UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the period ended: September 30, 2007
| o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-49649
PLAYLOGIC ENTERTAINMENT, INC.
(Exact name of small business issuer as specified in its charter)
Delaware | 23-3083371 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
Concertgebouwplein 13, 1071 LL Amsterdam, The Netherlands | 1071 LL | |
| (Address of principal executive offices) | (Zip Code) |
31-20-676-0304
(Issuer’s telephone number)
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
| Class | Outstanding at September 30, 2007 | |
| Common Stock, par value $.001 per share | 38,532,580 shares |
Transitional Small Business Disclosure Format (check one): Yes o No þ
PLAYLOGIC ENTERTAINMENT, INC.
FORM 10-QSB
TABLE OF CONTENTS
| Page No. | |||
| Item 1. | Financial Statements | 3 | |
| Item 2. | Management’s Discussion and Analysis | 15 | |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 20 | |
| Item 4 | Controls and Procedures | 20 | |
| Item 1. | Legal Proceedings | 20 | |
| Item 1A. | Risk Factors | 20 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 20 | |
| Item 3. | Defaults Upon Senior Securities | 20 | |
| Item 4. | Submission of Matters to a Vote of Security Holders | 21 | |
| Item 5. | Other Information | 21 | |
| Item 6. | Exhibits | 21 | |
| Signatures | 22 | ||
| Exhibit Index | 23 | ||
| Certifications | Attached | ||
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PLAYLOGIC ENTERTAINMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 2007
ASSETS | ||||
Current Assets | ||||
| Cash | $ | 317,168 | ||
| Cash in escrow (see note F) | 778,047 | |||
| Accounts receivable | ||||
| Trade, net of allowance for doubtful accounts | 2,160,224 | |||
| Value Added Taxes from foreign governments | 44,067 | |||
| Software development costs | 4,640,375 | |||
| Prepaid expenses and other | 459,123 | |||
Total current assets | 8,399,004 | |||
Net property and equipment | 783,450 | |||
Other assets | ||||
| Software development costs, net of current portion | 2,125,208 | |||
Total other assets | 2,125,208 | |||
Total Assets | $ | 11,307,662 | ||
LIABILITIES AND SHAREHOLDERS' DEFICIT | ||||
Current Liabilites | ||||
| Bank line of credit | $ | 1,442,051 | ||
| Short-term debts | 382,994 | |||
| Warrant derivatives | 7,373 | |||
| Current maturities of long-term debt | 42,555 | |||
| Accounts payable - trade | 4,593,885 | |||
| Other accrued liabilities | 2,335,113 | |||
| Deferred revenues | 143,197 | |||
| Loan from shareholders | 560,022 | |||
Total current liabilities | 9,507,190 | |||
Long-term debt, less current maturities | 223,414 | |||
Total Liabilities | 9,730,604 | |||
Commitments and contingencies | ||||
Shareholders' Equity | ||||
| Preferred stock - $0.001 par value. 20,000,000 shares authorized. None issued and outstanding | - | |||
| Common stock - $0.001 par value.100,000,000 shares authorized. 38,532,580 shares issued and outstanding | 38,533 | |||
| Additional paid-in capital | 54,148,735 | |||
| Deferred Compensation-Employee Stock Options | 298,493 | |||
| Accumulated currency translation adjustments reserve | (3,022,258 | ) | ||
| Accumulated deficit | (49,886,445 | ) | ||
Total shareholders' equity | 1,577,058 | |||
Total Liabilities and Shareholders' Equity | $ | 11,307,662 | ||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
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PLAYLOGIC ENTERTAINMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2007 | 2006 (restated) | 2007 | 2006 (restated) | |||||||||||||
Revenues | ||||||||||||||||
| Net Revenue | $ | 3,712,390 | $ | 1,461,194 | $ | 8,296,418 | $ | 4,593,865 | ||||||||
Cost of sales | ||||||||||||||||
| Direct costs of production | (1,685,929 | ) | (664,582 | ) | (3,538,227 | ) | (2,592,495 | ) | ||||||||
Gross profit | 2,026,461 | 796,612 | 4,758,191 | 2,001,370 | ||||||||||||
Operating expenses | ||||||||||||||||
| Research and development | 82,207 | 975,810 | 448,962 | 2,262,975 | ||||||||||||
| Selling and marketing | 398,723 | 330,392 | 929,346 | 1,068,394 | ||||||||||||
| General and administrative | 1,025,392 | 1,170,223 | 2,760,234 | 3,961,870 | ||||||||||||
| Asset impairment charges | - | 72,127 | - | 1,123,439 | ||||||||||||
| Depreciation | 40,757 | 785,494 | 193,381 | 226,490 | ||||||||||||
Total operating expenses | 1,547,079 | 3,334,046 | 4,331,923 | 8,643,168 | ||||||||||||
Profit / (Loss) from operations | 479,382 | (2,537,435 | ) | 426,268 | (6,641,798 | ) | ||||||||||
Other income/(expense) | ||||||||||||||||
| gain on debt restructuring | 377,000 | - | 850,411 | - | ||||||||||||
| Interest expense | (169,535 | ) | (439,715 | ) | (1,054,659 | ) | (611,803 | ) | ||||||||
| Loan penalty expense | 1,377,150 | (1,242,400 | ) | 1,377,150 | (1,242,400 | ) | ||||||||||
| Realized and unrealized exchange losses | - | (360,471 | ) | - | (49,305 | ) | ||||||||||
Income/(Loss) before provision for income taxes | 2,063,997 | (4,580,020 | ) | 1,599,170 | (8,545,307 | ) | ||||||||||
| Provision for Income Taxes | - | - | - | - | ||||||||||||
Net loss before before extraordinary items | 2,063,997 | (4,580,020 | ) | 1,599,170 | (8,545,307 | ) | ||||||||||
| Extra ordinary items | - | - | - | - | ||||||||||||
Net Profit / (loss) | 2,063,997 | (4,580,020 | ) | 1,599,170 | (8,545,307 | ) | ||||||||||
| Net loss per weighted-average share of common stock outstanding, computed on Net Profit / (Loss) | ||||||||||||||||
| - basic and fully diluted | 0.07 | (0.19 | ) | 0.06 | (0.35 | ) | ||||||||||
| Weighted-average number of shares of common stock outstanding | ||||||||||||||||
| - basic and fully diluted | 27,727,726 | 24,593,733 | 26,343,562 | 24,445,768 | ||||||||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended September 30, | ||||||||
| 2007 | 2006 (restated) | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net cash used in operating activities | $ | (2,299,374 | ) | $ | (3,409,230 | ) | ||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Cash paid for software development | (1,679,208 | ) | (1,854,507 | ) | ||||
| Cash paid to acquire property and equipment | (24,492 | ) | (269,357 | ) | ||||
Net cash used in investing activities | (1,703,701 | ) | (2,123,865 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Payments on bank line of credit | (460,919 | ) | (562,632 | ) | ||||
| Cash receipts from short term notes | 2,514,776 | 372,733 | ||||||
| Cash repaid on short term notes | (898,417 | ) | 3,970,713 | |||||
| Principal payments on long-term debt | (30,258 | ) | (27,955 | ) | ||||
| Payments on loans | - | (75,091 | ) | |||||
| Proceeds from sales of common stock | 2,735,019 | 823,759 | ||||||
| Collections on stock subscriptions receivable | - | 1,229,344 | ||||||
Net cash provided by financing activities | 3,860,202 | 5,730,872 | ||||||
Effect of foreign exchange on cash | 443,503 | (334,960 | ) | |||||
Increase/(Decrease) in Cash | 300,630 | (137,183 | ) | |||||
| Cash at beginning of period | 16,537 | 139,760 | ||||||
Cash at end of period | $ | 317,168 | $ | 2,577 | ||||
Supplemental disclosures of interest and income taxes paid | ||||||||
| Interest paid during the period | $ | 1,326,164 | $ | 74,534 | ||||
| Income taxes paid (refunded) | - | - | ||||||
Supplemental disclosures of non-cash investing and financing activities | ||||||||
| Common stock issued to repay notes payable | $ | 5,852,523 | $ | 737,700 | ||||
| Cost of acquiring capital paid with issuance of common stock | $ | 21,150 | $ | 13,200 | ||||
| Payments paid to vendors directly by equity subscribers | $ | 2,924,432 | $ | - | ||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
| Additional | Deferred Compensation | Currency | Currency | |||||||||||||||||||||||||
| Common stock | paid-in | Employee Stock | translation | Accumulated | ||||||||||||||||||||||||
| Shares | Amount | capital | options | adjustment | deficit | Total | ||||||||||||||||||||||
Balances at December 31, 2006 | 25,332,109 | $ | 25,332 | $ | 42,596,112 | $ | 414,040 | $ | (2,439,541 | ) | $ | (51,485,615 | ) | $ | (10,889,671 | ) | ||||||||||||
| Common stock issued for cash | 2,648,278 | $ | 2,648 | $ | 2,732,371 | $ | 2,735,019 | |||||||||||||||||||||
| Common stock issued for cash paid directly to vendors | 3,415,522 | $ | 3,416 | $ | 2,92,016 | $ | 2,924,432 | |||||||||||||||||||||
| Common stock issued in exchange for debt | 7,136,671 | $ | 7,137 | $ | 5,845,336 | $ | 5,852,523 | |||||||||||||||||||||
| Capital contributed to support operations | $ | 75,000 | $ | 75,000 | ||||||||||||||||||||||||
| Issuing costs | $ | (21,150 | ) | $ | (21,150 | ) | ||||||||||||||||||||||
| Stock options issued pursuant to Employee Compensation Plan | $ | (115,547 | ) | $ | (115,547 | ) | ||||||||||||||||||||||
| Change in currency translation adjustment | $ | (582,718 | ) | $ | (582,718 | ) | ||||||||||||||||||||||
| Net loss for the period | $ | 1,599,170 | $ | 1,599,170 | ||||||||||||||||||||||||
Balances at September 30, 2007 | 38,532,580 | $ | 38,533 | $ | 54,148,735 | $ | 298,493 | $ | (3,022,258 | ) | $ | (49,886,445 | ) | $ | 1,577,058 | |||||||||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
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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. Furthermore, the Company has reclassified gains from debt extinguishments from General and Administrative expenses to other income in the Condensed Consolidated Statement of Operations.
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.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Unexercised stock options to purchase 1,435,000 shares of the Company’s common stock as of September 30, 2007, 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 6,089,270 shares of the Company’s common stock as of September 30, 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.
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 September 30, 2007, the Company had an accumulated deficit of approximately $50.1 million, a shareholders’ equity of approximately $1.4 million and a working capital deficit of approximately $1.3 million. Furthermore, the Company realized a year-to-date net profit of $ 1.4 million during the nine months ended September 30, 2007. These figures show a significant improvement of the financial position compared to previous periods, however, the current Company’s financial position still raises uncertainties about the Company’s ability to continue as a going concern.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 it is reasonably possible that the Company’s is able to secure additional capital in the future to reach the Company’s goals, there is no assurance 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.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE E - COMPREHENSIVE INCOME/(LOSS)
Components of comprehensive income/(loss) are as follows:
| Nine months ended September 30, | |||||||||
| 2007 | 2006 | ||||||||
| Net income / (loss) | $ | 1,599,170 | $ | (8,545,307 | ) | ||||
| Foreign currency translation adjustment | (582,442 | ) | (460,639 | ) | |||||
| Comprehensive income / (loss) | $ | 1,016,728 | $ | (9,005,946 | ) | ||||
NOTE F – CASH IN ESCROW
As of September 30, the Company held an amount of $778,000 in escrow which is cash being held by an attorney. These funds are subject to withdrawal by the Company at the Company's option. The full amount has been transferred to the Companies bank account during the month of October 2007.
NOTE G - SOFTWARE DEVELOPMENT COSTS
The following table provides the details of software development costs for the six months ended September 30, 2007:
| Beginning balance | $ | 4,463,430 | ||
| Additions | 3,179,312 | |||
| Amortization | (1,317,260 | ) | ||
| Write down | 0 | |||
| Foreign exchange | 440,101 | |||
| Ending balance | 6,765,583 | |||
| Less: current portion | (4,640,375 | ) | ||
| Non-current portion | $ | 2,125,208 | ||
The amount of software development costs resulting from advance payments and guarantees to third-party developers was $6,167,000 at September 30, 2007. In addition, software development costs at September 30, 2007 included an amounts of $2,315,000 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.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE H - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
| Payroll taxes payable | $ | 1,073,682 | a) | ||
| Deferred payroll taxes | 521,400 | ||||
| Royalties to be paid | 212,775 | ||||
| Accrued interest | 39,236 | ||||
| Invoices to be received | 126,246 | ||||
| Accrued holiday expenses employees | 223,581 | ||||
| Board remuneration to be paid | 137,624 | ||||
| Other accrued liabilities | 569 | ||||
| $ | 2,335,113 |
_________________
a) Payroll taxes payable have been partly offset against VAT refund claimed.
NOTE I – SHAREHOLDER’S EQUITY TRANSACTIONS
Common stock
During the nine months ended ended September 30, 2007, the Company sold 3,182,609 units at $1.15 per unit to unrelated third parties for proceeds of $ 3,660,000 pursuant to an exemption from registration claimed under Rule 4(2) of the Securities Act of 1933, as amended. Each unit consisted of two shares of the Company’s par value common stock and one Common Stock Warrant to purchase the Company’s common stock at $2.75 per share at any time within the next 5 years. In total 1,591,308 warrants have been issued in relation to this sale.
During the nine months ended September 30, 2007, the Company issued 9,147,861 units at $0,80 per unit to unrelated third parties for proceeds of approximately $7,313,000 pursuant to an exemption from registration claimed under Rule 4(2) of the Securities Act of 1933, as amended. In relation to this sale 2,500,000 warrants have been issued to purchase the Company’s common stock at $1.35 per share at any time within the next 5 years.
Of this subscription, 6,287,273 shares were used to convert outstanding debt amounting to $5,024,899. The remaining 2,288,471 shares have been sold for cash, however the cash was paid directly by subscriber to vendors of the Company and didn’t therefore go through the Company’s records.
During the quarter, the Company sold 600,000 shares of its common stock to an accredited investor based in the Netherlands at $0,90 per share for a total cash consideration of $538,604 pursuant to an exemption from registration claimed under Rule 4(2) of the Securities Act of 1933, as amended.
| Cash | Cash to Vendors | Conversion of Debt | Total | Units | ||||||||||||||||
| Shares issued @ 1.15 | $ | 2,735,019 | $ | 635,961 | $ | 289,020 | $ | 3,660,000 | $ | 3,182,609 | ||||||||||
| Shares issued @ 0.80 | 2,288,471 | 5,024,899 | 7,313,370 | 9,147,861 | ||||||||||||||||
| Shares issued @ 0.90 | 538,604 | 538,604 | 600,000 | |||||||||||||||||
| $ | 2,735,019 | $ | 2,924,432 | $ | 5,852,523 | $ | 11,511,974 | $ | 12,930,470 | |||||||||||
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE J - COMMITMENTS AND CONTINGENCIES
Litigation
In June 2007, Playlogic Entertainment Inc. was sued in class action before the US district court in Manhattan, with respect to alleged damage as a result of copy protection software included in Age of Pirates – Caribbean Tales. We do not foresee any liability in this matter, as plaintiffs have clearly sued the wrong company and the wrong entity. Playlogic acts only as a publisher of the game and therefore is not liable for possible faults in production or distribution. Moreover, as far as any claim could be brought against Playlogic, it would be the Dutch subsidiary Playlogic International NV, with its statutory seat in Amsterdam, the Netherlands, that would have to be sued. As a consequence, the pending case should fail on both grounds and any new action against the Dutch subsidiary would have to be brought before the Dutch courts that are even more likely than the US courts to reject class actions like this.
Moreover the Company is involved in a few 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 expires on June 30, 2008. The lease requires annual payments of approximately $83,000 (€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 $425,000 (€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$425,000 (€300,000) per year, payable in quarterly installments.
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 $25,000.
Debt restructuring
During the three months ended September 30, 2007, the Company has negotiated a discount amounting to approximately $180,000 with some of it’s creditors resulting in the obligation to pay the amount of approximately $210,000 as a premium to the next capital raise. The realized gain following the agreed discount has been included in other income and expenses.
NOTE K — 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.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 approximately $ 50,000 which is paid in twelve monthly installments.
NOTE L - 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:
| Nine months ended September 30, | |||||||
| 2007 | 2006 | ||||||
Europe and United Kingdom | |||||||
| Customer A | 2,772,328 | * | 33% | 1,463,597 | 32% | ||
| Customer B | 1,676,799 | 20% | 1,213,661 | 26% | |||
| Customer C | 1,795,135 | 22% | 0 | 0% | |||
| Customer D | 652,853 | 8% | 0 | 0% | |||
| Others | 1,268,530 | 15% | 304,158 | 7% | |||
| 8,165,645 | 98% | 2,981,416 | 65% | ||||
Middle East/Africa | |||||||
| Others | 0 | 0% | 53,538 | 1% | |||
| 0 | 0% | 53,538 | 1% | ||||
United States & Canada | |||||||
| Customer A | 0 | * | 0% | 1,144,864 | 25% | ||
| Customer E | 130,773 | 2% | 414,047 | 9% | |||
| 130,773 | 2% | 1,558,911 | 34% | ||||
| Total | 8,296,418 | 100% | 4,593,865 | 100% | |||
* The Company entered into a license contract with Customer A, for global distribution of certain games. As the Company is located in Europe, the revenue has been allocated to Europe and UK. Part of this revenue should however be read as US market revenue.
NOTE M – OTHER INCOME & EXPENSES
Debt restructuring
During the three months ended September 30, 2007, the Company has negotiated a discount amounting to $100,000 with vendor A resulting in the obligation to pay an amount of $100,000 as a premium to the next capital raise. The realized gain following the agreed discount has been included in gain on debt restructuring. Furthermore, the Company has negotiated a discount amounting to $80,000 with vendor B resulting in the obligation to pay an amount of $110,000 as a premium to the next capital raise. The realized gain following the agreed discount has been included in gain on debt restructuring. With the same vendor (B) the Company agreed a settlement of 197,000 based on agreed payments.
The Company estimates the chance of a future successful capital raise to be reasonably possible.
During the first nine months of 2007, the company negotiated discounts resulting in the following gains, as presented under gains on debt restructuring totaling $850,411 over 4 different vendors.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The total gain from settlements amounts to:
| Vendor | gain on debt restructuring first six months | Gain on debt restructuring during the 3th quarter | Total | |||||||||
| Vendor A | $ | 100,000 | $ | 100,000 | ||||||||
| Vendor B | $ | 277,000 | $ | 285,000 | ||||||||
| Vendor C | $ | 115,000 | $ | 115,000 | ||||||||
| Vendor D | $ | 350,411 | $ | 350,411 | ||||||||
| $ | 465,411 | $ | 377,000 | $ | 850,411 | |||||||
The gains have been recognized based on agreed payments done.
Loan penalty expense
During the three months ended September 30, 2007, one of the Company’s loan providers, who imposed a penalty for being in default of repayment of a loan, amounting to $1,242,000 (€ 1,000,000) has waived that penalty during the quarter. As a result we have reversed that transaction and we have recorded this reversal as a gain, amounting to $1,377,000 (€ 1,000,000).
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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, production, localization, QA and testing, PR and marketing, manufacturing and sales of our products. Playlogic’s products are sold to distributors who supply retailers worldwide. Furthermore, we sell directly to consumers through online distribution channels with various partners.
Development studios throughout the world help create the games which are published by Playlogic. One of these studios is our fully owned subsidiary, Playlogic Game Factory B.V., located in The Netherlands. Other independent studios in various countries develop our games under Software Development Agreements (SDA). These development contracts generally provide that we pay an advance on future royalties earned upon achievement of milestones successfully completed and delivered. In addition, we license the rights of existing Playlogic IP to other development studios who then adapt these products to the specifications and abilities of other (console) platforms.
Studios and developers contact us daily requesting financing and publishing of their games or concepts. We evaluate each of these offers based on several factors, including sales potential of concept or product, technology & tools used, track record and project management of the studio.
We select which games we develop based on our analysis of consumer buying 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 global or local distributors. When appropriate we have the ability to release our titles simultaneously across a range of hardware formats to maximize overall sales for a particular product with a minimum augmentation in development time and resources.
We believe that greater online functionalities, applications and digital distribution on the new platforms will improve revenue margins and encourage further industry growth. 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 combined US and European software markets will grow at a 13.5% CAGR over the 2006-2008 period. (WedBush Morgan).
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.
With 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
The fastest-growing segment during the next five years, global video game spending will increase to $55.6 billion in 2008, at a 20.1 percent CAGR. (PricewaterhouseCoopers). By 2008, online and wireless will be major distribution channels, spurred by broadband penetration and new mobile phones that will be used as much for entertainment as for communication. The PC game market will shrink, and console game spending will grow as next generation consoles are introduced.
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The video game market was in a transition year in 2005, awaiting the introduction of the next-generation consoles. Growth slumped to 3.3 percent, the slowest increase during the past five years. The next generation of consoles and recently introduced handheld games will spur the console/handheld market in the U.S., EMEA, Asia Pacific, and Canada, while PC games will continue to decline or see little growth in the U.S. and EMEA. The introduction of new wireless phones capable of downloading games will boost the wireless game market in the U.S., EMEA, Asia Pacific, and Canada. Overall, the video game market will expand at an 11.4 percent CAGR to $46 billion in 2010 from $27 billion in 2005.
Console Installed Base
Since the introduction of PlayStation 2 in 2000, the console has sold over 140 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. Playlogic will continue development of PlayStation2 titles, because of their large installed base of over 120 million units.
Microsoft’s Xbox360 has sold 11.6 million units so far. As of April 1, 2007 , Sony has shipped approximately 5.5 million Playstation 3 units worldwide. Nintendo’s next generation console, called ‘Wii’ has sold more than 9.27 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 47.3 million units by June 30, 2007, and PSP reached the sales volume of 25.4 million units sold as of March 31 , 2007.
PC Games
Playlogic will continue to also release PC games since, in comparison to next generation consoles games, these products are less expensive to develop, address a very wide target audience and contribute significant better margins. Furthermore Playlogic will focus on new successful platforms like the Nintendo DS and Nintendo Wii.
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.
Females are being significantly attracted to playing certain online multi-user video games that offer a more communal experience, and a small hardcore group of young females are playing aggressive games that are usually thought of as being "traditionally male" games. The most loyal fan-base is reported to be for large role-playing games (Nielsen Active Gamer Study).
According to the ESRB almost 41% of video and PC gamers are women.
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.
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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 | |||
| Gene Troopers | Cauldron (SK) | PS2, Xbox, PC | Released | |||
| Xyanide | Playlogic Game Factory (NL) | Xbox | Released (2) | |||
| Age of Pirates: Caribbean Tales | Akella (Russia) | PC | Released | |||
| Infernal | Metropolis (Poland) | PC | Released | |||
| Ancient Wars: Sparta | World Forge (Russia) | PC | Released | |||
| Xyanide Resurrection | Playlogic Game Factory (NL) | PSP | Released | |||
| Evil Days Of Luckless John | 3A Entertainment (Great Britain) | PC | Released | |||
| Xyanide: Resurrection | Playlogic Game Factory (NL) | PS2 | Released | |||
| Obscure 2 | Hydravision (F) | PC | Released (1) | |||
| Obscure 2 | Hydravision (F) | PS2 | Released (1) | |||
Under development | ||||||
| Obscure 2 | Hydravision (F) | PS2, PC, Wii | Q1 2008 (4) | |||
| Officers | GFI (Russia) | PC | Q1 2008 | |||
| Dimensity | Dagger Studio (Bulgaria) | PC | Q1 2008 | |||
| Age of Pirates: Captain Blood* | Akella (Russia) | PC | Q1 2008 | |||
| Age of Pirates: Captain Blood* | Akella (Russia) | Xbox360 | Q1 2008 | |||
| Aggression 1914 | Buka (Russia) | PC | Q1 2008 | |||
| Red Bull Break Dancing | TBC | DS | Q2 2008 | |||
| Infernal 2 | Metropolis (Poland) | TBC | Q2 2008 (5) | |||
| Xyanide: Resurrection | Playlogic Game Factory (NL) | PC | Q1 2008 | |||
| Dragon Hunters | Engine software (NL) | DS | Q1 2008 | |||
| Simon the Sorcerer 4 | RTL /Silverstyle Studio (GER) | PC | Q1 2008 | |||
| The Strategist | Humagade/Canada | DS | Q2 2008 | |||
| Undisclosed Title | Playlogic Game Factory (NL) | PS3, Xbox360, PC | Q4 2008 |
_______________
1 Released in Europe only.
2 Released in the US only
3 Released in Asia only
4 To be released in all territories/Global
5 Final decision on Next Generation options to be made.
* working title
The games industry is currently in a transition period. The current and Next Gen consoles (Xbox360, PlayStation 3, Wii) and DS platforms have broadened the market, appealing to an even larger mass consumer audience than ever before, providing increased publishing opportunities. The investments in next generation platforms are however larger than for the previous generation platforms. Playlogic has created a healthy balance between games available for the current and the next generation platforms. To spread risk and broaden Playlogic’s portfolio, PC games and handheld titles are a substantial part of the line-up for the coming year.
Material agreements
During the three months ended September 30, 2007, the Company entered into a number of publishing and distribution agreements.
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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
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
Net sales. Net sales for the nine months ended September 30, 2007 were $8,296,418 as compared to $4,593,865 for the nine months ended September 30, 2006. This increase of $3,702,553 or 81% in revenue is primarily related to the release of Infernal and Sparta Ancient Wars through our global distribution agreement with Eidos and the release of Obscure II in the third quarter of 2007.
Gross Profit. Gross profit totaled $4,758,191 for the nine months ended September 30, 2007. For the nine months ended September 30, 2006, gross profit totaled $2,001,370. This increase in gross profit is primarily the result of the increase in net sales.
Gross Profit as a percentage of sales can vary significantly from period to period due to the sales mix and the type of sales deals included.
Selling, Marketing, General and Administrative Expenses. Selling, marketing, general and administrative expenses totaled $3,689,580, for the nine months ended September 30, 2007. For the nine months ended September 30, 2006, selling, general and administrative expenses totaled $5,030,264. This represents a decrease of $1,340,684 or 27%. 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 $448,962 for the nine months ended September 30, 2007. For the nine months ended September 30, 2006, research and development totaled $2,262,975. This represents a decrease of $1,814,013 or 404%. This decrease is due to costs in relation to 3 rd party development activities being classified as Cost of Sales.
Depreciation. Depreciation expenses totaled $193,381 for the nine months ended September 30, 2007. For the nine months ended September 30, 2006, the depreciation expense totaled $226,490.
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Gain on debt restructuring. Gain on debt restructuring totaled $850,411 for the nine months ended September 30, 2007. For the nine months ended September 30, 2006, gain on debt restructuring totaled $0. The gains relate to debt extinguishments with various creditors arranged during the first nine months of the year.
Interest Expense. Interest expense totaled $1,054,659 for the nine months ended September 30, 2007. For the nine months ended September 30, 2006, interest expense totaled $611,803. This represents an increase of $442,856, or 72%. This increase in interest expense is primarily due to the increase of interest bearing short term loans during the year.
Loan penalty Expense. The nine months ending September 30, 2006 showed a penalty expense of €1 million ($1,242,000). The nine months ending September 30, 2007 show an income of €1 million ($1,377,000). The €1 million penalty charged in the third quarter of 2006 was waived in the third quarter of 2007 and is therefore shown as a profit in 2007.
Net Result. Our net profit was $1,599,170 for the nine months ended September 30, 2007. For the nine months ended September 30, 2006, the net loss totaled $8,545,307. The improvement of the result is primarily the result of new titles released to market in the first three quarters of Fiscal 2007. Furthermore the Company was able to agree settlements on certain outstanding debts that have resulted in significant gains. 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 $(582,442) for the nine months ended September 30, 2007 and $(460,639) for the nine months ended September 30, 2006.
Liquidity and Capital Resources
As of September 30, 2007, our cash balance was $317,168. Furthermore the Company recorded "Cash in escrow", amounting to $778,047which is cash being held by an attorney. These funds are subject to withdrawal by the Company at the Company's option. The full amount has been transferred to the Company’s bank account during October 2007
In order to cover our working capital requirements through the fourth 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 both private investors and institutional investors. 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 September 30, 2007 was $2,160,224.
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.
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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 nine months ended September 30, 2007, our accumulated foreign currency translation adjustment loss was approximately $3.0 million.
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 September 30, 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 third 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
In June 2007, Playlogic Entertainment Inc. was sued in class action before the US district court in Manhattan, with respect to alleged damage as a result of copy protection software included in Age of Pirates – Caribbean Tales. We do not foresee any liability in this matter, as plaintiffs have clearly sued the wrong company and the wrong entity. Playlogic acts only as a publisher of the game and therefore is not liable for possible faults in production or distribution. Moreover, as far as any claim could be brought against Playlogic, it would be the Dutch subsidiary Playlogic International NV, with its statutory seat in Amsterdam, The Netherlands, that would have to be sued. As a consequence, the pending case should fail on both grounds and any new action against the Dutch subsidiary would have to be brought before the Dutch courts that are even more likely than the US courts to reject class actions like this.
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 2006 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.
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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: | ||||
| 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. |
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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.
Playlogic International, Inc. | ||
| Date: November 6, 2007 | By: | /s/ Willem M. Smit 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. |
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