UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One)





x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended June 30, 2010





OR





 ̈
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from _____________  to ______________





Commission file number:   333-141521





Game Trading Technologies, Inc.


(Exact Name of Registrant as Specified in Its Charter)





Delaware

20-5433090(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)





10957 McCormick Road, Hunt Valley, Maryland

21031(Address of Principal Executive Offices)

(Zip Code)





(410) 316-9900(Registrant’s Telephone Number, Including Area Code)











Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No   ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes    ̈    No    ̈   (not required)





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer
 ̈
Accelerated filer
 ̈Non-accelerated filer
 ̈
Smaller reporting company
x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   ̈    No  x





As of August 16, 2010, there were 8,290,000 shares of the registrant’s common stock outstanding.











1





Game Trading Technologies, Inc.





TABLE OF CONTENTS





PagePART I - FINANCIAL INFORMATIONItem 1.       Financial Statements (Unaudited)
3Condensed Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and December 31, 2009
3Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)
4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 (unaudited)
5Notes to Condensed Consolidated Financial Statements (unaudited).
6Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations
18Item 3.       Quantitative and Qualitative Analysis About Market Risk
22Item 4.     Controls and Procedures
22PART II - OTHER INFORMATIONItem 1.        Legal Proceedings
23Item 1A.     Risk Factors
23Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds
23Item 3.        Defaults Upon Senior Securities
23Item 4.        Removed and Reserved
23Item 5.        Other Information
23Item 6.        Exhibits
23SIGNATURES
24











2











PART I   FINANCIAL INFORMATION





Item 1.    Financial Statements





Game Trading Technologies, Inc.


Condensed Consolidated Balance Sheets





(Unaudited)


*(Audited)June 30,

2010


December 31,

2009ASSETSCurrent AssetsCash and cash equivalents

$
158,961


$
641,088Accounts Receivable - Net of Allowance of $100,000 as of June 30, 2010 and December 31, 2009


2,590,033



2,383,688Inventories


5,343,026



2,897,432Prepaid Expenses and Other


690,971



-TOTAL CURRENT ASSETS


8,782,991



5,922,208Property and Equipment, net


343,300



109,984Other AssetsDeferred Financing Costs


-



258,325TOTAL OTHER ASSETS


-



258,325TOTAL ASSETS

$
9,126,291


$
6,290,517LIABILITIES AND STOCKHOLDERS' EQUITYCurrent LiabilitiesAccounts payable

$
2,738,358


$
4,253,396Accrued expenses and other


69,007



60,534Revolving Line of Credit


2,063,285



-Note Payable - current portion


-



513,046Note payable - related party


18,402



408,424Discontinued Operations – liability


21,735



88,921TOTAL CURRENT LIABILITES


4,910,787



5,324,321Long Term LiabilitiesNote Payable – non-current portion


-



2,236,954Warrant Redemption Liability


-



281,935TOTAL LONG TERM LIABILITES


-



2,518,889TOTAL LIABILITIES


4,910,787



7,843,210Redeemable preferred stock, Series A; $.0001 par value, 2,837,500 shares authorized, 2,837,500 and 0 shares issued and outstanding at June, 30, 2010 and December 31, 2009, respectively, net (Face value $5,675,000 and $0, respectively)


385,173



-Stockholders' equityPreferred stock, $0.0001 par value, 17,162,500 shares authorized, none issued and outstanding as of June 30, 2010 and December, 31, 2009, respectively


-



-Common stock, $0.0001 par value, 100,000,000 shares authorized, 8,290,000 and 7,090,000 shares issued and  outstanding at June 30, 2010 and December 31, 2009, respectively


829



709Additional paid-in capital


8,219,925



89,659Accumulated deficit


(4,390,423
)


(1,643,061
)Total stockholders' equity


3,830,331



(1,552,693
)TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
9,126,291


$
6,290,517


* Derived from audited financial statements


The accompanying notes are integral parts of these financial statements.








3








Game Trading Technologies, Inc.


Condensed Consolidated Statements of Operations


(Unaudited)








For The Three Months Ended

June 30,


For The Six Months Ended

June 30,2010


2009


2010


2009Net Sales

$
6,631,951


$
12,998,799


$
18,033,238


$
21,339,859Cost of Sales


5,852,764



11,168,226



15,281,415



18,067,719Gross Profit


779,187



1,830,573



2,751,823



3,272,140Operating Expenses:Selling, General and Administrative


1,278,620



649,928



2,613,323



1,270,062Employee Stock Based Compensation


372,559



-



1,317,765



-Non-Employee Stock Based Compensation


-



-



1,496,023



-Depreciation


11,235



17,123



35,299



33,393Total Operating Expense


1,662,414



667,051



5,462,410



1,303,455Income (Loss) from Operations


(883,227
)


1,163,522



(2,710,587
)


1,968,685Other Income (Expenses):Interest Expense, net


(18,333
)


(212,005
)


(83,268)



(355,878
)Other


-



-



46,493



-Total Other Income (Expenses)


(18,333
)


(212,005
)


(36,775
)


(355,878)Income (Loss) Before Provision for Income Taxes


(901,560
)


951,517



(2,747,362
)


1,612,807Provision for Income Taxes


-



-



-



-Income (Loss) from Continuing Operations

$
(901,560
)

$
951,517


$
(2,747,362
)

$
1,612,807Discontinued OperationsLoss from Discontinued Operations


-



35,653



-



68,809Net income (loss) attributable to common shareholders before accretion of preferred dividends and discount

$
(901,560
)

$
915,864


$
(2,747,362
)

$
1,543,998Accretion of preferred dividends and discount


66,007







84,965



-Accretion of preferred amortization of beneficial conversion and warrant features


319,166







319,166Net income (loss) attributable to common shareholders

$
(1,286,733
)

$
915,864


$
(3,151,493
)

$
1,543,998Net income (loss) per share:Income (loss) per share from continuing operations – basic & diluted

$
(0.11
)

$
0.13


$
(0.35
)

$
0.23Income (loss) per share from discontinued operations – basic & diluted

$
0.00


$
(0.00)


$
0.00


$
(0.01)Net income (loss) per share – basic & diluted

$
(0.11
)

$
0.13


$
(0.35
)

$
0.22Weighted Average Common Shares Outstanding - basic


8,290,000



7,090,000



7,918,729



7,090,000Weighted Average Common Shares Outstanding - diluted


8,290,000



7,090,000



7,918,729



7,090,000





4








Game Trading Technologies, Inc.


Condensed Consolidated Statements of Cash Flows


(Unaudited)





For the Six Months Ended June 30,2010


2009Cash flows from operating activitiesNet Income (Loss)

$
(2,747,362
)

$
1,543,998Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Depreciation & Amortization  - Property and Equipment


35,299



33,393Issuance of Stock Warrants for Services


1,496,024



-Stock Options for employee services


1,317,765



-Other


12,317



(4,867
)Changes in assets and liabilitiesAccount receivable


(206,345
)


(1,617,003
)Inventory


(2,445,594
)


1,431,716Accounts payable


(1,515,038
)


818,902Accrued liabilities


8,473



564Deferred Expenses


9,801



4,736Prepaid expenses and other


(690,971
)


-Liabilities of discontinued operation


(67,186
)


-Net Cash Provided (Used) In Operating Activities


(4,792,817
)


2,211,439Cash flows from investing activitiesPurchases of fixed assets


(268,615
)


(34,643
)Net Cash Provided (Used) In Investing Activities


(268,615
)


(34,643
)Cash flows from financing activitiesProceeds from the sale of convertible preferred stock


5,675,000



-Proceeds from line of credit, net


2,063,285



(600,000
)Repayments on notes payable


(2,750,000
)


(112,500
)Payment of Series A preferred dividends


(18,958
)


-Advance (Repayment) of due to stockholder


-



(20,000
)Issuance (Repayment) of note payable-related party


(390,022
)


(181,107
)Net Cash Provided (Used) In Financing Activities


4,579,305



(913,607
)Net increase (decrease) in cash and cash equivalents


(482,127
)


1,263,189Cash and cash equivalents at the beginning of the period


641,088



301,397Cash and cash equivalents at the end of the period

$
158,961


$
1,564,586Supplemental disclosure of cash flow information :Cash paid for interest

$
83,267


$
355,878Cash paid for taxes

$
-


$
-


The accompanying notes are integral parts of these financial statements.








5








GAME TRADING TECHNOLOGIES, INC.


and Its Wholly Owned Subsidiary


Notes to Consolidated Condensed Financial Statements (Unaudited)


June 30, 2010






1.
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Nature of Business





Game Trading Technologies, Inc. is a leading provider of comprehensive trading solutions and services for video game retailers, publishers, rental companies, and consumers.  Through our trading platform, we provide our customers with extensive services including valuation, procurement, refurbishment, and merchandising of pre-owned video games.  Additionally, through our trading platform, we process and market video game consoles, DVDs, and video game accessories, and provide related e-commerce retailing and interactive marketing services.





Business Combination and Corporate Restructure





On February 25, 2010, we completed a “reverse acquisition” transaction, in which we entered into a securities exchange agreement (the “Exchange Agreement”) with Gamers Factory, Inc., a Maryland corporation (“Gamers” or the “Company”) and for certain limited purposes, its stockholders.  Pursuant to the Exchange Agreement, the shareholders of Gamers transferred all of the issued and outstanding shares of common stock of Gamers to us in exchange for 7,090,000 newly issued shares of our common stock (the “Transaction”).   At the time of the Transaction, our corporate name was City Language Exchange, Inc.  Following the merger, we changed our name to Game Trading Technologies, Inc. (the “GTTI”) and our trading symbol to “GMTD.OB.”   As a result of the Transaction, Gamers became our wholly-owned subsidiary, with Gamers’ former shareholders acquiring a majority of the outstanding shares of our common stock.





The transactions contemplated by the Exchange Agreement were accounted for as a “reverse acquisition,” since the stockholders of Gamers owned a majority of the outstanding shares of our common stock immediately following the Transaction. Gamers is deemed to be the acquirer in the Transaction and, consequently, the assets and liabilities and the historical operations that will be reflected in the financial statements will be those of Gamers and will be recorded at the historical cost basis of Gamers. Except for the right of the holders of our series A convertible preferred stock, as a class, to elect one of our directors, no arrangements or understandings exist among present or former controlling stockholders with respect to the election of members of our board of directors and, to our knowledge, no other arrangements exist that might result in a change of control of our company.





In connection with the closing of the Exchange Agreement, we completed the closing of a private placement (referred to herein as the “February 2010 private placement”) of $3,900,000 of units (each, a “Unit” and collectively, the “Units”) pursuant to the terms of a Securities Purchase Agreement, dated as of February 25, 2010, with each Unit consisting of one share of our series A convertible preferred stock and a warrant to purchase one share of our common stock.  Each share of series A convertible preferred stock has a stated value equal to $2.00 per share and is initially convertible at any time into shares of our common stock at a conversion price equal to $2.00 per share or an aggregate of 1,950,000 shares of common stock, subject to adjustment under certain circumstances. Each warrant entitles the holder to purchase one share of common stock (equivalent to 100% warrant coverage in respect of the shares underlying the series A convertible preferred stock) at an exercise price of $2.50 per share through February 25, 2015.





At the closing of the February 2010 private placement, buyers that purchased shares of our series A convertible preferred stock with a stated value of at least $150,000 received a unit purchase option (the “Unit Purchase Option”) to purchase, on the same terms as those Units sold at the closing of the February 2010 private placement, additional Units of series A convertible preferred stock and warrants equal to 50% of the Units they purchased at the closing of the February 2010 private placement. The shares of common stock underlying the securities issuable upon exercise of a Unit Purchase Option are entitled to the same registration rights as those securities underlying the Units issued at the closing of the February 2010 private placement.





On April 20, 2010, certain holders of Unit Purchase Options exercised Unit Purchase Options to purchase 825,000 Units resulting in aggregate gross proceeds to us of $1,650,000. Each unit (“Unit”) consisted of one share of the Company’s series A convertible preferred stock and a warrant to purchase one share of the Company’s common stock at an exercise price of $2.50 per share through April 20, 2015.




6




GAME TRADING TECHNOLOGIES, INC.
 and Its Wholly Owned Subsidiary
 Notes to Consolidated Condensed Financial Statements (Unaudited)
 June 30, 2010





On April 26, 2010, the holders of certain Unit Purchase Options exercised Options to purchase 62,500 units of the Company’s securities for aggregate gross proceeds of $125,000.  Each unit (“Unit”) consisted of one share of the Company’s series A convertible preferred stock and a warrant to purchase one share of the Company’s common stock at an exercise price of $2.50 per share through April 26, 2015.





Basis of Presentation





Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the Unites States of America, have been condensed or omitted.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the interim financial information have been included.  The results of operations for any interim period presented herein are not necessarily indicative of the results of operations for the year ended December 31, 2010.





The consolidated condensed financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America.





A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated condensed financial statements is as follows:





Principle of Consolidation





The consolidated condensed financial statements include the accounts of Game Trading Technologies, Inc. and its subsidiary.  Intercompany transactions and balances have been eliminated.  Equity investments in which the Company exercises significant influence but do not control and are not the primary beneficiary are accounted for using the equity method.  Investments in which the Company is not able to exercise significant influence over the investee and which do not have readily determinable fair values are accounted for under the cost method.





Management’s Use of Estimates and Assumptions





The preparation of the consolidated condensed financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated condensed financial statements, and the reported amounts of revenue and expense during the reporting periods.   Actual results may differ from those estimates and assumptions.





Reclassifications





Certain amounts reported in previous period have been reclassified to conform to the Company’s current period presentation.





Concentration of Credit Risk





Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents.  The Company places its cash and temporary cash investments with credit quality institutions. At times, such investments may be in excess of FDIC insurance limits. Management considers this to be an acceptable business risk.





Cash and Cash Equivalents





For the purposes of the Statement of Cash Flows, the Company considers liquid investments with an original maturity of three months or less to be cash equivalents.





Accounts Receivable





The Company extends credit to customers without requiring collateral.  The Company uses the allowances method to provide for doubtful accounts based on management’s evaluations of the collectability of accounts receivable.  Management’s evaluation is based on the Company’s historical collection experience and a review of past-due amounts.  Based on management’s evaluation of collectability, there is a $100,000 allowance for doubtful accounts as of June 30, 2010 and December 31, 2009 respectively.  During the six months ended June 30, 2010 and  the year ended December 31, 2009, the Company wrote off $0 and $248,957 respectively as uncollectible accounts receivables. The Company determines accounts receivable to be delinquent when greater than 30 days past due.  Accounts receivable are written off when it is determined that amounts are uncollectible.


7




GAME TRADING TECHNOLOGIES, INC.
 and Its Wholly Owned Subsidiary
 Notes to Consolidated Condensed Financial Statements (Unaudited)
 June 30, 2010






Inventory





Inventory, consisting of goods held for resale, is stated at the lower of cost or market.  Cost is determined using the weighted-average method.  At June 30, 2010 and December 31, 2009, no allowance for obsolete inventory was deemed necessary based on management’s estimate of the realizability of the inventory.





Property and Equipment





Property and equipment is stated at cost.  Depreciation and amortization expense is computed using principally accelerated methods over the estimated useful life of the related assets ranging from 3 to 7 years. When assets are sold or retired, their costs and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is included in the statement of operations.





The Company recognizes an impairment loss on property and equipment when evidence, such as the sum of expected future cash flows (undiscounted and without interest charges), indicates that future operations will not produce sufficient revenue to cover the related future costs, including depreciation, and when the carrying amount of the asset cannot be realized through sale. Measurement of the impairment loss is based on the fair value of the assets.





Impairment of Long-Lived Assets





The Company assesses long-lived assets, such as property and equipment and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be fully recoverable. Recoverability of asset groups to be held and used in measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group.  If the carrying amount exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of an asset group exceeds the fair value of the asset group. The Company evaluated its long-lived assets and no impairment charges were recorded for any of the periods presented.





Revenue Recognition





The Company recognizes revenue based on Account Standards Codification (“ASC”) 605 “Revenue Recognition” which contains Securities and Exchange Commission Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements’ and No. 104, “Revenue Recognition”. In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, shipment has occurred, price is fixed or determinable and collectability of the resulting receivable is reasonably assured.  The Company had $6,631,951 and $18,033,238 and $12,998,799 and $21,339,859 in revenue for the three and six months ended June 30, 2010 and June 30, 2009, respectively.





Seasonality





Our business is seasonal since we rely upon retailers and consumers, with the major portion of our sales and operating profits occurring during the first fiscal quarter following the holiday selling season.  Since our supply of video game products depends significantly on consumer trade-ins and returns, there exists significant supply of these items immediately following the holiday season in January through March. Historically, our sales lag the holiday season by one quarter. We have historically generated our highest sales and operating profits during the first quarter of the year.





Shipping and Handling Costs





The Company includes its outbound shipping and handling costs in selling, general and administrative expenses.  Those costs were $141,817 and $387,568 for the three and six months ended June 30, 2010 and  $89,193 and $220,867 for the three and six months ended June 30, 2009, respectively.  Inbound shipping and handling costs are included as an allocation to inventory.  Those costs were $65,517 and $148,086 for the three and six months ended June 30, 2010 and $302,827 and $655,072 for the three and six months ended June 30 2009, respectively.




8






GAME TRADING TECHNOLOGIES, INC.
 and Its Wholly Owned Subsidiary
 Notes to Consolidated Condensed Financial Statements (Unaudited)
 June 30, 2010


Share Based Expenses





ASC 718 "Compensation - Stock Compensation", codified in SFAS No. 123, prescribes that accounting and reporting standards for all stock-based payments award to employees, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights, may be classified as either equity or liabilities. The Company should determine if a present obligation to settle the share-based payment transaction in cash or other assets exists. A present obligation to settle in cash or other assets exists if:





a)
the option to settle by issuing equity instruments lacks commercial substance or





b)
the present obligation is implied because of an entity's past practices or stated policies. If a present obligation exists, the transaction should be recognized as a liability; otherwise, the transaction should be recognized as equity.





The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50 "Equity - Based Payments to Non-Employees" which codified SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18 ("EITF 96-18"),  "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services".  Measurement of share-based payment transactions with non-employees shall be based on the fair value of whichever is more reliably measurable:





a)
the goods or services receive or





b)
the equity instruments issued.





The fair value of the share-based payment transaction should be determined at the earlier of performance commitment date or performance completion date.





Fair value of Financial Instruments





The Company adopted ASC topic 820, “Fair Value Measurements and Disclosures” , formerly SFAS No. 157 “Fair Value Measurements,” effective January 1, 2009.  ASC 820 defines “fair value” as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There was no impact relating to the adoption of ASC 820 to the Company’s financial statements.  ASC 820 also describes three levels of inputs that may be used to measure fair value:





·
Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.





·
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.





·
Level 3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.





Financial instruments consist principally of cash, prepaid expenses, accounts payable, and accrued liabilities. The carrying amounts of such financial instruments in the accompanying balance sheets approximate their fair values due to their relatively short-term nature.  It is management’s opinion that the Company is not exposed to any significant currency or credit risks arising from these financial instruments.




Derivative Instruments and Hedging




In June 2008, the FASB issued new accounting guidance which requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock by assessing the instrument’s contingent exercise provisions and settlement provisions. See Note 6.





Income Taxes





Under the asset and liability method prescribed under ASC 740, Income Taxes, The Company uses the liability method of accounting for income taxes.  The liability method measures deferred income taxes by applying  enacted statutory rates in effect at the balance  sheet date to the differences  between the tax basis of assets and  liabilities  and their reported  amounts on the  financial statements.  The resulting deferred tax assets or liabilities are adjusted to reflect changes in tax laws as they occur.  A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized.




9




GAME TRADING TECHNOLOGIES, INC.
 and Its Wholly Owned Subsidiary
 Notes to Consolidated Condensed Financial Statements (Unaudited)
 June 30, 2010





The Company recognizes the financial statement benefit of an uncertain tax position only after considering the probability that a tax authority would sustain the position in an examination. For tax positions meeting a "more-likely-than-not" threshold, the amount recognized in the financial statements is the benefit expected to be realized upon settlement with the tax authority. For tax positions not meeting the threshold, no financial statement benefit is recognized. As of June 30, 2010, the Company has had no uncertain tax positions. The Company recognizes interest and penalties, if any, related to uncertain tax positions as general and administrative expenses. The Company currently has no federal or state tax examinations nor has it had any federal or state examinations since its inception. All of the Company's tax years are subject to federal and state tax examination.





Discontinued Operations





Accounting for the Impairment or Disposal of Long-Lived Assets, the Company classifies a business that has been disposed as a discontinued operation if the cash flow of the business has been eliminated from the ongoing operations and will no longer have any significant continuing involvement in the Company.  The results of operations of discontinued operations through the date of sale, including any gains or losses on disposition, are aggregated and presented as one line in the consolidated statements of operations.   ASC 360-10-05, formerly SFAS No. 144 requires the classification of amounts presented for prior years as discontinued operations.  The amounts presented in the statements of operations for the three months ended June 30, 2010 and 2009 were classified to comply with ASC 360-10-05.





During the year ended December 31, 2006, the Company decided to discontinue operations of Planet Replay, LLC, a retail affiliate of the Company, and sell or liquidate the assets of the discontinued operations.  The decision to discontinue the operations of Planet Replay, LLC was based upon the historical and continuing losses of Planet Replay, LLC.  All assets were disposed during 2007 and liabilities of $21,735 and $88,921 existed at June 30, 2010 and December 31, 2009. The Company recognized a loss from discontinued operations totaling $0 and $35,653 and $0 and $68,809 for the three and six months ended June 30, 2010 and 2009, respectively. The assets and liabilities of the discontinued operation are presented separately under captions “Assets of discontinued operation” and “Liabilities of discontinued operation,” respectively, in the accompanying consolidated balance.  In conjunction with the discontinued operations, the Company has certain operating lease obligations for abandoned retail locations. These obligations were terminated with the landlord in exchange for a termination fee of $35,524 in July 2010.





Income (loss) Per Common Share





Basic income (loss) per share is calculated using the weighted-average number of common shares outstanding during each reporting period.  Diluted loss per share includes potentially dilutive securities such as outstanding options and warrants, using various methods such as the treasury stock or modified treasury stock method in the determination of dilutive shares outstanding during each reporting period.   Common equivalent shares are excluded from the computation of net loss per share since their effect is anti-dilutive.





Liquidity





As shown in the accompanying condensed consolidated financial statements, the Company has incurred a net loss from continuing operations of ($2,747,362) for the six months end June 30, 2010 and a net income from continuing operations of $1,612,807 for the six months ended June 30, 2009.  As of June 30, 2010, the Company’s current assets exceed its current liabilities by $3,872,204, with cash and cash equivalents representing $158,961.





Recent Authoritative Accounting Pronouncements





In February 2010, the FASB Accounting Standards Update 2010-10 (ASU 2010-10), “Consolidation (Topic 810): Amendments for Certain Investment Funds.”  The amendments in this Update are effective as of the beginning of a reporting entity’s first annual period that begins after November 15, 2009 and for interim periods within that first reporting period. Early application is not permitted.  The adoption of provisions of ASU 2010-10 does not have a material effect on the Company’s financial position, results of operations or cash flows.




ASU No. 2010-11 was issued in March 2010, and clarifies that the transfer of credit risk that is only in the form of subordination of one financial instrument to another is an embedded derivative feature that should not be subject to potential bifurcation and separate accounting.  This ASU will be effective for the first fiscal quarter beginning after June 15, 2010, with early adoption permitted. The Company does not expect the provisions of ASU 2010-11 to have a material effect on the financial position, results of operations or cash flows of the Company.




10




GAME TRADING TECHNOLOGIES, INC.
 and Its Wholly Owned Subsidiary
 Notes to Consolidated Condensed Financial Statements (Unaudited)
 June 30, 2010




In April 2010, the FASB issued Accounting Standard Update No. 2010-12. “Income Taxes” (Topic 740). In April 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-12 (ASU 2010-12),  IncomeTaxes (Topic 740): Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts.   After consultation with the FASB, the SEC stated that it “would not object to a registrant incorporating the effects of the Health Care and Education Reconciliation Act of 2010 when accounting for the Patient Protection and Affordable Care Act”. The Company does not expect the provisions of ASU 2010-12 to have a material effect on the financial position, results of operations or cash flows of the Company.




ASU No. 2010-13 was issued in April 2010, and will clarify the classification of an employee share based payment award with an exercise price denominated in the currency of a market in which the underlying security trades.  This ASU will be effective for the first fiscal quarter beginning after December 15, 2010, with early adoption permitted.  The Company does not expect the provisions of ASU 2010-13 to have a material effect on the financial position, results of operations or cash flows of the Company.




In April 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-17 (ASU 2010-17), Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition. The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity should apply the amendments retrospectively from the beginning of the year of adoption. The Company does not expect the provisions of ASU 2010-17 to have a material effect on the financial position, results of operations or cash flows of the Company.




In April 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-18 “Receivables (Topic 310) – Effect of a Loan Modification When the Loan is Part of a Pool that is Accounted for as a Single Asset – a consensus of the FASB Emerging Issues Task Force.”  ASU 2010-18 provides guidance on account for acquired loans that have evidence of credit deterioration upon acquisition. It allows acquired assets with common risk characteristics to be accounted for in the aggregate as a pool.  ASU 2010-18 is effective for modifications of loans accounted for within pools under Subtopic 310-30 in the first interim or annual reporting period ending on or after July 15, 2010.  The Company does not expect ASU 2010-18 to have an impact on its financial condition, results of operations, or disclosures.




In May 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-19 (ASU 2010-19), Foreign Currency (Topic 830): Foreign Currency Issues: Multiple Foreign Currency Exchange Rates. The amendments in this Update are effective as of the announcement date of March 18, 2010. The Company does not expect the provisions of ASU 2010-19 to have a material effect on the financial position, results of operations or cash flows of the Company.





There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.





Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.






2.
PROPERTY AND EQUIPMENT


The Company’s property and equipment at June 30, 2010 and December 31, 2009 consists of the following:





6/30/10


12/31/09Machinery and equipment

$
522,375


$
251,347Leasehold improvements


16,653



19,483Computer equipment and software


142,641



142,223$
681,669


$
413,053Less accumulated depreciation


338,369



303,069Property and Equipment, net

$
343,300


$
109,984





Depreciation expense included as a charge to income was $11,235 and $35,299 for the three and six months end June 30, 2010 compared to $17,123 and $33,393 for the three and six months ended June 30, 2009, respectively.




11




GAME TRADING TECHNOLOGIES, INC.
 and Its Wholly Owned Subsidiary
 Notes to Consolidated Condensed Financial Statements (Unaudited)
 June 30, 2010


3.
Working Capital Line of Credit


Bank of America Revolver





On May 4, 2010, Gamers Factory, Inc. (the “Borrower”), a wholly owned subsidiary of the Company entered into a Loan Agreement (the “Loan Agreement”) with Bank of America, N.A.   The Loan Agreement provides for a revolving line of credit to the Borrower equal to the lesser of (i) $2,500,000 (the “Credit Limit”) or the sum of (a) 75% of the balance due on Acceptable Receivables (as defined in the Loan Agreement) and (b) the lesser of $1,000,000 or 20% of the value of Acceptable Inventory (as defined in the Loan Agreement) (the “Facility No. 1 Commitment”).  The Borrower has the right to prepay loans under the Loan Agreement in whole or in part at any time. All amounts borrowed under the Loan Agreement must be repaid on or before May 27, 2011.  Loans under the Loan Agreement bear interest at a rate equal to the British Bankers Association London interbank offered rate (“BBA LIBOR”) plus 2.50% per annum. The Company has incurred interest expense of $8,716 for the three and six months end June 30, 2010. The BBA LIBOR rate was .35%.





Initial borrowings under the Loan Agreement are subject to, among other things, the substantially concurrent repayment by the Borrower of all amounts due and owing under the Borrower’s existing second amended and restated loan agreement and $1,800,000 second amended and restated promissory note, each dated December 29, 2009, respectively, with The Columbia Bank and the satisfaction and termination of such borrowing (collectively, the “Columbia Bank Loan”).  All amounts owed under the Columbia Bank Loan were satisfied and terminated by Borrower on May 6, 2010.





As of June 30, 2010, the balance on the revolver was $2,063,285, with additional availability of $436,715.






4.
NOTES PAYABLE





A summary of notes payable at June 30, 2010 and December 31, 2009 is as follows:





6/30/10


12/31/09Allegiance Capital Limited

$
-


$
700,000The Columbia Bank


-



1,800,000Vision Capital Advisors, Ltd.


-



250,000$
-


$
2,750,000Less: Current Portion


-



513,046Notes Payable

$
-


$
2,236,954





Subordinated Note Payable – Allegiance Capital Limited


Effective July 25, 2006, the Company entered into a financing agreement issuing a debenture to Allegiance Capital Limited Partnership in the amount of $1,000,000.  This debenture was retired utilizing proceeds from the February 2010 private placement transaction.





Note Payable –  The Columbia Bank


On December 29, 2009 the Company was issued a note payable of $1,800,000 from The Columbia Bank. The note bears interest at 8.0% and matures on December 29, 2014.  The note required consecutive monthly payments of principal and interest of $15,056 with a balloon payment due on December 29, 2014.    The note was collateralized by substantially all assets of the Company and personal assets of the majority shareholder.  This note was retired utilizing proceeds from the April 2010 private placement transaction without penalty or additional interest.





Note Payable – Vision


On December 22, 2009, Vision Capital Advisors, Ltd. issued a note payable of $250,000. The note bears interest at 8.0% and matured on June 30, 2010.  The note required a payment of principal and interest due on June 30, 2010.    This note was not collateralized.  This note was retired utilizing proceeds from the February 2010 private placement transaction without penalty or additional interest.








12




GAME TRADING TECHNOLOGIES, INC.
 and Its Wholly Owned Subsidiary
 Notes to Consolidated Condensed Financial Statements (Unaudited)
 June 30, 2010


5.
NOTES PAYABLE – RELATED PARTY







Note Payable – TW Development LLC





On December 6, 2007, the Company issued a note payable of $500,000 to TW Development LLC. The note bears interest at 6% and matured on April 4, 2008, and has been extended to December 31, 2010.  The note requires no monthly payments and at times in the current year, the Company has attained, and subsequently repaid, additional advances. The Company may repay this note at any time, in whole or in part, without penalty or additional interest. The balance as of June 30, 2010 and December 31, 2009 was $18,402 and $408,424, respectively. TW Development LLC is wholly owned by, our Chief Executive Officer, Todd Hays.






6.
REDEEMABLE PREFERRED STOCK


We are authorized to issue shares of our Series A Convertible Preferred Stock (“Series A”), $2.00 stated value. As of June 30, 2010, 20,000,000 shares of our Preferred Stock were authorized, with 2,837,500 shares designated as Series A, and 2,837,500 shares issued and outstanding. The rights and preferences of the Series A Convertible Preferred Stock include, among other things, the following:





·
liquidation preferences (120% of stated value);





·
dividend preferences;





The Series A Convertible Preferred Stock provides an annual dividend of 5% payable quarterly in arrears in cash or stock.  Each Series A Preferred share is convertible, at the option of the holder thereof, at any time, into one share of the Company’s common stock at an initial conversion price of $2.00 per share, subject to adjustments for anti-dilution provisions.





On February 25, 2009, the Company sold 1,950,000 shares of Series A with attached warrants to purchase an aggregate of 1,950,000 shares of the Company’s common stock at $2.00 per share. The Company received $3,900,000 from the sale of the Series A shares. Since the Series A may ultimately be redeemable at the option of the holder, the carrying value of the preferred stock, net of discount and accumulated dividends, has been classified as temporary equity on the balance sheet at June 30, 2010.





In accordance with ASC 470 Topic “Debt" a portion of the proceeds were allocated to the warrants based on their relative fair value, which totaled $2,427,566 using the Black Scholes option pricing model. Further, the Company attributed a beneficial conversion feature of $1,472,434 to the Series A preferred shares based upon the difference between the effective conversion price of those shares and the closing price of the Company’s common stock on the date of issuance. The assumptions used in the Black-Scholes model are as follows:  (1) dividend yield of 0%; (2) expected volatility of 45%, (3) weighted average risk-free interest rate of 2.2%, (4) expected life of 5 years, and (5) estimated fair value of GTTI common stock of $4.25 per share. The expected term of the warrants represents the estimated period of time until exercise and is based on historical experience of similar awards and giving consideration to the contractual terms. The amounts attributable to the warrants and beneficial conversion feature, aggregating $3,900,000 have been recorded as a discount and deducted from the face value of the preferred stock. Since the preferred stock is classified as temporary equity, the discount will be amortized over the period from issuance to February 2015 (the initial redemption date) as a charge to additional paid-in capital (since there is a deficit in retained earnings).





On April 20, 2010 and April 26, 2010, certain holders of Unit Purchase Options exercised Unit Purchase Options to purchase 825,000 and 62,500 shares, respectively of Series A resulting in aggregate gross proceeds to us of $1,650,000 and $125,000, respectively. Since the Series A may ultimately be redeemable at the option of the holder, the carrying value of the preferred stock, net of discount and accumulated dividends, has been classified as temporary equity on the balance sheet at June 30, 2010.





In accordance with ASC 470 Topic “Debt" a portion of the proceeds were allocated to the warrants based on their relative fair value, which totaled $1,157,175 using the Black Scholes option pricing model. Further, the Company attributed a beneficial conversion feature of $617,825 to the Series A preferred shares based upon the difference between the effective conversion price of those shares and the closing price of the Company’s common stock on the date of issuance. The assumptions used in the Black-Scholes model are as follows:  (1) dividend yield of 0%; (2) expected volatility of 45%, (3) weighted average risk-free interest rate of 2.2%, (4) expected life of 5 years, and (5) estimated fair value of GTTI common stock of $4.70 per share. The expected term of the warrants represents the estimated period of time until exercise and is based on historical experience of similar awards and giving consideration to the contractual terms. The amounts attributable to the warrants and beneficial conversion feature, aggregating $1,775,000, have been recorded as a discount and deducted from the face value of the preferred stock. Since the preferred stock is classified as temporary equity, the discount will be amortized over the period from issuance to April 2015 (the initial redemption date) as a charge to additional paid-in capital (since there is a deficit in retained earnings).




13




GAME TRADING TECHNOLOGIES, INC.
 and Its Wholly Owned Subsidiary
 Notes to Consolidated Condensed Financial Statements (Unaudited)
 June 30, 2010


The charge to additional paid in capital for amortization of discount and costs for the period ended June 30, 2010 was $319,166.  There was no amortization of discounts for Series A preferred stock for the period ended June 30, 2009.





For the period ended June 30, 2010 we have paid dividends in the amount of $18,958 and cumulative accrued dividends of $66,007. The accrued dividends have been charged to additional paid-in capital (since there is a deficit in retained earnings) and the net unpaid accrued dividends been added to the carrying value of the preferred stock. There were no accrued dividends for Series A preferred stock for the period ended June 30, 2009.





7.
CAPITAL STOCK


The Company has authorized 20,000,000 shares of preferred stock, with a par value of $.0001 per share. As of June 30, 2010, the Company has 2,837,500 shares of preferred stock issued and outstanding, designated Series A preferred stock. There were no shares of preferred stock outstanding as of December 31, 2009. The company has authorized 100,000,000 shares of common stock, with a par value of $.0001 per share. As of June 30, 2010 and December 31, 2009, the Company has 8,290,000 and 7,090,000, respectively, of shares of common stock issued and outstanding.





On February 25, 2010, we completed a “reverse acquisition” transaction, in which we entered into a securities exchange agreement (the “Exchange Agreement”) with Gamers Factory, Inc., a Maryland corporation (“Gamers” or the “Company”) and for certain limited purposes, its stockholders.  Pursuant to the Exchange Agreement, the shareholders of Gamers transferred all of the issued and outstanding shares of common stock of Gamers to us in exchange for 7,090,000 newly issued shares of our common stock (the “Transaction”).   As a result of the Transaction, Gamers became our wholly-owned subsidiary, with Gamers’ former shareholders acquiring a majority of the outstanding shares of our common stock.






8.
STOCK OPTIONS & WARRANTS


Employee Stock Options





The following table summarizes the changes in the options outstanding at June 30, 2010, and the related prices for the shares of the Company’s common stock issued to employees of the Company under a non-qualified employee stock option plan.





Range of

Exercise

Prices


Number

Outstanding


Weighted

Average

Exercise

Price


Weighted

Average

Remaining

Contractual

Life


Number

Exercisable


Weighted

Average

Exercise

Price$
2.25



1,050,000


$
2.25



4.82



350,000


$
2.252.50



50,000



2.50



4.69



16,666



2.504.60



100,000



4.60



4.69



33,334



4.604.75



60,000



4.75



4.81



20,000



4.751,210,000







4.80



420,000





A summary of the Company’s stock awards for options as of December 31, 2009 and changes for the six months ended June 30, 2010 is presented below:





Options

and Warrants


Weighted

Average

Exercise

PriceOutstanding, December 31, 2009


—


$
—Granted


1,210,000



2.58Exercised


—



—Expired/Cancelled


—



—Outstanding, June 30, 2010


1,210,000



2.58Exercisable, June 30, 2010


420,000



2.58





14





GAME TRADING TECHNOLOGIES, INC.
 and Its Wholly Owned Subsidiary
 Notes to Consolidated Condensed Financial Statements (Unaudited)
 June 30, 2010








The weighted-average fair value of stock options granted to employees during the six-month period ended June 30, 2010 and 2009 and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes-Merton (“Black-Scholes”) option pricing model are as follows:





June 30, 2010


June 30, 2009Significant assumptions (weighted-average):Risk-free interest rate at grant date


3.5
%


-Expected stock price volatility


45
%


-Expected dividend payout


-



-Expected option life (in years)


5.0



-Expected forfeiture rate


0
%


-Fair value per share of options granted

$
0.30


$
-





The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company has no historical experience with which to establish a basis for determining an expected life of these awards. Therefore, the Company only gave consideration to the contractual terms and did not consider the vesting schedules, exercise patterns and pre-vesting and post-vesting forfeitures significant to the expected life of the option award.




The Company based the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. The Company has not paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company used an expected dividend yield of zero in the Black-Scholes option valuation model.





Total stock-based compensation expense in connection with options granted to employees recognized in the unaudited condensed consolidated statement of operations for the three and six months ended June 30, 2010 was $372,559 and $1,317,765, and for the three and six months ended June 30, 2009 was $0, respectively, net of tax effect. Additionally, the aggregate intrinsic value of options outstanding and unvested as of June 30, 2010 is $0.





Warrants





The following table summarizes the changes in the warrants outstanding at June 30, 2010, and the related prices for the shares of the Company’s common stock issued to non-employees of the Company.  These warrants were issued in lieu of cash compensation for services performed or financing expenses and in connection with the Series A preferred private placement.





Range of

Exercise

Prices


Number

Outstanding


Weighted

Average

Exercise

Price


Weighted

Average

Remaining

Contractual

Life


Number

Exercisable


Weighted

Average

Exercise

Price$
0.65



1,120,000


$
.65



3.53



1,120,000


$
.652.50



2,927,500



2.50



4.66



2,927,500



2.504,047,500







4.24



4,047,500




15





GAME TRADING TECHNOLOGIES, INC.
 and Its Wholly Owned Subsidiary
 Notes to Consolidated Condensed Financial Statements (Unaudited)
 June 30, 2010





A summary of the Company’s stock awards for warrants as of December 31, 2009 and changes for the six months ended June 30, 2010 is presented below:





Options

and Warrants


Weighted

Average

Exercise

PriceOutstanding, December 31, 2009


1,110,000


$
0.65Granted


3,237,500



2.50Exercised


—



—Expired/Cancelled


(300,000
)


0.65Outstanding, June 30, 2010


4,047,500



1.99Exercisable, June 30, 2010


4,047,500



1.99





The Company issued 2,837,500 warrants to Series A preferred stockholders and 400,000 compensatory warrants to non-employees during the six months ended June 30, 2010.  The Series A Warrants entitled the holder to purchase one share of the Company’s common stock, have a term of five years from the date of issuance with 100% coverage and an exercise price of $2.50.  The warrants shall become exercisable on a cashless exercise basis if the underlying shares have not been fully registered within twelve months of the closing of the February 2010 private placement transaction.  Under FASB Statement 123R, the Company estimates the fair value of each stock award at the grant date by using the Black-Scholes option pricing model with the following weighted average assumptions used for the grants, respectively; dividend yield of zero percent for all periods; expected volatility is 45%; risk-free interest rate .41%; expected lives ranging from three years to five years.





Total non-employee stock-based compensation expense in connection with warrants recognized in the unaudited condensed consolidated statement of operations for the three and six months ended June 30, 2010  $0 and $1,496,023 and for the three and six months ended June 30, 2009 was $0, respectively, net of tax effect.




9.
RELATED PARTY TRANSACTIONS


The Company has a note payable outstanding of $18,402 due to TW Development, LLC, a company wholly owned by Todd Hays, our chief executive officer.  The note bears interest at 6% and due no later than December 31, 2010. For information regarding the note payable, see “Note Payable – Related Party” in Note 5 of the Notes to Unaudited Condensed Consolidated Financial Statements contained herein.





On February 25, 2010, Mr. Hays, participated in the private placement of Series A Preferred Stock, purchasing 50,000 shares of Series A convertible redeemable preferred stock (convertible into 50,000 shares of common stock) and warrants to purchase 50,000 shares of common stock, for an aggregate purchase price of $100,000.





In connection with the Series A Preferred Stock private placement transaction, on April 20, 2010, the Company entered into an Executive Officer Reimbursement Agreement with Todd Hays, the Company’s President and Chief Executive Officer, pursuant to which the Mr. Hays agreed to convert a portion of outstanding indebtedness of the Company owed to him into Series A shares and Warrants pursuant to the Securities Purchase Agreement.  Mr. Hays converted $25,000 of outstanding indebtedness into 12,500 Series A shares and Warrants to purchase 12,500 shares of Common Stock.





From time to time the Company may receive advances from certain of its officers to meet short term working capital needs.  These advances may not have formal repayment terms or arrangements.





10.
BUSINESS CONCENTRATION


Revenue from two (2) major customers accounted for a combined $14,348,707 and $17,684,177 of revenue for the six months ended June, 2010 and 2009, respectively.  These amounts represent 80% and 83% of the Company’s revenue for the six months ended June 30, 2010 and 2009, respectively. As of June 30, 2010 and 2009, these customers accounted for 31% and 92% of accounts receivable, respectively.





Purchases from two (2) major suppliers approximated $5,597,838 of purchases, and three (3) major suppliers approximated $8,879,575 of purchases, for the six months ended June 30, 2010 and 2009, respectively. These amounts represent 34% and 59% of the Company’s supplies for the six months ended June 30, 2010 and 2009, respectively. As of June 30, 2010 and 2009, these suppliers accounted for 25% and 0% of accounts payable, respectively.




11.
COMMITMENTS




Office Lease Obligations





The Company has entered into an operating lease agreement for its warehouse and corporate offices located in Hunt Valley, MD.   The current lease term expiration date is January 31, 2012.




16




GAME TRADING TECHNOLOGIES, INC.
 and Its Wholly Owned Subsidiary
 Notes to Consolidated Condensed Financial Statements (Unaudited)
 June 30, 2010





Future minimum payments required under operating leases at June 30, 2010 are as follows:





Year Ending December 31:2010 (remainder of the year)


87,9752011


179,2232012 and thereafter


14,960$
282,158





Rent expense plus common area maintenance and related facilities fees for the six months ended June, 2010 and 2009 totaled $105,623 and $115,565, respectively.





In conjunction with the discontinued operations (see “Discontinued Operations” in Footnote 1.), the Company has certain operating lease obligations for abandoned retail locations. These obligations were terminated with the landlord in exchange for a termination fee of $35,524 in July 2010.





Employment and Consulting Agreements





The Company has employment agreements with certain of its key employees which include non-disclosure and confidentiality provisions for the protection of the Company’s proprietary information.





We entered into employment agreements with Todd Hays and Rodney Hillman effective at the closing of the Transaction and our February 2010 private placement. The employment agreements require each of the executives to devote all of their time and attention during normal business hours to our business as our Chief Executive Officer and President and our Chief Operating Officer, respectively. The employment agreements provide that each executive will receive an annual base salary of $175,000 and $125,000 per year, with the annual base salary increasing by 5% on each anniversary date of the employment agreement. In addition, each executive is entitled to (a) receive a cash bonus in an amount determined by the Compensation Committee if we meet or exceed certain mutually agreed upon performance goals and (b) participate in our stock option plan.




12.
SUBSEQUENT EVENTS




The Company evaluated for subsequent events through the issuance date of the Company’s financial statements and the following items are noted.





In conjunction with the discontinued operations (see “Discontinued Operations” in Footnote 1.), the Company has certain operating lease obligations for abandoned retail locations. These obligations were terminated with the landlord in exchange for a termination fee of $35,524 in July 2010.




Effective June 30, 2010, the holders of 100% of the outstanding shares of series A convertible preferred stock (the “Series A Preferred Stock”) and 98% of the outstanding warrants to purchase shares of common stock (collectively, the “Warrants”) issued pursuant to the terms of that certain securities purchase agreement, dated February 25, 2010 (the “Purchase Agreement”), agreed to amend the terms of the Series A Preferred Stock and Warrants in the following manner:
  ·
The parties agreed to add a provision to the certificate of designation for the Series A Preferred Stock whereby the minimum price in which the conversion price of the Series A Preferred Stock may be reduced shall be equal to $1.00;
  ·
The parties agreed to add a provision to the Warrants whereby the minimum price in which the exercise price of the Warrants may be reduced shall be equal to $1.00;
  ·
The parties agreed to add a provision to the Purchase Agreement whereby until the 36 month anniversary of the date of the Purchase Agreement, the Company shall not issue any of its equity securities below $1.00 without the prior written consent of any holder who was issued a Warrant for an aggregate of 2% or more of the Warrants initially issued pursuant to the Purchase Agreement.




17








Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations





This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words.  Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.





Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company should be read in conjunction with the Consolidated Financial Statements and notes related thereto included in this Quarterly Report on Form 10-Q. Important factors currently known to Management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for materials, and competition.





Overview





We are a leading provider of comprehensive trading solutions and services for video game retailers, publishers, rental companies, and consumers.  Through our trading platform, we provide our customers with extensive services including valuation, procurement, refurbishment, and merchandising of pre-owned video games.  Additionally, through our trading platform, we process and market video game consoles, DVDs, and video game accessories, and provide related e-commerce retailing and interactive marketing services.





On February 25, 2010, we completed a “reverse acquisition” transaction, in which we entered into the Exchange Agreement with Gamers Factory, Inc. (“Gamers”) and for certain limited purposes, its stockholders. Pursuant to the Exchange Agreement, the shareholders of Gamers transferred all of the issued and outstanding shares of common stock of Gamers to us in exchange for 7,090,000 newly issued shares of our common stock (the “Transaction”). As a result of the Transaction, Gamers became our wholly-owned subsidiary, with Gamers’ former shareholders acquiring a majority of the outstanding shares of our common stock.  At the time of the Transaction, our corporate name was City Language Exchange, Inc.  Following the merger, we changed our name to Game Trading Technologies, Inc. (“GTTI”) and our trading symbol to “GMTD.OB.”





In connection with the Transaction, we completed the closing of a private placement of $3,900,000 in Units, each Unit consisting of one share of our series A convertible preferred stock and a warrant to purchase one share of our common stock, to purchasers that qualified as accredited investors, as defined in Regulation D, pursuant to the terms of a Securities Purchase Agreement, dated as of February 25, 2010. Each share of series A convertible preferred stock has a stated value equal to $2.00 per share and is initially convertible at any time into shares of common stock at a conversion price equal to $2.00 per share or an aggregate of 1,950,000 shares of common stock, subject to adjustment under certain circumstances. Each warrant entitles the holder to purchase one share of common stock (equivalent to 100% warrant coverage in respect of the shares underlying both the series A convertible preferred stock) at an exercise price of $2.50 per share through February 25, 2015.





Recent Developments





On April 20, 2010, certain holders of Unit Purchase Options exercised Unit Purchase Options to purchase 825,000 Units resulting in aggregate gross proceeds to us of $1,650,000. Each unit (“Unit”) consisted of one share of the Company’s series A convertible preferred stock and a warrant to purchase one share of the Company’s common stock at an exercise price of $2.50 per share through April 20, 2015.





On April 26, 2010, the holders of certain Unit Purchase Options exercised Options to purchase 62,500 units of the Company’s securities for aggregate gross proceeds of $125,000.  Each Unit consisted of one share of the Company’s series A convertible preferred stock and a warrant to purchase one share of the Company’s common stock at an exercise price of $2.50 per share through April 26, 2015.




18








Results of Operations - Three Months and Six Months ended June 30, 2010 compared to the Three and Six Months ended June 30, 2009





The table below outlines revenues and related cost of sales for comparable periods:





Three months ended June 30,2010

2009

VarianceRevenue

$
6,631,951



100
%

$
12,998,799



100
%

$
(6,366,848
)


-49
%Cost of Sales


5,852,764



88
%


11,168,226



86
%


(5,315,462
)


-48
%Gross Profit

$
779,187



12
%

$
1,830,573



14
%

$
(1,051,386
)


-57
%





Six months ended June 30,2010

2009

VarianceRevenue

$
18,033,238



100
%

$
21,339,859



100
%

$
(3,306,621
)


-16
%Cost of Sales


15,281,415



85
%


18,067,719



85
%


(2,786,304
)


-15
%Gross Profit

$
2,751,823



15
%

$
3,272,140



15
%

$
(520,317
)


-16
%





Revenues. During the three and six months ended June 30, 2010, we had a decrease in revenues of $6,366,848, or -49% and $3,306,621, or -16%, respectively, compared to the three and six months ended June 30, 2009.  Excluding a major extraordinary retailer liquidation transaction consisting of approximately $5.5 million in sales in the 2nd quarter of 2009, revenues would have shown a decrease of approximately $900,000 for the comparative three month period and increased approximately $2.2 million for the comparative six month period.As demonstrated in the corresponding prior year period, from time to time larger than normal opportunities are made available to us for the acquisition and/or sale of used game products. These opportunities are not in the normal course of our business and there is no assurance when or if such opportunities will be made available to us in the future.





Cost of Sales. During the three and six months ended June 30, 2010, we had a decrease in cost of sales of $5,315,462, or -48%, and $2,786,304, or -15%, respectively, compared to the three and six months ended June 30, 2009. Our decrease in costs correlate with the decrease in revenue for the comparable periods.





Gross Profit. Gross profit decreased by $1,051,386, or -57%, and $520,317, or -16%, for the three and six months ended June 30, 2010, respectively, when compared to the three and six month period ended June 30, 2009. The decrease during the three and six months ended June 30, 2010 was primarily a resulting of lower sales volumes as compared to the prior periods.





Operating Expense. Operating expenses, which consist of sales and marketing expenses, general and administrative costs, stock based compensation and depreciation totaled $1,662,414 and $5,462,410 during the three and six months ended June 30, 2010, respectively as compared to $667,051 and $1,303,455 during the three and six months ended June 30, 2009, respectively. The operating expenses for the three and six months ended June 30, 2010 increased by $995,363 and $4,158,955, respectively, as compared to the three and six months ended June 30, 2009. The major component of these increased expenses between the corresponding periods was professional services consisting of legal, accounting and investor relations fees as well as non-cash employee stock based compensation of $372,559 and $1,317,765 and non-employee stock based compensation of $0 and $1,496,023 for the three and six months ended June 30, 2010, respectively.





Selling, General and Administrative Expenses (SG&A). The SG&A expenses consist of salaries, advertising, professional service fees, investor relations services and overhead expenses, totaled $1,278,620 and $2,613,323 during the three and six months ended June 30, 2010, respectively, as compared to $649,928 and $1,270,062 during the three and six months ended June 30, 2009, respectively. SG&A increased by $628,692 and $1,343,261 between the corresponding three and six months periods, respectively. The increase between the corresponding three and six month periods is primarily attributable to professional fees associated with the reverse merger and private placement consummated in February 2010 and investor relations fees totaling approximately $311,000 and $813,000, respectively. Furthermore, administrative salaries and related costs increased approximately $205,000 and $229,000, a comparable increase in volume of small package shipments in outbound shipping costs increased approximately $52,000 and $167,000, and IT related services increased approximately $48,000 and $115,000, respectively between the three and six months comparative periods.




19





Stock Based Compensation. During the three and six months ended June 30, 2010, the employee stock based compensation expense was $372,559 and $1,317,765, respectively from issuances of employee incentive stock options. The incentive stock options were valued using the Black Scholes method and the option shall become exercisable during the term of recipient’s employment in three equal annual installments with the first installment to be exercisable upon issuance of the option agreement. There were no stock option issuances in the prior year period.





Non-Employee Stock Based Compensation. For the three and six months ended June 30, 2010, $0 and $1,496,024 noncash charges were due to the issuance of stock warrants in exchange for professional services associated with reverse merger and private placement consummated in February 2010.  The value of the warrants was determined using the Black Scholes method, the details of which are more fully explained within the notes to the financial statements.  There were no warrant issuances in the prior year period.





Net Income (Loss). We had a net loss of ($901,560) and ($2,747,362) for the three and six months ended June 30, 2010 as compared to a net income of $951,517 and $1,612,807 for the three and six months ended June 30, 2009. The increase in legal and accounting services, the charges resulting from the warrants and stock options issuances related to the private placement are the primary reason for the net loss for the period.





Seasonality




Our business is seasonal since we rely upon retailers and consumers, with the major portion of our sales and operating profits occurring during the first fiscal quarter following the holiday selling season.  Since our supply of video game products depends significantly on consumer trade-ins and returns, there exists significant supply of these items immediately following the holiday season in January through March. Historically, our sales lag the holiday season by one quarter. We have historically generated our highest sales and operating profits during the first quarter of the year.





Liquidity and Capital Resources





We have financed our operations since inception primarily through private and public offerings of our equity securities and the issuance of various debt instruments and asset based lending.





Working Capital





Our working capital increased by $3,274,317 during the six months ended June 30, 2010 from a working capital surplus of $597,887 at December 31, 2009 to a working capital surplus of $3,872,204 at June 30, 2010. The change in working capital for the six months ended June 30, 2010 is due to a combination of factors, of which significantly include:





Cash had a net decrease from working capital by $482,127 for the six months ended June 30, 2010. The most significant uses and proceeds of cash were:·Approximately $4,793,000 of cash consumed directly in operating activities·Purchases of equipment of $268,615·Proceeds from the Series A Preferred offering of $5,675,000·Net proceeds from the Bank of America working line of credit of $2,063,285 to fund inventory purchases·Repayments of certain notes payable outstanding of $3,140,022





Of the total current assets of $8,782,991 as of June 30, 2010, cash represented $158,961.  Of the total current assets of $5,922,208 as of December 31, 2009, cash represented $641,088.





Series A Preferred Offering





We completed the closing of a private placement of $3,900,000 of units (each, a “Unit” and collectively, the “Units”) pursuant to the terms of a Securities Purchase Agreement, dated as of February 25, 2010, with each Unit consisting of one share of our series A convertible preferred stock and a warrant to purchase one share of our common stock.  Each share of series A convertible preferred stock has a stated value equal to $2.00 per share and is initially convertible at any time into shares of our common stock at a conversion price equal to $2.00 per share or an aggregate of 1,950,000 shares of common stock, subject to adjustment under certain circumstances. Each warrant entitles the holder to purchase one share of common stock (equivalent to 100% warrant coverage in respect of the shares underlying the series A convertible preferred stock) at an exercise price of $2.50 per share through February 25, 2015.




20





On April 20, 2010, certain holders of Unit Purchase Options exercised Unit Purchase Options to purchase 825,000 Units resulting in aggregate gross proceeds to us of $1,650,000. Each unit (“Unit”) consisted of one share of the Company’s series A convertible preferred stock and a warrant to purchase one share of the Company’s common stock at an exercise price of $2.50 per share through April 20, 2015.





On April 26, 2010, the holders of certain Unit Purchase Options exercised Options to purchase 62,500 units of the Company’s securities for aggregate gross proceeds of $125,000.  Each Unit consisted of one share of the Company’s series A convertible preferred stock and a warrant to purchase one share of the Company’s common stock at an exercise price of $2.50 per share through April 26, 2015.





Working Capital Line of Credit





On May 4, 2010, Gamers Factory, Inc. (the “Borrower”), a wholly owned subsidiary of the Company entered into a Loan Agreement (the “Loan Agreement”) with Bank of America, N.A.   The Loan Agreement provides for a revolving line of credit to the Borrower equal to the lesser of (i) $2,500,000 (the “Credit Limit”) or the sum of (a) 75% of the balance due on Acceptable Receivables (as defined in the Loan Agreement) and (b) the lesser of $1,000,000 or 20% of the value of Acceptable Inventory (as defined in the Loan Agreement) (the “Facility No. 1 Commitment”).  The Borrower has the right to prepay loans under the Loan Agreement in whole or in part at any time. All amounts borrowed under the Loan Agreement must be repaid on or before May 27, 2011.





Initial borrowings under the Loan Agreement were subject to, among other things, the substantially concurrent repayment by the Borrower of all amounts due and owing under the Borrower’s existing second amended and restated loan agreement and $1,800,000 second amended and restated promissory note, each dated December 29, 2009, respectively, with The Columbia Bank and the satisfaction and termination of such borrowing (collectively, the “Columbia Bank Loan”).  All amounts owed under the Columbia Bank Loan were satisfied and terminated by Borrower on May 6, 2010.





As of June 30, 2010, the balance on the revolver was $2,063,285, with additional availability of $436,715.





Proceeds from the issuance of common stock





During the three months ended June 30, 2010, the Company did not receive any proceeds from the issuance of its common stock.





Cashflow analysis





Cash used in continuing operations was $4,792,817 during the period ending June 30, 2010 and proceeds provided by continuing operations was $2,211,439 during the period ended June 30, 2009. During the period ended June 30, 2010, our primary capital needs were for working capital necessary to fund inventory purchases and reducing our trade payables.





We utilized cash for investing activities from continuing operations of $268,615 and $34,643 during the periods ended June 30, 2010, and 2009, respectively. This increase is primarily attributable to the acquisition of additional computer and warehouse equipment.





Cash provided from financing activities from continuing operations $4,579,305 during the period ending June 30, 2010, compared to cash used in financing activities was $913,607 during the period ending June 30, 2009. This increase is primarily attributable to funds received from the February and April 2010 Series A preferred private placements of $5,675,000 and proceeds on our working capital line of credit used for inventory purchases of $2,063,285. The financing activities from continuing operations also included repayments of certain notes payable of $3,140,022 and $913,607 during the period ending June 30, 2010 and 2009, respectively.





We believe that we will require additional financing to carry out our intended objectives during the next twelve months. There can be no assurance, however, that such financing will be available or, if it is available, that we will be able to structure such financing on terms acceptable to us and that it will be sufficient to fund our cash requirements until we can reach a level of profitable operations and positive cash flows. If we are unable to obtain the financing necessary to support our operations, we may be unable to continue as a going concern. We currently have no firm commitments for any additional capital.





The downturn in the United States stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our shares of common stock. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing.   If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.





21





Off-Balance Sheet Arrangements





As of June 30, 2010, we had no off-balance sheet arrangements.





Item 3.
Quantitative and Qualitative Disclosures About Market Risk





None.





Item 4.
Controls and Procedures





(a)
Evaluation of Disclosure Controls and Procedures





Under the supervision and with the participation of our management, including our chief executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report.  Based on this evaluation, our chief executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level, to ensure that (i) information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.





(b)
Changes in Internal Control Over Financial Reporting





There were no changes in our internal control over financial reporting during the second quarter of fiscal 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





22








PART II - OTHER INFORMATION





Item 1.
Legal Proceedings





We are not party to any legal proceedings, nor are we aware of any contemplated or pending legal proceedings against us.





Item 1A.
Risk Factors





We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this item.





Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds





On April 26, 2010, the holders of certain unit purchase options (the “Options”) issued by the Company in connection with that certain securities purchase agreement, dated February 25, 2010 (the “Purchase Agreement”), exercised Options to purchase 62,500 units of the Company’s securities for aggregate gross proceeds of $125,000. Each unit (“Unit”) consisted of one share of the Company’s series A convertible preferred stock and a warrant to purchase one share of the Company’s common stock at an exercise price of $2.50 per share through April 26, 2015.





On April 22, 2010, in connection with his appointment as a director, Eric Salzman received an option to purchase 60,000 shares of our common stock at a price of $4.75 per share, the closing price of our common stock as quoted on the Over-the-Counter Bulletin Board on April 21, 2010. The options vest in three (3) equal installments of thirty-three and one-third percent (33 1/3%), the first installment to be exercisable on the date of grant, with an additional thirty-three and one-third percent (33 1/3%) becoming exercisable on each of April 22, 2011 and April 22, 2012, respectively. These options were issued under the Company’s Amended and Restated 2009 Incentive Stock Plan.





On April 20, 2010, the holders of certain Options issued by the Company in connection with the Purchase Agreement, exercised Options to purchase 825,000 units of the Company’s securities for aggregate gross proceeds of $1,650,000. Each Unit consisted of one share of the Company’s series A convertible preferred stock and a warrant to purchase one share of the Company’s common stock at an exercise price of $2.50 per share through April 20, 2015.








Item 3.
Defaults Upon Senior Securities





None.





Item 4.
Removed and Reserved





Item 5.
Other Information





None.





Item 6.
Exhibits





Exhibits required by Item 601 of Regulation S-K:





Number

Description31.1

Certification as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer and Chief Financial Officer.32.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer and Chief Financial Officer.








23








SIGNATURES





In accordance with the requirements of the Exchange Act, the registrant caused duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




GAME TRADING TECHNOLOGIES, INCDate: August 23, 2010
By:
/s/ Todd HaysTodd HaysChief Executive Officer

(principal executive officer and principal financial and

accounting officer)











24