PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
Playlogic Entertainment, Inc. (“the Company, “we”, “us” or similar pronouns) is a developer and publisher of interactive entertainment products, such as video game software and other digital entertainment products. We publish for most major interactive entertainment hardware platforms, such as Sony’s PlayStation 3 and Playstation2, Microsoft’s Xbox and Xbox360, Nintendo’s Wii, PCs and handheld devices (such as Nintendo DS, and PSP) and mobile devices.
Our principal sources of revenue are derived from publishing operations. Publishing revenues are derived from the sale of our digital entertainment products. We own most of the intellectual properties of our products.
As a publisher, we are responsible for publishing, sales and marketing of our products. We sell our products to distributors, who sell to retail. Furthermore, we sell directly to consumers through online distribution channels, at least two months after the product was made available at retail.
NOTE B - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company and reflect all adjustments necessary for fair presentation of our financial position, results of operations and cash flows. Inter-company accounts and transactions have been eliminated. The preparation of these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. We adhere to the same accounting policies in preparation of interim financial statements. As permitted under generally accepted accounting principles, interim accounting for certain expenses, including income taxes are based on full year assumptions when appropriate. Actual results could differ materially from those estimates.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), although we believe that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements and accompanying notes should be read in conjunction with our annual consolidated financial statements and the notes thereto for the fiscal year ended December 31, 2006, included in our Annual Report on Form 10-KSB for the year ended December 31, 2006.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year presentation.
Earnings Per Share
SFAS No. 128, “Earnings Per Share”, requires dual presentation of basic and diluted income per share for all periods presented. Basic income per share excludes dilution and is computed by dividing earnings available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.
Unexercised stock options to purchase 350,000 shares of the Company’s common stock as of March 31, 2007, respectively, were not included in the computation of diluted earnings per share because the exercise of the stock options would be anti-dilutive to earnings per share.
Unexercised warrants to purchase 1,097,962 shares of the Company’s common stock as of March 31, 2007, were not included in the computation of diluted earnings per share because the exercise of the warrants would be anti-dilutive to earnings per share. The 900,000 warrants issued in connection with a loan as per note L our Annual Report on Form 10-KSB for the year ended December 31, 2006 are excluded from the computation and reflected as a liability as they are used as collateral for the loan.
Restatements
During the course of preparing the unaudited financial statements for the three months ended September 30, 2006, Management of the Company determined that the Company’s accounting for the reimbursement of certain expenses incurred during the second and third quarter of 2005 had not been properly reflected in accordance with U.S. generally accepted accounting principles. Certain operating expenses and transaction costs associated with the Company’s Share Exchange Agreement entered into in June 2005, which were initially paid by the Company and reimbursed by certain shareholders, were not included in the Company’s consolidated statements of operations for each of the six and three months ended June 30, 2005, the nine and three months ended September 30, 2005 and the year ended December 31, 2005. The corrections to this situation resulted in the recognition of expenses in connection with the Share Exchange Agreement as well as either the recognition of additional contributed capital and/or a reduction in amounts due from shareholder(s) for unrelated advances made prior to the aforementioned Share Exchange Agreement
The restated numbers have been included in the consolidated statement of operations.
These restatements to the Company’s financial statements were, in part, caused by a material weakness in the Company’s internal control over financial reporting due to the limitations in the capacity of the Company’s accounting resources to appropriately identify and react in a timely manner to non-routine, complex and related party transactions and communicate said occurrences to it’s independent auditors, as well as the adequate understanding of the disclosure requirements relating to these types of transactions. In order to remediate this material weaknesses, Management of the Company has designed and implemented improvements to it’s internal controls over financial reporting and to better define the most appropriate protocols to enhance the preparation, review, presentation and disclosures of the Company’s financial statements.
NOTE C - GOING CONCERN UNCERTAINTY
The Company is a global publisher of interactive software games designed for personal computers, and video game consoles and handheld platforms manufactured by Sony, Microsoft and Nintendo. Its principal sources of revenue are derived from publishing and distribution operations. Publishing revenues are derived from the sale of internally developed software titles or software titles developed by third parties. Operating margins in its publishing business are dependent upon its ability to continually release new, commercially successful products. Operating margins for titles based on licensed properties are affected by the company's costs to acquire licenses. The Company pursues a growth strategy by capitalizing on the widespread market acceptance of video game consoles, as well as the growing popularity of innovative action games that appeal to mature audiences.
The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. At March 31, 2007, the Company had an accumulated deficit of approximately $50.7 million, a shareholders’ deficit of approximately $10.4 million and a working capital deficit of approximately $16.9 million. Although the Company realized a net profit of $ 759,000 and positive operating cash flows of approximately $23,000 during the three months ended March 31, 2007, the financial position raises uncertainties about the Company’s ability to continue as a going concern.
While the Company has contracts in place with several third-party developers and is developing titles through its Playlogic Game Factory B.V. subsidiary, and anticipates successful debuts of such titles; the market for interactive entertainment software is characterized by short product lifecycles and frequent introduction of new products. Many software titles do not achieve sustained market acceptance or do not generate a sufficient level of sales to offset the costs associated with product development. A significant percentage of the sales of new titles generally occur within the first three months following their release. Therefore, the Company’s profitability depends upon the Company’s ability to develop and sell new, commercially successful titles and to replace revenues from titles in the later stages of their lifecycles. Any competitive, financial, technological or other factor which delays or impairs the Company’s ability to introduce and sell the Company’s software could adversely affect future operating results.
The Company’s continued existence is dependent upon its ability to generate sufficient cash flows from operations to support its daily operations as well as provide sufficient resources to retire existing liabilities and obligations on a timely basis and its ability to raise debt and/or equity financing.
favorable to or affordable by the Company.
If no additional funding is received during the next twelve months, the Company will be forced to rely on additional funds loaned by management and/or significant stockholders to preserve the integrity of the corporate entity at this time. In the event, the Company is unable to acquire advances from management and/or significant stockholders, the Company’s ongoing operations would be negatively impacted to the point that all operating activities are ceased.
While the Company is of the opinion that good faith estimates of the Company’s ability to secure additional capital in the future to reach the Company’s goals have been made, there is no guarantee that the Company will receive sufficient funding to sustain operations or implement any future business plan steps.
No adjustment has been made in the accompanying financial statements to the amounts and classification of assets and liabilities which could result should the Company be unable to continue as a going concern.
NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable, accounts payable and notes payable, as applicable, approximates fair value due to the short term nature of these items and/or the current interest rates payable in relation to current market conditions.
Interest rate risk is the risk that the Company’s earnings are subject to fluctuations in interest rates on either investments or on debt and is fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company’s earnings are subject to fluctuations in interest rates or foreign exchange rates and are fully dependent upon the volatility of these rates. The company does not use derivative instruments to moderate its exposure to financial risk, if any.
NOTE E - COMPREHENSIVE INCOME/(LOSS)
Components of comprehensive income/(loss) are as follows:
| | | Three months ended March 31, | |
| | | 2007 | | 2006 | |
| | | | | | |
| Net income / (loss) | | $ | 58,944 | | $ | 1,197,505 | ) |
| Foreign currency translation adjustment | | | (104,667 | ) | | (107,619 | ) |
| Comprehensive income / (loss) | | $ | 54,277 | | $ | 1,305,124 | ) |
| | | | | | | | |
NOTE F - SOFTWARE DEVELOPMENT COSTS
The following table provides the details of software development costs for the three months ended March 31, 2007:
| |
| Beginning balance | $ | 4,463,430 |
| Additions | 1,693,280 |
| Amortization | (446,829) |
| Write down | 0 |
| Foreign exchange | 67,047 |
| Ending balance | 5,777,331 |
Less: current portion | 5,268,294 |
| Non-current portion | $ | 509,037 |
The amount of software development costs resulting from advance payments and guarantees to third-party developers was $4,888,490 at March 31, 2007. In addition, software development costs at March 31, 2007 included an amounts of $1,353,190, related to titles that have not been released yet.
The non-current portion of the capitalized software development costs is expected to be amortized in 2008.
NOTE G - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
| Payroll taxes payable | | $ | 2,835,642 | a) |
| Deferred payroll taxes | | | 521,400 | |
| Loan penalty expense | | | 1,318,600 | |
| Accrued interest | | | 529,957 | |
| Royalties to be paid | | | 200,391 | |
| Deferred Rent | | | 458,572 | |
| Accrued wages and related personnel costs | | | 435,725 | |
| Invoices to be received | | | 205,174 | |
| Board remuneration to be paid | | | 129,261 | |
| Other accrued liabilities | | | 37,778 | |
| | | $ | 6,672,501 | |
_________________
a) Payroll taxes payable can be partly offset against VAT refund claimed as included in other receivables.
NOTE H - LOAN FROM SHAREHOLDERS
On February 23, 2007, the Company entered into a loan agreement with a lender based in the Netherlands, pursuant to which the Company borrowed the principal amount of €1,600,000, or approximately $2,100,000. This loan bears compound interest at a rate of 10% per annum. The principle and the interest will be repaid in full by the end of August 2007. Under this loan agreement, the Company pledged all its IP as collateral and assigned all its receivables.
Loans from shareholder at March 31, 2007 are comprised of the following:
| Loan with a lender based in Andorra | | $ | 53,292 | |
| Loans with a lender based in the Netherlands | | | 5,182,647 | |
| Less: unamortized debt discount | | | (7,373 | ) |
| Loans from shareholder, less unamortized debt discount | | $ | 5,228,566 | |
NOTE I - COMMITMENTS AND CONTINGENCIES
Litigation
On March 30, 2007, Fortis Vastgoed B.V. (plaintiff) filed a motion to institute accelerated proceedings against Playlogic International N.V.(defendant) with the Court of Amsterdam (Kantongerecht) the Netherlands. Fortis claims evacuation of the offices at Amstelveenseweg 639-710 in Amstelveen with immediate effect and damages in the amount of € 142,249 plus € 91,626 for each quarter following April 1, 2007 till the end of the lease term expiring on May 31, 2011 in case Fortis is unable to agree on a lease for the offices with a third party (or approximately $ 187,569 using December 31, 2006 exchange rates) in view of the alleged unlawful non performance by Playlogic under the lease agreement dated June 1, 2005. On April 17 the Court of Amsterdam (Kantongerecht) the Netherlands issued a permanent injunction that the Company has to evacuate the offices at Amstelveenseweg 639-710 in Amstelveen within fourteen (14) days following registered notice of injunction to defenfant unless payment of all amounts due have been made by defendant to plaintiff within one month following April 17, 2007.
Moreover the Company is involved in a number of minor legal actions incidental to its ordinary course of business.
With respect to the above matter, the Company believes that it has adequate legal claims or defenses and/or provided adequate accruals for related costs such that the ultimate outcome will not have a material adverse effect on the Company’s future financial position or results of operations.
Office leases
The Company leases it’s executive offices located at Concertgebouwplein 13 in Amsterdam from Mr. Prof. Dr. D. Valerio. This lease agreement expired on March 31, 2007. This lease agreement contained an extension option, which has extended the expiration date to March 31, 2012. The lease requires annual payments of approximately$81,000 (€59,000) per year, to be paid in quarterly installments.
Our subsidiary, Playlogic Game Factory, B. V., previously operated in leased offices, located at Hoge Mosten 16-24 in Breda, from Kantoren Fonds Nederland B.V. pursuant to a lease agreement which expired on February 28, 2007. Playlogic Game Factory, B. V., leases offices located at Hambroeklaan 1 in Breda from Neglinge BV pursuant to a lease agreement which expires on October 1, 2013. This lease agreement contains an extension option, which if exercised, will extend the expiration date to October 1, 2018. At the execution of this lease agreement, the landlord committed itself to invest approximately $409,000 (€300,000) in leasehold improvements which are scheduled to be repaid by Playlogic Game Factory B.V. over a 10 year period. The lease requires annual payments of approximately$41,000 (€30,000) per year, payable in quarterly installments.
On June 1, 2005, the Company entered into a new lease agreement for new corporate offices at Amstelveenseweg 639-710 in Amstelveen. The move of our offices to this location has been delayed following late commissioning of entrance and elevators. We will start using this office now as from June 2007.
The lease requires annual payments of approximately$273 (€200.00) per square meter for rent and $34.00 (€25.00) per square meter for service costs. Payment started December 1, 2006 for approximately ½ of the leased premises (approximately 750 square meters) and in June 2007, payment will start on the second ½ of the leased premises (approximately 750 square meters). Payment of the service costs for each of the 750 square meter segments began at the execution of the lease agreement. The lease expires in June 2011.
Transportation leases
The Company leases 23 automobiles for certain officers and employees pursuant to the terms of their individual employment agreements under operating lease agreements. These agreements are for terms of 3 to 4 years and begin to expire in 2007. The leases require monthly aggregate payments of approximately $24,760.
NOTE J — OTHER RELATED PARTY TRANSACTIONS
Willem M. Smit, the Company’s Chief Executive Officer, has agreed to not receive any cash compensation until such time that the Company achieves positive cash flows from operations. However, the Company does reimburse Mr. Smit for his business related expenses and provides him with an automobile. As Mr. Smit provides executive management and oversight services to the Company, an amount of $100,000 per annum (or $25,000 per quarter) is imputed as the value of his services and recorded as additional contributed capital to the Company.
Furthermore Mr. Willem M. Smit has a current account with the Company, the balance of which is recorded as a receivable from officers. Given the nature of the transactions that resulted in this balance management believes this is no violation of section 4.02 of the Sarbanes Oxley Act. However, it is management’s policy that no receivables from officers exist and management will ensure this amount to be reduced to zero during 2007.
Effective January 1, 2006 the Company entered into a service agreement with Altaville Investments B.V., a company beneficially owned by its CEO Willem M. Smit. The Company pays for certain service among others house keeping and cleaning services provided by Altaville to the Company an annual aggregate amount of $ 49,843 which is paid in twelve monthly installments.
NOTE K - SEGMENT INFORMATION AND REVENUE CONCENTRATIONS
The Company sells it’s products to wholesale distributors in various domestic and foreign markets. The following table shows the Company’s gross revenue composition:
| | | Three months ended March 31, |
| | | 2007 | | 2006 |
| | | | | | | |
Europe and United Kingdom | | | | | | |
| Customer A | | 2,211,950 | 70% | | 558,181 | 31% |
| Customer B | | 433,398 | 10% | | 262,529 | 14% |
| Customer C | | 525,331 | 12% | | 0 | 0% |
| Others | | 311,911 | 7% | | 616,636 | 34% |
| | | 3,482,596 | 100% | | 1,437,346 | 79% |
Middle East/Africa | | | | | | |
| Others | | 0 | 0% | | 13,982 | 1% |
| | | 0 | 0% | | 13,982 | 1% |
| | | | | | | |
| Asia | | | | | | |
| Others | | 0 | 0% | | 0 | 0% |
| | | 0 | 0% | | 0 | 0% |
| | | | | | | |
United States & Canada | | | | | | |
| Customer D | | 0 | 0% | | 353,817 | 19% |
| Customer E | | 0 | 0% | | 0 | 0% |
| others | | 0 | 0% | | 19,054 | 1% |
| | | 0 | 0% | | 372,871 | 20% |
| | | | | | | |
South America | | | | | | |
| Others | | 0 | 0% | | 0 | 0% |
| | | 0 | 0% | | 0 | 0% |
| | | | | | | |
| | | | | | | |
| Total | | 3,482,596 | 100% | | 1,824,199 | 100% |
Item 2. Management’s Discussion and Analyses of Financial Condition and Results of Operation
Playlogic is a publisher of interactive entertainment products, such as video game software and other digital entertainment products. We publish for most major interactive entertainment hardware platforms, like Sony’s PlayStation 3,and Playstation2, Microsoft’s Xbox 360 and Nintendo’s Wii, PCs and handheld devices (such as Nintendo DS, and PSP) and mobile devices.
Our principal sources of revenue are derived from publishing operations. Publishing revenues are derived from the sale of our digital entertainment products. We own most of the intellectual properties of our products, which we believe positions us to maximize profitability.
As a publisher, we are responsible for publishing, sales and marketing of our products. We sell our products to distributors, who sell to retail. Furthermore, we sell directly to consumers through online distribution channels, at least two months after the product was made available at retail.
Various studios throughout the world develop games which we publish. One of these studios is our subsidiary, Playlogic Game Factory B.V., located in The Netherlands. Other independent studios in various countries develop our games under development contracts. These development contracts generally provide that we pay the studio an upfront payment, which is an advance on future royalties, earned, and a payment upon achievement of various milestones. In addition, we license the rights to our existing titles to other studios who then develop those titles for other platforms.
Different studios and developers frequently contact us requesting financing and publishing of their games. We evaluate each of these offers based on several factors, including sales potential (primarily based on past performance by the studio or developer), technology used, track record and human resources of the studio.
We select which games we develop, based on our analysis of consumer trends and behavior and our experience with similar or competitive products. Once we select a game to develop, we then assign a development studio, based upon its qualifications, previous experience and prior performance. Once developed, we distribute our games worldwide through existing distribution channels with experienced distributors. We generally aim to release our titles simultaneously across a range of hardware formats in order to spread development risks and increase and increase with a minimum augmentation in development time and resources.
We believe that greater online functionalities, applications and distribution on the new platforms will improve revenues and help our industry grow. In addition, according to DFC Intelligence, new sales potential, revenue opportunities from wireless gaming, online console gaming, and in-game advertising are expected to grow from $1 billion in 2005 to $5 billion in 2009.
Industry Overview
Over the past two decades, the video game industry has advanced and become a valuable contributor to the entertainment consumption business. The estimated break-down of gamers in US households is 61% male and 39% female, with 47% of gamers between 13 and 24 years old, 30% between 25 and 39 years old; and 23% over 40 years old.
Worldwide, the video game market is projected to increase from $26.2 billion in 2004 to $46.5 billion in 2010, growing at an 11.4 percent compound annual rate. Asia Pacific, currently the largest market at $9.6 billion in 2004, is projected to maintain its dominance, growing at a 12.3 percent compound annual rate through 2010 to reach $17.4 billion. The United States has the second largest market and is expected to grow from $8.4 billion in 2005 to $13.0 billion in 2010, an 8.9 percent compounded annual according to Company Annual Reports of Crandell & Sidak
The video game market reflects consumer spending on console games (including handheld games), personal computer (PC) games, online games, and wireless games. The category excludes spending on the hardware and accessories used to play the games.
The launch of the Nintendo Wii and Sony PlayStation 3, the gaming industry had a record-breaking year in 2006. According to NPD Group's industry tracking sales figures, overall profits are up 19 percent, and the combined hardware, software, and accessories sales reached $12.5 billion in the U.S. alone, making it the highest grossing year in the video game industry to date.
Market Trends - Worldwide
In the U.S. wireless games will experience the fastest rate of growth, increasing from $646 million in 2005 to $2.3 billion in 2010, a 28.6 percent compound annual increase. In EMEA the online game market will be driven by increased penetration of the broadband subscriber market as well as by the new consoles, which will emphasize online play. In the Asia Pacific region online games became the second-largest category in 2005, passing the PC game total, and will increase by 23.0 percent compounded annually, reaching $4.4 billion in 2010 as compared with $1.6 billion in 2005.As a result of lack of competition from the newer online and wireless technologies, PC games are relatively more important in Latin America and are not exhibiting the declines evident elsewhere in the world. Canada has one of the highest broadband penetration rates in the world, spurring growth in the online game segment, according to the 2006 report commissioned by the Entertainment Software Association exam
Console Installed Base
Since the introduction of PlayStation 2 in 2000, the console has sold over 100 million units worldwide according to games industry. biz. The PlayStation 3 has been introduced to the market in the second half of 2006. Microsoft introduced its next generation console, the Xbox 360, in November 2005.
Microsoft’s Xbox360 has sold more than 10 million units so far. Sony sold almost 3 million units of its Playstation 3.Nintendo’s next generation console, called ‘Wii’ has been sold more than 6 million units so far. Wed bush Morgan Securities expects next generation hardware shipments through the end of 2007 will reach 46 million units in the U.S. and Europe.
Nintendo Dual Screens (‘Nintendo DS’) and PlayStation Portable (‘PSP’) were both successfully introduced to the market. The sales volume of the Nintendo DS reached 13 million units by January 1, 2006, and PSP reached the sales volume of 10 million units by the end of October 2005.
PC Games
Playlogic will continue its focus on PC games because in comparison to next generation consoles, PC games are less expensive to develop and address a much wider target audience. Furthermore Playlogic will focus on handheld games, because of the large big installed base, Nintendo especially of the DS. Playlogic will continue development of PlayStation2 titles, because of their large installed base of over 100 million units.
Consumer Facts
Thirty percent of most frequent game players are under eighteen years old while twenty-six percent of most frequent game players are between 18 and 35 years old. Forty-four percent of most frequent game players are over 35 years old. Forty percent of most frequent console game players are under eighteen years old while thirty-five percent of most frequent game players are between 18 and 35 years old. Twenty-five percent of most frequent console game players are over 35 years old. Thirty-eight percent of game players are women. Women age 18 or older represent a significantly greater portion of the game-playing population (30%) than boys age 17 or younger (23%).The average adult woman plays games 7.4 hours per week. The average adult man plays 7.6 hours per week. Though males spend more time playing than do females, the gender/time gap has narrowed significantly. Whereas in 2003, males spent an average of 18 more minutes a day playing games than did their female counterparts, in 2004 they spent only six minutes more each day doing so. Females spend an average of two hours more per week playing games now than they did a year ago. Forty-four percent of most frequent game players say they play games online, up from 31% in 2002.
We believe the demographics of game players will widen, and be a major source of the growth of the industry. The first generation gamers are now in their 30s and are still playing games and new consumers enter the market, including children at the age of 6 to 8 and an increasing number of women players.
Release Overview
| | | | | | | Expected release |
Game | | Studio | | Platform | | date to retail |
Completed Games | | | | | | |
| Alpha Black Zero | | Khaeon (NL) | | PC | | Released |
| Airborne Troops | | Widescreen Games (F) | | PS2, PC | | Released |
| Cyclone Circus | | Playlogic Game Factory (NL) | | PS2 | | Released |
| Xyanide | | Overloaded (NL) | | Mobile Phones | | Released |
| World Racing 2 | | Synetic (G) | | PS2, Xbox, PC | | Released |
| Knights of the Temple 2 | | Cauldron (SK) | | PS2, Xbox, PC | | Released 1 |
| Gene Troopers | | Cauldron (SK) | | PS2, Xbox, PC | | Released 1 |
| Xyanide | | Playlogic Game Factory (NL) | | Xbox | | Released |
| Age of Pirates: Caribbean Tales | | Akella (Russia) | | PC | | Released |
| Infernal | | Metropolis (Poland) | | PC | | Released2 |
| | | | | | | |
Under Development | | | | | | |
| Ancient Wars: Sparta | | World Forge (Russia) | | PC | | Q2 2007 |
| Xyanide Resurrection | | Playlogic Game Factory (NL) | | PSP | | Q2 2007 |
| Evil Days Of Luckless John | | 3A Entertainment (Great Britain) | | PC | | Q2 2007 |
| Xyanide Resurrection | | Playlogic Game Factory (NL) | | PS2 | | Q3 2007 |
| Obscure 2 | | Hydravision (F) | | PC | | Q3 2007 |
| Obscure 2 | | Hydravision (F) | | PS2 | | Q3 2007 |
| Obscure 2 | | Hydravision (F) | | Wii | | Q3 2007 |
| Officers | | GFI (Russia) | | PC | | Q3 2007 |
| Age of Pirates:CT the Sequel | | Akella (Russia) | | | | Q3 2007 |
| Age of Pirates: Captain Blood* | | Akella (Russia) | | PC | | Q4 2007 |
| Age of Pirates: Captain Blood* | | Akella (Russia) | | Xbox360 | | Q4 2007 |
| Aggression 1914 | | Buka (Russia) | | PC | | Q4 2007 |
| Manhunter* | | L’Art/PLGF | | PC | | Q4 2007 |
| Collapse | | Buka (Russia) | | PC | | Q1 2008 |
| Red Bull Break dancing | | TBC | | TBC | | TBC |
| Infernal 2 | | Metropolis (Poland) | | TBC | | TBC |
| Infernal | | Metropolis (Poland) | | Wii | | TBC |
_______________
1 Released in Europe only.
2 Final decision on Next Generation options to be made.
* working title
Currently Playlogic is mainly focusing on PC titles. Some major publishers have posted higher losses than the previous year recently. These losses are primarily caused by their high investments in games for the next generation consoles. Playlogic has intentionally focused on publishing PC titles during the transition period, since the installed base of the Xbox 360 is too low for Playlogic to make sufficient return on investments. Playlogic intends to start publishing for the next generation consoles in the second half of 2007.
Material agreements
We entered into the following material agreements in the three months ended March 31, 2007:
Obscure 2 agreement. On March 13, 2007, we signed an agreement with the French Developer Hydravision to publish the game Obscure 2 worldwide excluding Russia and Japan. Obscure 2 is a survival horror game.
Critical Accounting Policies and Estimates
Our most critical accounting policies, which are those that require significant judgment, include: capitalization and recognition of software development costs and licenses; share-based compensation and revenue recognition. In-depth descriptions of these can be found in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006 (the “2006 Form 10-K”). There have been no material changes in our existing accounting policies from the disclosures included in our 2006 Form 10-K.
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which clarifies the definition of fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurement. SFAS 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 will be effective for us on November 1, 2008. We are currently assessing whether the adoption of SFAS 157 will have an impact on our financial statements.
In September 2006, the SEC released Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 provides interpretive guidance on the SEC’s views on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The provisions of SAB 108 will be effective for us on November 1, 2007. We are currently evaluating the impact of applying SAB 108 but do not believe that its application will have a material effect on our financial position, cash flows, or results of operations.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109 (“FIN 48”), to create a single model to address the accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 will be effective for us beginning November 1, 2007. The cumulative-effect of adopting FIN 48 will be recorded to opening retained earnings. Management is currently evaluating the effect, if any, that the adoption of FIN 48 will have on our consolidated financial statements.
Results of Operations
Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
Net sales. Net sales for the three months ended March 31, 2007 were $3,482,596 as compared to $2,719,610 for the three months ended March 31, 2006. This increase in revenue is primarily related to the release of Infernal and Sparta Ancient Wars through our global distribution agreement with Eidos.
Gross Profit. Gross profit totaled $2,396,195 for the three months ended March 31, 2007. For the three months ended March 31, 2006, gross profit totaled $957,985. This increase in gross profit is primarily the result of the increase in net sales.
Selling, Marketing, General and Administrative Expenses. Selling, marketing, general and administrative expenses totaled $1,213,396, for the three months ended March 31, 2007. For the three months ended March 31, 2006, selling, general and administrative expenses totaled $1,691,691. This represents a decrease of $478,295 or 28%. This decrease in selling, general and administrative expenses is due to managements’ focus on cost control and debt restructuring.
Research and Development. Research and development expenses totaled $22,719 for the three months ended March 31, 2007. For the three months ended March 31, 2006, research and development totaled $343,691. This represents a decrease of $320,972 or 93%. This decrease is due to costs in relation to 3rd party development activities being classified as Cost of Sales.
Depreciation. Depreciation expenses totaled $81,690 for the three months ended March 31, 2007. For the three months ended March 31, 2006, the depreciation expense totaled $78,498.
Interest Expense. Interest expense totaled $319,446 for the three months ended March 31, 2007. For the three months ended March 31, 2006, interest expense totaled $76,827. This represents an increase of $242,619, or 315%. This increase in interest expense is primarily due to the increase of interest bearing short term loans.
Net Result. Our net profit was $758,944 for the three months ended March 31, 2007. For the three months ended March 31, 2005, the net loss totaled $1,197,505. The increase of the result is primarily the result of new titles released to market in the first quarter of Fiscal 2007. Furthermore, the Company continues to focus on controlling operating expenses and debt restructuring.
Other comprehensive income. Other comprehensive income represents the change of the Currency Translation Adjustments balance during the reporting period. The Currency Translation Adjustments balance that appears in the stockholders’ equity section is cumulative in nature and is a consequence from translating all assets and liabilities at current rate whereas the stockholders’ equity accounts are translated at the appropriate historical rate and revenues and expenses being translated at the weighted-average rate for the reporting period. The Change in currency translation adjustments was $(104,667) for the three months ended March 31, 2007 and $(107,619) for the three months ended March 31, 2006.
Liquidity and Capital Resources
As of March 31, 2007, our cash balance was $6,601.
In order to cover our working capital requirements through the second quarter of 2007, we will need to obtain additional financing. The Company is currently in negotiation with several parties in this respect. The Company is presently in contact with private investors. The company anticipates closing during the second quarter a private placement composed of both the issuance of new shares and debt instruments in the maximum total amount of 10 million USD. If the Company does not obtain any necessary financing in the future, it may need to cease operations.
We expect our capital requirements to increase over the next several years as we continue to develop new products both internally and through our third-party developers, increase marketing and administration infrastructure, and embark on in-house business capabilities and facilities. Our future liquidity and capital funding requirements will depend on numerous factors, including, but not limited to, the cash generation from the released games, the cost of hiring and training production personnel who will produce our titles, the cost of hiring and training additional sales and marketing personnel to promote our products, and the cost of hiring and training administrative staff to support current management.
Our net accounts receivable, after providing an allowance for doubtful accounts, at March 31, 2007 was $1,031,723.
Fluctuations in Quarterly Operating Results and Seasonality
We have experienced fluctuations in quarterly operating results as a result of the timing of the introduction of new titles; variations in sales of titles developed for particular platforms; market acceptance of our titles; development and promotional expenses relating to the introduction of new titles; sequels or enhancements of existing titles; projected and actual changes in platforms; the timing and success of title introductions by our competitors; product returns; changes in pricing policies by us and our competitors; the accuracy of retailers’ forecasts of consumer demand; the size and timing of acquisitions; the timing of orders from major customers; and order cancellations and delays in product shipment. Quarterly comparisons of operating results are not necessarily indicative of future operating results.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We transact business in foreign currencies and are exposed to risks resulting from fluctuations in foreign currency exchange rates. Accounts relating to foreign operations are translated into United States dollars using prevailing exchange rates at the relevant quarter end. Translation adjustments are included as a separate component of stockholders’ equity. For the three months ended March 31, 2007, our accumulated foreign currency translation adjustment loss was approximately $2.5 million. The foreign exchange transaction loss recognized in our statement of operations for the three months ended March 31, 2007 was approximately $ 104,000.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of management, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) were effective as of March 31, 2007 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the first quarter of 2007, which were identified in connection with management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
On June 1, 2005, we entered into a lease for new offices at Amstelveenseweg 639-710 in Amstelveen. The move of our offices to this location has been delayed following late commissioning of entrance and elevators. The Company now intends to start using this office now as from June 2007.
On March 30, 2007, Fortis Vastgoed B.V. (plaintiff) filed a motion to institute accelerated proceedings against Playlogic International N.V.(defendant) with the Court of Amsterdam (Kantongerecht) the Netherlands. Fortis claims evacuation of the offices at Amstelveenseweg 639-710 in Amstelveen with immediate effect and damages in the amount of € 142,249, which is included in the accrued liabilities, plus € 91,626 for each quarter following April 1, 2007 till the end of the lease term expiring on May 31, 2011 in case Fortis is unable to agree on a lease for the offices with a third party (or approximately $ 187,569 using December 31, 2006 exchange rates) in view of the alleged unlawful non performance by Playlogic under the lease agreement dated June 1, 2005. On April 17 the Court of Amsterdam (Kantongerecht) the Netherlands issued a permanent injunction that the Company has to evacuate the offices at Amstelveenseweg 639-710 in Amstelveen within fourteen (14) days following registered notice of injunction to defenfant unless payment of all amounts due have been made by defendant to plaintiff within one month following April 17, 2007.
Except as referred to above there were no new material legal proceedings or material developments to the pending legal proceedings that have been previously reported in Part I, Item 3 of our 2007 Form 10-K. A full discussion of our pending legal proceedings is also contained in Part I, Item 1, “Notes to Unaudited Condensed Consolidated Financial Statements” of this Report.
Item 1A. Risk Factors
There have been no material changes to the Risk Factors disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006.
Item 2 - Changes in Securities.
No response required.
Item 3 - Defaults Upon Senior Securities.
No response required.
Item 4 - Submission of Matters to a Vote of Security Holders.
No response required.
Item 5 - Other Information.
No response required.
Item 6. Exhibits
| | | Exhibits: | | |
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| | | 31.1 | | Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| | | 31.2 | | Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| | | 32.1 | | Chief Executive Officer Certification 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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| | | 32.2 | | Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | Playlogic International, Inc. |
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| Dated: April 25, 2007 | By: | /s/ Willem M. Smit |
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Willem M. Smit Chief Executive Officer |
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Exhibit Index
| | | Exhibits: | | |
| | | | | |
| | | 31.1 | | Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| | | 31.2 | | Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| | | 32.1 | | Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| | | 32.2 | | Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
