                       |       |                                       |       | (287,000 | ) | $ | 4.80 |   |
| Forfeited  /cancelled/expired      |       | (90,466                       | )          |                                       |       | 90,466 |   | $ | 8.49 |   |
| **Balance  at April 1, 2007** |       | 2,514,700                     |       | 1,010,533                                  |       | 786,967 |   | $ | 6.47 |   |
|                               |       |                          |       |                                       |       |   |   |   |   |
| Granted                            |       | 182,000                       |       |                                       |       | (182,000 | )  | $ | 4.53 |   |
| Forfeited  /cancelled/expired      |       | (85,667                       | )          |                                       |       | 85,667 |   | $ | 5.25 |   |
| Exercised                          |       | (113,660                      | )          |                                       |       |   |   |   | $ | 0.0049 |   |
| **Balance  at July 1, 2007**       |       | 2,497,373                     |       | 912,139                                    |       | 690,634 |   | $ | 6.67 |   |
| ** **                         | ** ** | ** **                    | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Granted                            |       | 220,000                       |       |                                       |       | (220,000 | )  | $ | 3.50 |   |
| Forfeited  /cancelled/expired      |       | (202,599                      | )          |                                       |       | 202,599 |   | $ | 7.26 |   |
| **Balance  at September 30, 2007** |       | 2,514,774                     |       | 1,307,106                                  |       | 673,233 |   | $ | 6.34 |   |
| ** **                         | ** ** | ** **                    | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **2006**                           | ** ** | ** **                    | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance  at January 2, 2006**    |       | 2,158,000                     |       | 620,333                                    |       | 283,667 |   | $ | 7.14 |   |
|                               |       |                          |       |                                       |       |   |   |   |   |
| Granted                            |       | 219,000                       |       |                                       |       | (219,000 | ) | $ | 6.20 |   |
| Forfeited  /cancelled/expired      |       | (159,333                      | )          |                                       |       | 159,333 |   | $ | 8.13 |   |
| Exercised                          |       | (115,000                      | )          |                                       |       |   |   | $ | 0.0049 |   |
| **Balance  at April 2, 2006** |       | 2,102,667                     |       | 785,500                                    |       | 224,000 |   | $ | 7.36 |   |
|                               |       |                          |       |                                       |       |   |   |   |   |
| Authorized                         |       |                          |       |                                       |       | 1,080,000 |   |   |   |
|                                    |            |                               |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

 

 

8

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|                              |       |       |       |       |       |       |       |       |       |
|-----------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Granted                           |       | 109,500    |       |       |       | (109,500   | )          | $          | 5.18       |   |
| Forfeited  /cancelled/expired     |       | (153,501   | )          |       |       | 153,501    |       | $          | 10.07      |   |
| Exercised                         |       | (105,000   | )          |       |       |       |       | $          | 0.0049     |   |
| **Balance  at July 2, 2006** |       | 1,953,666  |       | 619,333    |       | 1,348,001  |       | $          | 7.42       |   |
| ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Granted                           |       | 249,000    |       |       |       | (249,000   | )          | $          | 4.22       |   |
| Forfeited  /cancelled/expired     |       | (15,333    | )          |       |       | 15,333     |       | $          | 13.50      |   |
| **Balance  at October 1, 2006**   |       | 2,187,333  |       | 1,043,167  |       | 1,114,334  |       | $          | 7.01       |   |
| ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                   |            |            |            |            |            |            |            |            |            |  |  |  |

 

 

The followingtable summarizes significant ranges of outstanding and exercisable options asof September 30, 2007**:**
| **Options outstanding**            | ** **                               | **Options exercisable** | ** ** |
|-----------------------------------------|------------------------------------------|------------------------------|------------|
| **Range of  exercise prices** | ** **                               | **Number  outstanding**      | ** ** | **Weighted-avg.  remaining  contractual  life** | ** ** | **Weighted-avg.  exercise  price** | ** ** | **Aggregate  intrinsic  value** | ** ** | **Number  exercisable** | ** ** | **Weighted-avg.  price** | ** ** | **Aggregate  intrinsic  value** | ** ** |
| $                                       |  0.0049                             |                         | 111,340    |   | 4.41 |   | $ | 0.0049 |   | $ | 320,114 |   | 111,340 |   | $ | 0.0049 |   | $ | 320,114 |   |
| $                                       |  3.50  —   4.80 |                         | 910,500    |   | 9.46 |   | 4.19 |   | — |   | 37,500 |   | 4.21 |   | — |   |
| $                                       |  5.18  —   9.92 |                         | 1,317,600  |   | 7.23 |   | 7.57 |   | — |   | 1,073,600 |   | 7.93 |   | — |   |
| $                                       | 11.95 — 14.51                  |                         | 166,000    |   | 7.88 |   | 12.17 |   | — |   | 77,333 |   | 12.27 |   | — |   |
| $                                       | 15.05 — 19.50                  |                         | 9,334      |   | 7.83 |   | 15.53 |   | — |   | 7,333 |   | 15.45 |   | — |   |
|                                    |                                     | 2,514,774                    |       | 7.96 |   | $ | 6.34 |   | $ | 320,114 |   | 1,307,106 |   | $ | 7.45 |   | $ | 320,114 |   |
|                                    |                                     |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                         |                                          |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The aggregate intrinsicvalue in the preceding table****representsthe total pre-tax intrinsic value, based on the Company’s closing stock priceof $2.88 on September 28, 2007, which would have been received by the optionholders had they exercised their options as of that date.  The total intrinsic value of optionsexercised during the nine months ended September 30, 2007 and October 1, 2006 was$0.5 million and $1.4 million, respectively. No options were exercised duringthe three months ended September 30, 2007 and October 1, 2006.

As of September 30, 2007, total unrecognized compensationcost related to non-vested options was $2.5 million, which is expected to berecognized over the next 32 months on a weighted-average basis.

 

**4. INCOME TAXES**

The income tax provision was $0 and$3.5 million for the nine-month periods ended in 2007 and 2006, respectively,and the effective tax rate was approximately 0% and 28%, respectively. Basedon the Company’s limited and volatile earnings history, the Company has recorded a full valuation allowance for the net deferredtax assets as management currently believes it is more likely than not thatdeferred tax assets will not be recovered in the foreseeable future. 

Effective for the firstquarter of 2007, the Company adopted Financial Accounting Standards BoardInterpretation 48, *Accounting forUncertainty in Income Taxes* (“FIN 48”). Based on the Company’s assessmentof its tax positions in accordance with FIN 48, there was no impact on theresults of operations, financial condition or liquidity and accordingly, therewas no effect on the Company’s deferred tax assets or related valuationallowance nor any cumulative effect adjustment recorded for the change inaccounting principle in the first quarter of 2007. Furthermore, neither theincome tax provision (benefit) or related accounts were impacted by FIN 48during the three month and nine month periods ended September 30, 2007.

9

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**5. COMMITMENTS AND CONTINGENCIES**

**China agreement and relatedcommitment.**On August 6, 2007, the Company entered into anagreement with a Chinese government-sanctioned body with authority over certainleisure sports, including the popular national Chinese card game “TraktorPoker,” known as Tuo La Ji.   During the five year term of theagreement, the Company is to receive exclusive branding and certain marketingand sponsorship rights related to the China National Traktor Poker Tour. In exchange for these rights, the Company is required to pay an annual fee,which starts at $505,000 in the first year and increases by 10% annually forthe remaining four years of the agreement. The Company does not consider theannual fees for years two through five to be commitments as the agreementterminates for failure of payment.

**Poker player litigation.**OnJuly 19, 2006, a legal action was commenced against the Company by sevenpoker players that alleges, among other things, an unfair business practice ofthe Company. On March 14, 2007, the plaintiffs filed a motion for summaryjudgment in the case and on April 12, 2007, the Company filed its opposition tothe motion. On May 22, 2007, the Court denied the plaintiffs’ motion forsummary judgment. A trial date has been set for April 1, 2008. Althoughmanagement is currently unable to estimate the minimum loss to be incurred, ifany, as a result of the ultimate outcome of this matter, it believes that theCompany is not likely to sustain any material loss in connection therewith, andaccordingly, no provision for loss has been recorded in connection therewith.

**Miscellaneouslegal matters.**The Company is also involved in variousinquiries, administrative proceedings and litigation relating to other mattersarising in the normal course of the Company’s business.  While any proceeding or litigation has anelement of uncertainty, management currently is unable to estimate the minimumloss to be incurred, if any, as a result of the final outcome of these matters butbelieves it is not likely to have a material adverse effect upon the Company’sfuture financial position or results of operations; accordingly, no provisionfor loss has been recorded in connection therewith.

**6. SEGMENT INFORMATION**

The operating segmentsreported below are the segments of the Company for which separate financialinformation is available and for which operating results are evaluated by thechief operating decision maker in deciding how to allocate resources and inassessing performance.

**Threemonths ended September 30, 2007 (in thousands):**
| ** **       | ** ** | ** **       | ** ** | **WPT Online** | ** ** | ** **  | ** ** | ** **                     | ** ** | ** **     | ** ** | ** **    | ** ** |
|------------------|------------|------------------|------------|---------------------|------------|-------------|------------|--------------------------------|------------|----------------|------------|---------------|------------|
| ** **       | ** ** | **WPT  Studios** | ** ** | **Gaming**          | ** ** | **Content** | ** ** | **WPT Global  Marketing** | ** ** | **WPT  China** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues         |       | $                | 2,163      |                | $          | 119         |       | $                              | 19         |           | $          | 2,104         |       | $ | — |   | $ | — |   | $ | 4,405 |   |
| Cost of revenues |       | 876              |       | 134                 |       | 12          |       | 333                            |       | —         |       | —        |       | 1,355 |   |
| Gross profit     |       | 1,287            |       | (15                 | )          | 7           |       | 1,771                          |       | —         |       | —        |       | 3,050 |   |
| Total assets     |       | 2,848            |       | 433                 |       | 88          |       | 1,335                          |       | 137            |       | 39,905        |       | 44,746 |   |
| Depreciation     |       | 78               |       | 13                  |       | —      |       | —                         |       | —         |       | 88            |       | 179 |   |
|                  |            |                  |            |                     |            |             |            |                                |            |                |            |               |            |  |  |  |  |  |  |  |  |  |

 

**Threemonths ended October 1, 2006 (in thousands):**
| ** **       | ** ** | ** **       | ** ** | **WPT Online** | ** ** | ** **  | ** ** | ** **                     | ** ** | ** **     | ** ** | ** **    | ** ** |
|------------------|------------|------------------|------------|---------------------|------------|-------------|------------|--------------------------------|------------|----------------|------------|---------------|------------|
| ** **       | ** ** | **WPT  Studios** | ** ** | **Gaming**          | ** ** | **Content** | ** ** | **WPT Global  Marketing** | ** ** | **WPT  China** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues         |       | $                | 3,790      |                | $          | 912         |       | $                              | 39         |           | $          | 1,127         |       | $ | — |   | $ | — |   | $ | 5,868 |   |
| Cost of revenues |       | 958              |       | 570                 |       | 21          |       | 188                            |       | —         |       | —        |       | 1,737 |   |
| Gross profit     |       | 2,832            |       | 342                 |       | 18          |       | 939                            |       | —         |       | —        |       | 4,131 |   |
| Total assets     |       | 3,111            |       | 709                 |       | 51          |       | 1,087                          |       | —         |       | 46,408        |       | 51,366 |   |
| Depreciation     |       | 96               |       | —              |       | —      |       | —                         |       | —         |       | 70            |       | 166 |   |
|                  |            |                  |            |                     |            |             |            |                                |            |                |            |               |            |  |  |  |  |  |  |  |  |  |

 

10

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**Nine monthsended September 30, 2007 (in thousands):**
| ** **       | ** ** | ** **       | ** ** | **WPT Online** | ** ** | ** **  | ** ** | ** **                     | ** ** | ** **    | ** ** | ** **    | ** ** |
|------------------|------------|------------------|------------|---------------------|------------|-------------|------------|--------------------------------|------------|---------------|------------|---------------|------------|
| ** **       | ** ** | **WPT  Studios** | ** ** | **Gaming**          | ** ** | **Content** | ** ** | **WPT Global  Marketing** | ** ** | **WPT China** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues         |       | $                | 10,810     |                | $          | 929         |       | $                              | 95         |          | $          | 4,783         |       | $ | — |   | $ | — |   | $ | 16,617 |   |
| Cost of revenues |       | 5,156            |       | 596                 |       | 58          |       | 784                            |       | —        |       | —        |       | 6,594 |   |
| Gross profit     |       | 5,654            |       | 333                 |       | 37          |       | 3,999                          |       | —        |       | —        |       | 10,023 |   |
| Depreciation     |       | 245              |       | 40                  |       | —      |       | —                         |       | —        |       | 255           |       | 540 |   |
|             |       |             |       |                |       |        |       |                           |       |          |       |          |       |   |   |
|                  |            |                  |            |                     |            |             |            |                                |            |               |            |               |            |  |  |  |  |  |  |  |  |  |

 

**Ninemonths ended October 1, 2006 (in thousands):**
| ** **       | ** ** | ** **       | ** ** | **WPT Online** | ** ** | ** **  | ** ** | ** **                     | ** ** | ** **    | ** ** | ** **    | ** ** |
|------------------|------------|------------------|------------|---------------------|------------|-------------|------------|--------------------------------|------------|---------------|------------|---------------|------------|
| ** **       | ** ** | **WPT  Studios** | ** ** | **Gaming**          | ** ** | **Content** | ** ** | **WPT Global  Marketing** | ** ** | **WPT China** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues         |       | $                | 16,768     |                | $          | 2,644       |       | $                              | 142        |          | $          | 3,796         |       | $ | — |   | $ | — |   | $ | 23,350 |   |
| Cost of revenues |       | 6,447            |       | 1,359               |       | 80          |       | 447                            |       | —        |       | —        |       | 8,333 |   |
| Gross profit     |       | 10,321           |       | 1,285               |       | 62          |       | 3,349                          |       | —        |       | —        |       | 15,017 |   |
| Depreciation     |       | 254              |       | 1                   |       | —      |       | —                         |       | —        |       | 166           |       | 421 |   |
|                  |            |                  |            |                     |            |             |            |                                |            |               |            |               |            |  |  |  |  |  |  |  |  |  |

 

** **

**7. SUBSEQUENT EVENTS**

As a result of thedecision to cease development of the Company’s stand-alone online gamingplatform based on the CyberArts software, the Company wrote offcertain property and equipment and related capitalized costs of approximately$2.3 million during the second quarter of 2007.  In addition to the write off, the Companycurtailed the Israel operations and closed one of the two offices.  During the fourth quarter of 2007, furtherrestructuring of the online division has been initiated, including closing downthe remaining office in Israel.  TheCompany expects to incur between $150,000-$200,000 in costs during the quarterrelated to the closing of the Israel location. 

11

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**WPTENTERPRISES, INC.****Management’s Discussion and Analysis ofFinancial Condition****And Results of Operations**
| **ITEM 2.** | ** ** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

** **

** **

**FinancialOverview**

We had a net loss in the first nine months of 2007 of$7.8 million, or $0.38 per fully diluted share, compared to net income of $8.8million, or $0.43 per fully diluted share, in the 2006 period. The primaryreasons for the net loss in the 2007 period compared to the net earnings in2006 are as follows:

•                  The prior yearperiod included a gain on sale of our investment in PokerTek, Inc. of $10.2 million,which was offset by an income tax provision of $3.5 million.

•                 During the secondquarter of 2007, we wrote-off approximately $2.3 million in online gamingassets as a result of ceasing development of our stand-alone online gamingoperation and joining the CryptoLogic online gaming network.

•                  Revenues in the2007 period decreased by $6.7 million as compared to the 2006 period,principally because of the delivery of fewer television episodes in 2007.

•                  Selling, generaland administrative expense increased year-over-year by $2.9 million, primarilydue to the Company’s increased efforts in developing its online gaming operations,as well as costs associated with WPT China.

 

**BusinessOverview**

We create internationallybranded entertainment and consumer products driven by the development,production and marketing of televised programming based on gaming themes. OurWorld Poker Tour®, or WPT, television series, based on a series ofhigh-stakes poker tournaments, currently airs on the Travel Channel in theUnited States, and is expected to begin airing on GSN in early 2008, and hasbeen licensed to telecast in more than 150 markets globally.  We also offer a real-money online gamingwebsite which prohibits wagers from players in the U.S. and other restrictedjurisdictions.  We currently license ourbrand to companies in the business of poker equipment and instruction, apparel,publishing, electronic and wireless entertainment, DVD/home entertainment,casino games and giftware.  We are alsoengaged in the sale of corporate sponsorships. We have four operating units:

*WPTStudios*, our multi-media entertainment division, generatesrevenue through the domestic and international licensing of broadcast andtelecast rights of our television shows and through casino host fees. Since ourinception, the WPT Studios division has been responsible for approximately 72%of our total revenue. We licensed Seasons One through Five of the WPT series toThe Travel Channel, L.L.C. (“TRV” or “Travel Channel”) for telecast in theUnited States under an exclusive license agreement (the “TRV Agreement”). OnApril 2, 2007, we entered into an agreement (the “GSN Agreement”) with GameShow Network, LLC (“GSN”), pursuant to which GSN agreed to license from us thesixth season of the WPT series for the payment of a $300,000 license fee perepisode.  Under the TRV agreement, wereceived an average of $477,000 per episode for Season Five.  We have license agreements for thedistribution of our WPT and PPT episodes into international territories forwhich we receive license fees, net of our agent’s sales fee and agreed uponsales and marketing expenses.  We alsocollect annual host fees from the member casinos that host World Poker Tourevents (our member casinos).

Since our inception, fees from the TRV Agreement andan agreement with TRV relating to the PPT series have been 

 

12

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responsible for approximately 57% of our totalrevenue. For each season covered by the TRV Agreement and related options, TRVhas exclusive rights to exhibit the episodes in that season an unlimited numberof times on its television network in the U.S. for four years. 

Underthe TRV and GSN Agreements, TRV and GSN pay fixed license fees for each episodewe produce, which are payable at various times during the pre-production,production and post-production process and revenues are recognized upon receiptand acceptance of the completed episode. Television production costs related toWPT episodes are generally capitalized and charged to the cost of revenues asrevenues are recognized. Therefore, the timing and number of episodes involvedin the various seasons of the series affect the timing of the revenues andexpenses of the WPT Studios business. The following table describes the timingof Seasons One through Six of the WPT series, including the delivery andexhibition of the episodes each season:
| **World Poker  Tour Season** | ** ** | **Date of  Agreement or  Option for  Season** | ** ** | **Number of  episodes  (including  specials)** | ** ** | **Production Period and  Delivery of Episodes** | ** ** | **Initial Telecast of  Episodes in Season** |
|----------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------------------------|
| Season One                             |       | January 2003                                                 |       | 15                                                  |       | February 2002 — June 2003                                      |       | March 2003 — June 2003                                     |
| Season Two                             |       | August 2003                                                  |       | 25                                                  |       | July 2003— June 2004                                           |       | December 2003 — September 2004                             |
| Season Three                           |       | May 2004                                                     |       | 21                                                  |       | May 2004 — April 2005                                          |       | October 2004 — August 2005                                 |
| Season Four                            |       | March 2005                                                   |       | 21                                                  |       | May 2005 — April 2006                                          |       | October 2005 — June 2006                                   |
| Season Five                            |       | March 2006                                                   |       | 22                                                  |       | May 2006 — April 2007                                          |       | August 2006 — August 2007                                  |
| Season Six                             |       | April 2007                                                   |       | 23                                                  |       | May 2007 — April 2008 (projected)                              |       | March 2008 — August 2008 (projected)                       |

 

The agreement withTRV relating to the PPT series, which continues to cover the broadcast rightsto Season One was substantially similar in structure to the TRV Agreement.

Under the WPT and PPT Agreements, TRV has the right toreceive a percentage of our adjusted gross revenues from internationaltelevision licenses, product licensing and publishing, merchandising andcertain other sources, after specified minimum amounts are met.  For the nine months ended September 30, 2007,we recognized $0.5 million of Travel Channel participation expense that wasrecorded in cost of revenues.

 

In December 2006, we signed a multi-year agreementwith PartyGaming Plc, owner of PartyPoker.com, pursuant to which they sponsorcertain international television broadcasts of the WPT and PPT.  The agreement covers shows produced under WPTSeasons Four, Five, and Six and PPT Seasons One, Two, and Three. The agreementhelps solidify and expand the international WPT brand through PartyGaming’sextensive marketing resources, provides valuable promotional opportunities forWPT’s online gaming site, worldpokertour.com, and represents a new revenuestream for us.  PartyPoker.com receivesexclusive in-show branded integration and association with a premiere brand intelevised poker.  For the three monthsended September 30, 2007, we recognized revenues of $0.7 million from thePartyGaming agreement.  

 

WPT GlobalMarketing, includes branded consumer products, sponsorship, and eventmanagement divisions. Our branded consumer products division generates revenueprincipally through royalties from the licensing of our brand to companiesseeking to use the World Poker Tour brand and logo in the retail sales of theirconsumer products. In addition, this business unit generates revenue fromdirect sales of company-produced branded merchandise. We have generatedsignificant revenues from existing licensees, including Hands-On Mobile and MDI.

 

Oursponsorship and event management division generates revenue through corporatesponsorship and management of televised and live events. Our sponsorshipprogram uses the professional sports model as a method to foster entitlementsponsorship opportunities and naming rights to major corporations.  Anheuser-Busch has been the largest source ofrevenues through its sponsorship of Seasons Two, Three, Four and Five of theWPT series on TRV. In addition, we had an agreement with Blue Diamond Almondsto sponsor the WPT Season Five Championship in April 2007 at the Bellagio.  We recognized revenues from these agreementsas the Season Five programs were broadcast.

 

*WPT Online*.  In 2005, we began operating WPTonline.comthrough a license agreement with WagerWorks, Inc., under which we licensed ourbrand to WagerWorks and WagerWorks shared with us a percentage of all net revenueit collected from the operation of the online poker room and onlinecasino.  In June 2007,WPTonline.com ceased operations and the relationship with WagerWorks, Inc. wasterminated as we transitioned to a new online gaming software platform as describedbelow.  

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In 2006, we decided to develop our own software forour online poker room. We licensed a software platform from CyberArtsLicensing, LLC, and hired approximately thirty employees in Israel to developthe software and support infrastructure. On April 23, 2007, we entered into athree year software supply and support agreement (the “Agreement”) withCryptoLogic Inc., and its wholly-owned subsidiary WagerLogic Limited,(collectively referred to as “CryptoLogic”). As a result of the decision tomove away from the online gaming platform we were developing based on theCyberArts software and stopping the development of our own online gaming site,we wrote off certain property and equipment and related capitalized costs ofapproximately $2.3 million during the second quarter of 2007. In addition tothe write off, during the second quarter of 2007, we curtailed our Israeloperations and closed one of our two offices. In the fourth quarter of 2007, wedecided to close the remaining office in Israel and expect to incur between$150,000-$200,000 in closing costs during the quarter. 

Pursuant to theAgreement, CryptoLogic operates an online gaming site for us featuring a pokerroom and casino games utilizing its proprietary software, in exchange for apercentage of the revenue generated from the site.  We are entitled to approximately 80% of netgaming revenues, as defined below, from the operation of the site. Under theAgreement, we are also a member in a centralized online gaming network (the“Network”) with several other licensees of CryptoLogic pursuant to whichplayers are able to play on our branded gaming site on the Network. 

On June 14, 2007,CryptoLogic delivered the poker software to us and the go-live date for ouronline poker room was June 28, 2007. On July 26, 2007, CryptoLogic deliveredten casino games (the “Initial Casino”), including multi-hand blackjack,European roulette and multiple interactive slots including their most popular –Millionaire’s Club ®, Bejeweled ®, and The Hulk TM.  We also have an option, exercisable at anytime prior to July 1, 2008, to require CryptoLogic to provide our customerswith access to a full suite of casino games within three months of such notice.

We are entitled tothe following percentages of net gaming revenue: (a) Seventy-eight percent(78%) of the first $150,000 per month, (b) Seventy-nine percent (79%) ofrevenue in excess of $150,000 but less than $500,000 per month; and (c) Eightypercent (80%) of the revenue in excess of $500,000 per month.  CryptoLogic is entitled to earn a minimumguaranteed revenue associated with the Initial Casino of $500,000 per year or$125,000 per quarter. In the third quarter we had a shortfall of approximately$77,000, which will be netted against future settlements from CryptoLogic. 

If, at any timeafter the nine (9) month anniversary of the go-live date, monthly gamingrevenues fall below $500,000 for three (3) consecutive months, CryptoLogic hasthe right to terminate the Agreement on ninety (90) days written notice.  However, we may prevent any such terminationthrough payment of the shortfall of CryptoLogic’s percentage of such gamingrevenue within thirty (30) days of receipt of CryptoLogic’s notice oftermination.

Our online gaming business generated approximately $0.9million in revenues, which are presented gross of WagerWorks and CryptoLogic costsand net of network promotions and bonuses, for the nine months ended September30, 2007, compared to costs of revenues of approximately $0.6 million.

*WPTChina.* On August 6, 2007, we entered into a CooperationAgreement (the "Cooperation Agreement") with the China Leisure SportsAdministrative Center (the "CLSAC"), a Chinese government-sanctionedbody with authority over certain leisure sports, including the popular Chinesenational card game "Traktor Poker" or "Tuo La Ji." Pursuantto the Cooperation Agreement, we have the right to brand and exploit the ChinaNational Traktor Poker Tour (the "Traktor Poker Tour") during thefive (5) year term of the Cooperation Agreement. Additionally, we are affordedcertain marketing and sponsorship rights in conjunction with the Traktor PokerTour, including the right to sanction and derive revenue from third-partybranding at tour events and the right to exploit films and other contentgenerated in conjunction with the Traktor Poker Tour in all media. Furthermore,the CLSAC agreed to organize no less than fifteen (15) Traktor Poker Tourevents each year during the term, to secure placement of the championshipfinals on a major Chinese television station, and to promote the Traktor PokerTour. In exchange, we pay a yearly fee to the CLSAC, which starts at FiveHundred and Five Thousand Dollars ($505,000) for the first year and increasesby ten percent (10%) annually for the remaining four years of the term. 

On October 12, 2007, we officially launched theinaugural season of the WPT National Traktor Poker Tour in Lanzhou, Gansu. Thetournament was the first of 15 regional preliminary tournaments to be held eachweekend throughout China, which will run from October 2007 through April 2008.Tour play is based on a team structure where teams in each tour city compete toqualify for a final tournament called the Grand Final.

 

 

 

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**Results of Operations**

During the threeand nine month periods ended September 30, 2007, we experienced substantialoperating losses as compared to earnings in the comparable periods of the prioryear. This decline in our operating results as compared to the prior year wasdue primarily to a gain on the sale of an investment in the prior year, adecline in revenues, principally because of the delivery of fewer televisionepisodes, and increased costs in the current year related to our online gamingoperations. See additional details below.

**Ninemonths Ended September 30, 2007 Compared to the Nine months Ended October 1,2006**

*Revenues.*Our total revenues decreased by $6.7 million (29%) duringthe nine months ended September 30, 2007, compared to the nine months endedOctober 1, 2006. Domestic television licensing revenues decreased $5.3 million(40%) in the first nine months of 2007 compared to the 2006 period. Thedecrease was primarily a result of the delivery of seventeen episodes of SeasonFive of the WPT television series in the first nine months versus sixteenepisodes of Season Four of the WPT and nineteen episodes of the PPT deliveredin the 2006 period.International television licensing revenues decreased by $0.5 million as aresult of fewer distribution agreements in the international marketplace.  Product licensing revenues increased byapproximately $0.2 million (10%) in the first nine months of 2007 compared tothe 2006 period. The increase was primarily due to higher interactive gaming revenuesfrom Take Two.  Online gaming decreased$1.7 million (65%) primarily due to lower levels of player activity versus theprior year period, as well as us ceasing operations on the WagerWorks networkin June while transitioning our online gaming operations to CryptoLogic.  Event hosting and sponsorship revenuesincreased $0.6 million (24%) primarily due to PartyGaming sponsorship revenuesthat did not exist in the same period in 2006. 

*Cost of revenues*. Cost of revenues decreasedby approximately $1.7 million (21%) in the first nine months of 2007 comparedto the 2006 period.  The decrease was aresult of a decrease in production costs of $1.3 million as we delivered fewerepisodes in the 2007 period versus the 2006 period, as noted above.Additionally, online gaming cost of revenues decreased $0.8 million in the 2007versus the 2006 period due to lower revenues. The decreased costs were offsetby higher costs of $0.4 million related to PartyGaming sponsorship revenues.

*Gross margins.*  Overall gross margins were 60% in the first nine months of2007 compared to 64% in the first nine months of 2006.  Domestic television licensing margins were41% in the first nine months of 2007 compared to 55% in the same period in2006.  This decrease was principallybecause of the delivery of nineteen episodes of our PPT series in 2006 forwhich the production costs had been expensed in an earlier period.  In addition, online gaming contributed to theoverall lower margin in the first nine months of 2007 as a result of anamendment of the agreement with WagerWorks that was effective in July 2006,which significantly increased the percentage of revenues paid to it.

*Selling, generaland administrative expense.*Selling, general andadministrative expense increased $2.9 million (21%) year-over-year to $16.9million. The increase was primarily due to our efforts to develop our ownonline gaming software and support infrastructure prior to entering into anagreement with CryptoLogic, as well as costs associated with WPT China.

*Loss onabandonment of online gaming assets.*During the secondquarter of 2007, we wrote-off approximately $2.3 million in online gamingassets as a result of ceasing development of the stand-alone online gamingplatform we were developing based on the CyberArts software.

*Other income*. Other income decreased in2007, primarily as a result of recognizing $10.2 million in gain on sale ofinvestment in the first nine months of 2006, relating to the sale of the stockin PokerTek, Inc. Interest income increased by $0.2 million (16%) for the firstnine months of 2007 compared to the 2006 period, primarily due to higher interestrates on cash equivalents and investment in marketable securities balances.

*Income taxes*.  The income taxprovision was $0 and $3.5 million for the first nine months of 2007 and 2006,respectively, and the effective tax rate for the first nine months of 2007 and2006 was approximately 0% and 28%, respectively. We experienced no effect ofadopting Financial Accounting Standards Board (“FASB”) Interpretation 48, *Accounting for Uncertainty in Income Taxes*, in 2007. Weexpect to generate a net operating loss for 2007, and a valuation allowance hasbeen recorded for the net deferred tax asset related to the net loss generatedin the first nine months.

**ThreeMonths Ended September 30, 2007 Compared to the Three Months Ended October 1,2006**

*Revenues.*Our total revenues decreased by $1.5 million (25%) duringthe three months ended September 30, 2007, compared to the three months endedOctober 1, 2006. Domestic television licensing revenues decreased $1.7 million(55%) 

 

 

 

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in the third quarter of 2007compared to the 2006 period. The decrease was primarily a result of thedelivery of three episodes of Season Five of the WPT series in the thirdquarter versus the delivery of one episode of Season Five of the WPT and nineepisodes of the PPT in the 2006 period.  Internationaltelevision licensing revenues decreased by $0.1 million (21%) as a result offewer distribution agreements in the international marketplace.  Product licensing revenues decreased byapproximately $0.1 million (12%) in the third quarter of 2007 compared to the2006 period. The decrease was primarily due to lower license revenues from USPlaying Cards and MDI.  Online gaming decreased$0.8 million (87%) due to lower levels of player activity, which was primarilya result of migrating less than 20% of our player database from WagerWorks, aswell as not aggressively marketing the online gaming site. Event hosting andsponsorship revenues increased $1.3 million primarily due to PartyGaming sponsorshiprevenues that did not exist in the same period in 2006 and sponsorship revenuesfrom the airing of seven Season Five episodes in the third quarter of 2007versus no airings in the prior year period. 

*Cost of revenues*. Cost of revenues decreasedby approximately $0.4 million (22%) in the third quarter of 2007 compared tothe 2006 period.  The decrease wasprimarily a result of a decrease in online gaming costs of $0.4 million asthere were lower levels of player activity as we transitioned operations fromthe WagerWorks network to the CryptoLogic network.

*Gross margins.*  Overall gross margins were 69% in the third quarter of 2007compared to 70% in the third quarter of 2006. Domestic television licensing margins were 42% in the third quarter of2007 compared to 73% in the same period in 2006.  This decrease was principally becauseof the delivery of nine episodes of our PPT series in 2006 for which theproduction costs had been expensed in an earlier period.  The lower domestictelevision margins in the 2007 period were largely offset by increased margincontribution from international television and sponsorship.

*Selling, generaland administrative expense.*Selling, general and administrativeexpense increased $1.2 million (26%) quarter-over-quarter to $5.7 million. Theincrease was primarily due to costs associated with our online gamingoperation, as well as costs associated with our WPT China segment, which wasnot established in the 2006 period.

*Otherincome.* Other income decreased in 2007, primarily as a resultof recognizing $4.5 million in gain on sale of investment in the third quarterof 2006, relating to the sale of the stock in PokerTek, Inc. Interest incomewas relatively flat in the third quarter of 2007 compared to the 2006period.  

*Income taxes*.  The income taxprovision was $0 and $1.9 million for the third quarter of 2007 and 2006,respectively, and the effective tax rate for the third quarter of 2007 and 2006was approximately 0% and 41%, respectively. We expect to generate a netoperating loss for 2007, and a valuation allowance has been recorded for thenet deferred tax asset related to the net loss generated in the third quarter.

 

 

 

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** **

**Liquidity and Capital Resources**

During the first nine months of 2007, cash and cashequivalents and investments in marketable securities decreased by $4.7 millionto a combined balance of $34.9 million. Cash flows were used to support operatingactivities and to purchase property and equipment. Our principal cashrequirements consist of the following costs: online gaming operations,television production, payroll and benefits, professional fees, marketing,business insurance and office lease. We intend to use funds currently on handfor working capital and capital expenditures associated with the expansion ofour online gaming, media and other businesses and for general corporatepurposes. We anticipate that sales and marketing costs will increasesignificantly in upcoming quarters as we aggressively market our online gamingwebsite. In addition, we intend to invest significantly in internationalexpansion, including our recent activities in China where we signed an agreementwith the CLSAC. This agreement requires an annual payment for exclusivemarketing and sponsorship opportunities in China, starting at $505,000 andincreasing by 10% each year. In addition, our operating and marketing effortsin China will likely require significant expenditures. We expect that cash, cashequivalents and investments in marketable securities on hand and generated fromoperations will be sufficient to fund our working capital and capitalexpenditure requirements for at least the next twelve months.

However, we may from time to time seek additional capitalto fund our operations or fund our expansion plans as circumstances arise. Toraise capital, we may seek to sell additional equity securities, issue debt orconvertible securities, or seek to obtain credit facilities through financialinstitutions.

The table below sets forth our known contractualobligations as of September 30, 2007 (in thousands):
| ** **                       | ** ** | **Payments due by period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual obligations** | ** ** | **Total**                                 | ** ** | **Year 1** | ** ** | **Years 2-3** | ** ** | **Years 4-5** | ** ** | **Years 6  and beyond** | ** ** |
| Operating lease  obligations (1) |       | $                                         | 3,288      |   | $ | 849 |   | $ | 1,786 |   | $ | 653 |   | $ | — |   |
| Purchase  obligations (2)        |       | 2,680                                     |       | 1,382 |   | 1,298 |   | — |   | — |   |
| Employee  obligations (3)        |       | 625                                       |       | 500 |   | 125 |   | — |   | — |   |
|                             |       | $                                         | 6,593      |   | $ | 2,731 |   | $ | 3,209 |   | $ | 653 |   | $ | — |   |
|                                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)                   Operating leaseobligations include rent payments for our corporate offices pursuant to twolease agreements. For the first lease, monthly lease payments began atapproximately $38,000 and escalate to approximately $45,000 over the six-yearlease term. For the second lease, monthly payments began at approximately$28,000 and escalate up to approximately $33,000 over the five-year lease term.The amounts set forth in the table above assume monthly lease payments throughJune 2011.

 

(2)                   Purchaseobligations include minimum guarantees to CryptoLogic and operational expensesassociated with our online gaming division, as well as a $505,000 annualpayment to the CLSAC for exclusive marketing and sponsorship opportunities inChina (the table does not include commitments for years two through five, asthe agreement terminates for failure of payment). Additionally, included inpurchase obligations are open purchase orders of approximately $460,000 as of September30, 2007.  These liabilities are includedin Other Accrued Expenses.

 

(3)                   Employeeobligations include the base salary payable to Steven Lipscomb under hisemployment agreement.

**Critical Accounting Estimates andPolicies**

Although our financialstatements necessarily make use of certain accounting estimates by management,except as described below, we believe there are no matters that are the subjectof such estimates that are so highly uncertain or susceptible to change as topresent a significant risk of a material impact on our financial condition oroperating performance. Moreover, except as described below, we do not employany critical accounting policies that are selected from among availablealternatives or require the exercise of significant management judgment toapply.

* *

*Revenue recognition:*  Revenue from the domestic and internationaldistribution of our television series is recognized as earned under thefollowing criteria established by the American Institute of Certified PublicAccountants Statement of Position (SOP) No. 00-2, *Accounting by Producers or Distributors of Films*(SOP 00-2):

 

 

 

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•                  Persuasiveevidence of an arrangement exists;

•                The show/episode is complete, and inaccordance with the terms of the arrangement, has been delivered or isavailable for immediate and unconditional delivery;

•                The license period has begun and thecustomer can begin its exploitation, exhibition or sale;

•                The seller’s price to the buyer isfixed and determinable; and

•                Collectibility is reasonably assured.

In accordance with theterms of the TRV Agreements, we recognize domestic television license revenuesupon the receipt and acceptance of completed episodes.  However, due to restrictions and practicallimitations applicable to our operating relationships with foreign networks, wecurrently do not consider collectibility of international television licenserevenues to be reasonably assured, and accordingly, we do not recognize suchrevenue until the distributor has received payment.  Additionally, we present international distribution license fee revenues netof the distributor’s fees, as the distributor is the primary obligor in thetransaction with the ultimate customer pursuant to Emerging Issues Task Force(EITF) 99-19, *Reporting Revenue Gross as a Principalversus Net as an Agent*(EITF99-19).

Product licensingrevenues are recognized when the underlying royalties from the sales of therelated products are earned. We recognize minimum revenue guarantees ratablyover the term of the license or as earned royalties based on actual sales ofthe related products, if greater.  Wepresent product licensing fees gross of licensing commissions, which arerecorded as selling and administrative expenses as we are the primary obligorin the transaction with the ultimate customer pursuant to EITF 99-19.

Online gaming revenues are recognized monthly based on detailedstatements received from CryptoLogic, our online gaming service provider, foronline poker and casino activity during the previous month.  In accordance with EITF 99-19, we presentonline gaming revenues gross of the service provider costs, (including theservice provider’s management fee, royalties and credit card processing feesthat are recorded as cost of revenues) as we have the ability to adjust priceand specifications of the online gaming site, we bear the majority of thecredit risk and we are responsible for the sales and marketing of the gamingsite.**We include certainpromotional expenses related to free bets and deposit bonuses along withcustomer chargebacks as deductions of revenue. All other promotional expensesare generally recorded as sales and marketing expenses.

Event hosting feesare paid by host casinos for the privilege of hosting the events and arerecognized as the episodes that feature the host casino are aired. Sponsorshiprevenues are recognized as the episodes that feature the sponsor areaired.  Licensing advances and guaranteedpayments collected, but not yet earned, by us, as well as casino host fees andsponsorship receipts collected prior to the airing of episodes, are classifiedas deferred revenue in the accompanying balance sheets.

*TravelChannel Participation: *We account for royalty payments to TRV inaccordance with the WPT and PPT agreements, in which TRV retains a right to 15%of adjusted gross revenues from the exploitation of the World Poker Tour andProfessional Poker Tour brands.  Werecord these amounts in cost of revenues as revenues from internationaltelevision, consumer products licensing, home entertainment and merchandise arerecognized.

*Deferred television costs:*  We account for deferred television costs inaccordance with SOP 00-2.  Deferredtelevision costs include capitalizable direct costs, production overhead anddevelopment costs and are stated at the lower of cost or net realizable valuebased on anticipated revenue. We have not currently anticipated any revenues inexcess of those subject to existing contractual relationships, since we haveinsufficient operating history to enable such anticipation.  Marketing, distribution and general andadministrative costs are expensed as incurred. Capitalized televisionproduction costs for each episode are expensed as revenues are recognized upondelivery and acceptance by the Travel Channel of the completed episode.Management currently estimates that 41% of the approximately $1.7 million incapitalized deferred television costs at September 30, 2007, are expected to beexpensed in connection with episode deliveries by the end of fiscal 2007.

*Investments: *On July 31, 2006, weacquired an approximate 10% ownership interest in Cecure Gaming (“Cecure”) forapproximately $2.9 million.  Cecuredesigns and operates software and products which enable Cecure or its licenseesto offer gaming services to customers via mobile devices.  As we have less then 20% ownership interestand do not have the ability to exercise significant influence over Cecure, weaccount for this investment under the cost method and adjust only for other 

 

 

 

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than-temporarydeclines in fair value.  Management iscurrently unaware of any change in circumstance that might trigger such adecline.

*Income taxes:*  We must assess the likelihood that deferredtax assets will be recovered from future taxable income and to the extent webelieve that recovery is not likely, we must establish a valuationallowance.  Our current growth plansinclude international expansion, primarily related to our online gamingbusiness and activities in China, and expansion of our television and productlicensing businesses.  Although weanticipate that all potential strategies will be accretive to earnings, we areaware of the risks involved with an aggressive growth strategy.  Therefore, based on our limited and volatileearnings history combined with our cautious optimism, we have determined that a valuation allowance is necessary to the extentthat management currently believes it is more likely than not that deferred taxassets will not be recovered in the foreseeable future.

Effective for the first quarter of 2007, the Companyadopted Financial Accounting Standards Board (“FASB”) Interpretation 48, *Accounting for Uncertainty in Income Taxes*(“FIN 48”). Based on the Company’s assessment of its tax positions inaccordance with FIN 48, there was no impact on the results of operations,financial condition or liquidity and accordingly, there was no effect on theCompany’s deferred tax assets or related valuation allowance nor any cumulativeeffect adjustment recorded for the change in accounting principle in 2007.

##### **RecentlyIssued Accounting Pronouncements**

In September 2006, the FASB issued SFASNo. 157, *Fair Value Measurements,*which defines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements. In February 2007, theFASB issued SFAS No. 159, *The Fair ValueOption for Financial Assets and Financial Liabilities—Including an amendment ofFASB Statement No. 115,*which will permit the option ofchoosing to measure certain eligible items at fair value at specified electiondates and report unrealized gains and losses in earnings. Both SFAS No.157 andSFAS No. 159 will become effective for us for our 2008 fiscal year. We arecurrently evaluating the effect that SFAS No. 157 and No. 159 might have on ourfuture financial position, results of operations and operating cash flows.

**Off-BalanceSheet Arrangements**

We have nooff-balance sheet arrangements that have or are reasonably likely to have acurrent or future material effect on our financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources.

**Private SecuritiesLitigation Reform Act**

The foregoingdiscussion and other statements in this report contain various “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. Forward-looking statements are based on our current expectations orbeliefs concerning future events. These statements can be identified by the useof terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,”“may,” “could,” “possible,” “plan,” “project,” “will,” “forecast” and similarwords or expressions.

Forward-looking informationinvolves important risks and uncertainties that could significantly affect ouranticipated future results and, accordingly, actual results may differmaterially from those expressed in any forward-looking statement.  Our forward-looking statements generallyrelate to plans for future expansion and other business development activities,expected levels of capital spending, potential sources of future financing andthe possible effects on our business of gaming, tax and other regulation and ofcompetition.  Although it is not possibleto foresee all of the factors that may cause actual results to differ from ourforward-looking statements, these factors include, among others, the followingrisks:

•                Our business arrangements withCryptoLogic (with respect to online gaming) and GSN (with respect to thebroadcast of the WPT television series) are new arrangements that will likelybe the main source of our future revenue, and there is no guarantee that ourrelationships with either of them will be successful or long-term;

•                The termination or impairment of ourrelationships with key licensing and strategic partners could harm our businessperformance;

 

 

 

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•                Our television programming may fail tomaintain a sufficient audience for a variety of reasons, many of which arebeyond our control;

•                Our ability to create and license ourtelevision programming profitably may be negatively affected by adverse trendsthat apply to the television production business generally;

•                 Our competitors (many of whom havegreater financial resources or marketplace presence) may develop televisionprogramming that would directly compete with our television programming;

•                 A decline in general economicconditions or the popularity of our brand of televised poker tournaments maynegatively impact our business;

•                 We may be unable to protect ourentertainment concepts, our current and future brands and our otherintellectual property rights;

•                     We depend on third parties todevelop and market our operations in China, and we have little control overtheir day-to-day operations and have no way to ensure that we can monetize ourChina operations effectively;

•                 We may be unable to successfullyexpand into foreign markets or into new or complementary businesses;

•                 The regulatory environment for onlinegaming is currently uncertain, and despite our efforts to comply withapplicable laws, we may be unable to pursue this business fully or ouractivities may be claimed or found to be in violation of applicable UnitedStates or foreign regulations;

•                 It is difficult for us to predict thegrowth of our online gaming business, which is a relatively new industry withan increasing number of market entrants;

•                 It is uncertain whether the UnlawfulInternet Gambling Enforcement Act of 2006 will have an adverse effect on thecompetitive environment for finding online gaming customers outside the UnitedStates; and

•                 The loss of our President and ChiefExecutive Officer or another member of our senior management team maynegatively impact the success of our business.

 

 

 

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**WPT ENTERPRISES, INC.Quantitative and Qualitative Disclosures about Market Risk; Controls andProcedures**

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Our financialinstruments include cash and cash equivalents, U.S. Treasury and Agencysecurities and short-term municipal securities. Our main investment objectivesare the preservation of investment capital and the maximization of after-taxreturns on our investment portfolio. Consequently, we invest with onlyhigh-credit-quality issuers and limit the amount of credit exposure to any oneissuer. We do not use derivative instruments for speculative or investmentpurposes.

Our cash and cashequivalents are not subject to significant interest rate risk due to the shortmaturities of these instruments. As of September 30, 2007, the carrying valueof our cash and cash equivalents approximated fair value. We have in the pastand may in the future obtain marketable debt securities (principally consistingof commercial paper, corporate bonds and government securities) having aweighted average duration of one year or less. Consequently, such securitieswould not be subject to significant interest rate risk.

**ITEM 4.CONTROLS AND PROCEDURES**

Under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, we conducted an evaluation ofour disclosure controls and procedures, as such term is defined underRule 13a-15(e) or Rule 15d – 15(e) promulgated under the SecuritiesExchange Act of 1934, as amended, as of the end of the period covered by thisquarterly report. Based on their evaluation, our Chief Executive Officer andChief Financial Officer concluded that WPT Enterprises, Inc.’s disclosurecontrols and procedures are effective.

There have been nosignificant changes (including corrective actions with regard to significantdeficiencies or material weaknesses, if any) in our internal controls or inother factors that could significantly affect these controls subsequent to thedate of the evaluation referenced above.

 

 

 

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**WPT ENTERPRISES, INC.Part IIOther Information**

**ITEM 1.LEGAL PROCEEDINGS**

On July 19, 2006, a legal action was commencedagainst us by seven poker players that alleged that we engaged in, among otherthings, unfair, anti-competitive business practices. On March 14, 2007,the plaintiffs filed a motion for summary judgment and on April 12, 2007 wefiled our opposition to the motion. On May 22, 2007, the court denied theplaintiffs’ motion for summary judgment. A trial date has been set forApril 1, 2008.

Weare also involved in various inquiries, administrative proceedings, andlitigation relating to other matters arising in the normal course of ourbusiness. While any proceeding or litigation has an element of uncertainty,management currently believes that the final outcome of these matters is not likelyto have a material adverse effect upon our future financial position or resultsof operations.

**ITEM 1A.RISK FACTORS**

In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2006, and our Form 10-Qs for the quarters endedApril 1 and July 1, 2007 some of which have been revised in their entirety thatare listed below.  Additional risks anduncertainties not currently known to us or that we currently deem to beimmaterial also may materially adversely affect our business, financialcondition and/or operating results.

***Terminationor impairment of our relationships with key licensing and strategic partnerscould adversely affect our revenues and results of operations.***

We have developedrelationships with key strategic partners in many areas of our business,including poker tournament event sponsorship, merchandise licensing, corporatesponsorship, Internet gaming and international distribution. We hope to derivesignificant income from our licensing arrangements, and our agreements with ourstrategic partners are vital to finding these licensing arrangements. If wewere to fail to manage our existing licensing relationships, this failure couldhave a material adverse effect on our financial condition and results ofoperations. We would also be materially adversely affected if we were to loseour rights under any of our other key contracts or if the counterparty to anyof these contracts were to breach its obligations to us. We rely on a limitednumber of contracts under which third parties provide us with services vital toour business. These agreements include:

•       our agreement with PartyGaming, pursuant towhich PartyGaming agreed to pay us fees for sponsoring international broadcastsof our programming in international territories (i.e., non-U.S.), subject tocertain requirements regarding the type and amount of advertising and brandingwe are able to provide them;

•       our agreement with Brandgenuity LLC, pursuant towhich it negotiates third party consumer product licensing agreements;

•       our agreement with CryptoLogic, pursuant towhich CryptoLogic operates and manages our WPT-branded real-money gaming website,WorldPokerTour.com;

•          our agreement with theCLSAC, pursuant to which the CLSAC will work with us to develop and market theWPT Traktor Poker Tour in China.

 

 

 

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If our relationship withany of these or certain other third parties were to be interrupted, or theservices provided by any of these third parties were to be delayed ordeteriorate for any reason without being adequately replaced, our businesscould be materially adversely affected. If we are forced to find a replacementfor any of these strategic partners, this could create disruption in ourbusiness and may result in reduced revenues, increased costs or diversion ofmanagement’s attention and resources.

In addition, whilewe have significant control over our licensed products and advertising, we donot have operational and financial control over these third parties, and wehave limited influence with respect to the manner in which they conduct theirbusinesses. If any of these strategic partners experiences a significantdownturn in its business or were otherwise unable to honor its obligations tous, our business could be materially disrupted.

***Our further expansion into foreign markets will subject usto additional business risks.***

In connection withour prior decision to build and operate our own online gaming site, wesignificantly expanded our international presence.  Furthermore, we recently began operations inChina pursuant to our agreement with the CLSAC, pursuant to which we willdevelop and market the WPT Traktor Poker Tour in mainland China. We intend tofurther expand our business in foreign markets in other ways, includingcontinued international distribution of our U.S. telecasts, creating additionalpoker tours in foreign countries and distributing branded merchandise inforeign countries. Our international operations could be adversely affected bychanges in political and economic conditions, trade protection measures and thestatus of regulatory requirements that may restrict the sales of our products,increase costs of foreign production or other costs that prohibit Internetgaming activities in international jurisdictions. Also, changes in exchangerates between the U.S. dollar and other currencies could potentially result insignificant increases in our costs or decreases in our earnings.

 

***TheChina initiative is unproven,  itssuccess will depend on multiple factors beyond our control, and there is noguarantee that we will be able to monetize our rights in the territory. ***

The success of ourinitiative in China will greatly depend upon our ability to expand our brandand to monetize our rights throughout the territory.  We are highly dependent upon third partiesfor the organization of events, acquisition and use of certain businesslicenses throughout China, the marketing of the WPT Traktor Poker Tour and thelicensing of our trademark and intellectual property rights. If these third partiesfail to perform as anticipated, business operations in China could be severelyaffected. Furthermore, there is no guarantee that we will be able tosuccessfully enforce our rights in China against any infringers of ourtrademarks or other rights granted to us. 

We are highlydependent upon the CLSAC’s performance of its obligations under its contract,which include organizing Traktor Poker Tour events, securing placement of thechampionship finals on a major Chinese Television station, and promoting thetour.  Failure of the CLSAC to properlysupport the tour could severely impact our ability to generate revenue inChina.   Morever, even if the tournamentsattract a large number of participants, we cannot guarantee that this willtranslate into significant revenue for the Company.

 

**ITEM 5. OTHERINFORMATION**

On September 10, 2007, we hired Andy A. Goetsch as ourExecutive Vive President – Online Gaming. The material terms of his employment are contained in Exhibit 10.2hereof.

 

 

 

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**ITEM 6.EXHIBITS**
| 10.1   |   | Cooperation Agreement  by and between WPT Enterprises, Inc. and the China Leisure  Sports Administrative Center, dated August 6, 2007.                        |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                          |
| 10.2   |   | Material terms of Andy A. Goetsch employment, dated  September 10, 2007.                                                                                      |
|   |   |                                                                                                                                                          |
| 31.1   |   | Certification of CEO pursuant to Securities Exchange  Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                                                                                          |
| 31.2   |   | Certification of CFO pursuant to Securities Exchange  Act Rules 13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                                                                                          |
| 32.1   |   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002           |
|   |   |                                                                                                                                                          |
| 32.2   |   | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002           |

 

 

 

 

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report on Form 10-Q to be signed onits behalf by the undersigned, thereunto duly authorized. 

 
| Dated: November 8, 2007 |   | WPT ENTERPRISES, INC.   |
|-------------------------|--------|-------------------------|
|                    |   | Registrant              |
|                    |   |                    |
|                    |   |                    |
|                    |   | /s/ Steven Lipscomb     |
|                    |   | Steven Lipscomb         |
|                    |   | Chief Executive Officer |
|                    |   |                    |
|                    |   |                    |
|                    |   | /s/ Scott A. Friedman   |
|                    |   | Scott A. Friedman       |
|                    |   | Chief Financial Officer |

 

 

 

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