UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2008
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FROM THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER: 000-49649
PLAYLOGIC ENTERTAINMENT, INC.
(Name of Small Business Issuer in Its Charter)
| Delaware | 23-3083371 |
| (State or other Jurisdiction of | (I.R.S. Employer |
| Incorporation or Organization) | Identification No.) |
World Trade Centre C-Tower 10th Floor Strawinskylaan 1041 Amsterdam The Netherlands | 1077 XX |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number: (011) 31-20-676-0304
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "accelerated filer, large accelerated filer and smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | | Accelerated filer | | Non-accelerated filer (Do not check if a smaller reporting company) | | Smaller reporting company ý |
Indicate by check mark whether the registrant is a shell company (as defined in the Rule 12b-2 of the Act). Yes No ý
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant's most recently completed second fiscal quarter was approximately $46,718,123.
As of March 31, 2009, there were 46,743,450 shares of the Registrant's common stock outstanding.
PLAYLOGIC ENTERTAINMENT ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
TABLE OF CONTENTS
| PART I | | Page |
| Item 1. | Business | 3 |
| Item 1A. | Risk Factors | 11 |
| Item 2. | Property | 18 |
| Item 3. | Legal Proceedings | 18 |
| Item 4. | Submission of Matters to a Vote of Security Holders | 19 |
| | | |
| PART II | | |
| Item 5. | Market for Registrant’s Common Equity, Related Shareholder Matters and Small Business Issuer Purchases of Equity Securities | 19 |
| Item 6. | Management’s Discussion and Analysis | 22 |
| Item 7. | Financial Statements | 22 |
| Item 8. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 27 |
| Item 9. | Directors and Executive Officers of the Registrant; Compliance with Section 16(a) of the Exchange Act | 27 |
| Item 9A. | Controls and Procedures | 27 |
| Item 9B. | Other Information | 27 |
| | | |
| PART III | | |
| | | |
| Item 10. | Executive Compensation | 28 |
| Item 11. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters | 32 |
| Item 12. | Certain Relationships and Related Transactions | 35 |
| Item 13. | Exhibits and Financial Statement Schedules | 35 |
| Item 14. | Principal Accounting Fees and Services | 35 |
| Item 15. | Exhibits | 36 |
ITEM 1. BUSINESS
Caution Regarding Forward-Looking Information
Certain statements contained in this Annual Report including, without limitation, statements containing the words "believes", "anticipates", "expects" and words of similar import, constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
Such factors include, among others, the following: international, national and local general economic and market conditions: demographic changes; the ability of the Company to sustain, manage or forecast its growth; the ability of the Company to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Annual Report and investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
Background
Playlogic Entertainment, Inc. was incorporated in the State of Delaware in May 2001, when its name was Donar Enterprises, Inc. Initially, our plan was to engage in the business of converting and filing registration statements, periodic reports and other forms of small to mid-sized companies with the U.S. Securities and Exchange Commission electronically through EDGAR. We had limited operations until June 30, 2005, when we entered into a share exchange agreement with Playlogic International N.V., a corporation formed under the laws of The Netherlands that commenced business in 2002, and its shareholders. Pursuant to this agreement, the former shareholders of Playlogic International became the owners of over approximately 91% of our common stock, as described below. Playlogic International has become our wholly-owned subsidiary and represents all of our commercial operations.
On June 30, 2005, we entered into a share exchange agreement with Playlogic International N.V. and Playlogic International's shareholders whereby all of the Playlogic International shareholders exchanged all of their ordinary shares (which are substantially similar to shares of common stock of a U.S. company) and priority shares (which are substantially similar to shares of preferred stock of a U.S. company) of Playlogic International for 21,836,924 shares of our common stock. Pursuant to the share exchange agreement, the former shareholders of Playlogic International received approximately 91.0% of our outstanding common stock. Of the 21,836,924 shares of Playlogic Entertainment issued in the share exchange, 1,399,252 were placed in escrow with the Company’s stock transfer agent, Securities Transfer Corporation, as escrow agent. Following review by our auditors and our filing of the financial statements of the first quarter of 2006 these 1,399,252 shares in escrow were released to Halter Financial Group, Inc. and its affiliates or their assigns.
On August 2, 2005, Donar Enterprises Inc. merged with and into a wholly owned subsidiary named Playlogic Entertainment, Inc. In connection with the merger, Donar's name was changed to Playlogic Entertainment, Inc. Playlogic Entertainment, Inc. was formed specifically for the purpose of effecting the name change.
In this annual report, "Playlogic Entertainment," the "Company," "we," "us" and "our" refer to Playlogic Entertainment, Inc. and, unless the context otherwise indicates, our subsidiary Playlogic International N.V. and/or its subsidiary Playlogic Game Factory B.V.
General
Our principal business office is located at the World Trade Centre, C-Tower 10th Floor, Strawinskylaan 1041, 1077 XX Amsterdam, The Netherlands, and our telephone number at that address is 31-20-676-0304.
Our corporate web site is www.playlogicgames.com. The information found on our website is not intended to be part of this annual report and should not be relied upon by you when making a decision to invest in our common stock.
Playlogic is a publisher of interactive entertainment products, such as video game software and other digital entertainment products. We publish on all 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. Owning our Intellectual Properties increases the value of our company as our portfolio increases every quarter with new titles published.
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 or at a time agreed with our distributors. Moreover, starting in 2008 we will be selling our products online through our own website in a specifically designed store. Both digital downloads as well as finished products will be available to consumers on the Playlogic website.
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, market conditions, technology used, track record and human resources of the studio, production pipeline and project management skills.
We select which games we develop, based on our analysis of consumer trends and behavior and our experience with similar or competitive products. Full due diligence and a financial risk analysis / assessment are part of this process. 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 total unit sales per SKU with just a marginal augmentation in development time, resources and associated costs.
We believe that greater online functionality and the vast processing capabilities, as well as the new casual games with simplified controls (i.e. Nintendo Wii, Nintendo DS, Playstation 3 Sixaxis and Playstation Eye) of the new platforms will further increase the total world wide installed base, diversifying the consumer base 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.
The games industry has gone through 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 marginally 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, both Next Gen titles for the Playstation 3, Xbox 360 and Nintendo Wii as well as PC games and handheld titles are all part of the line-up for the coming year.
As the console transition from ‘past’ to ‘next’ has been in progress over the past two years Playlogic will focus more of it’s publishing portfolio on console titles for the current platforms. With the Increased console installed base Playlogic will shift its focus from publishing PC and console titles to simultaneous multi platform console releases as primary and PC as secondary.
The ‘next’ generation began in 2004, when Nintendo developed the DS platform as a successor to the Game Boy Advance, with a touch screen allowing the user to interact with video game content in a different way. Few observers appreciated that that the Nintendo DS signaled a change in gameplay that would have a lasting impact on the industry. Sony followed with the Playstaion Portable (PSP) in early 2005, with Microsoft launching the Xbox360 later that year. In late 2006 Sony and Nintendo launched the PS3 and Wii, respectively and the next generation was in full gear. Although the last of these launches completed the beginning of the next generation cycle, they by no means marked the end of the current cycle. Both Sony and the software publishers managed software growth in 2006 both by extending the value of the deep catalog of ‘legacy’ software and by continuing to develop for the Playstation 2.
Since the introduction of the Playstation 2 in October 2000, the installed base of current generation hardware (PS2, Gamecube, Xbox) reached over 130 million units in the US and Europe alone. Total console and handheld software sales have grown from $6 billion in the US and Europe in 2000 to $12.2 billion 2006, representing a compound annual growth rate of 11%. It is expected this growth rate will accelerate to almost 20% over the next three years, even though partially offset by declining PC sales, unprecedented levels of software sales are anticipated.
Nintendo is off to a strong early start with its Wii console. The company has chosen to forego competition based solely on microprocessor speed and graphics capability, and instead has chosen to emphasize game play and an innovative control mechanism.
The differentiating features of the Xbox360 and the PS3 is the ability to display game content in high definition (1080p). In contrast to past cycles, it is believed that that the high definition features of the next generation consoles will result in slower adoption by the masses, at least until the penetration of HD monitors accelerates. In prior console cycles, new consoles were compatible with standard format televisions, so the only hardware required was the console itself. While the next generation of consoles will operate satisfactorily on normal 4:3 format televisions, most games for the PS3 and Xbox360 are designed for 16:9 formats in high definition. It is expected that ultimately most console purchasers will desire the full benefits of the next generation experience, and that most consumers will defer buying a PS3 or Xbox360 until they have purchased an HD monitor. Nintendo is well positioned to exploit the slower adoption of next generation technology, as its Wii console does not require an HD monitor. Accordingly, it is expected that overall console adoption will be slower in the next cycle than in the past, with slower sales of the PS3 and Xbox360 compared to their predecessors, partially offset by more robust sales of the Wii compared to the Gamecube (Source: WedBush Morgan Securities: Industry report May 2007)
Market Trends - Worldwide
The Xbox360 and the PS3 are far more similar than their predecessors were and the economics of game development will serve as a discentive to third party publishers to offer exclusive content for either console. The similarity between the two platforms will likely serve to lower the cost of porting from one platform to another. It is to be expected that virtually all games developed for one of these platforms will also be ported to the other. The lack of differentiation between the PS3 and the Xbox 360 allows the Wii to gain a competitive advantage, due to its different controls and relatively simple components, publishers are required to develop a special SKU for the Wii, further differentiating the console. Due to its superior library of first party titles and low price, Nintendo’s Wii has the greatest share of the hardware market (46 million units sold as of the end of 2008)..
Although it is expected that digital content offers the potential for tremendous growth, it is not expected that there will be a significant earnings contribution from sales of digital content for a few years. (Source: WedBush Morgan Securities: Industry report May 2007)
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.
Microsoft’s Xbox360 has sold more than 28 million units so far. Sony sold almost 20 million units of its Playstation 3.Nintendo’s next generation console, called ‘Wii’ has been sold 46 million units so far.
Nintendo Dual Screens (‘Nintendo DS’) and PlayStation Portable (‘PSP’) were both successfully introduced to the market. The sales volume of the Nintendo DS reached 98 million units by the end of December 2008, and PSP reached the sales volume of 44 million units by the end of the same period.
Several Demographic trends and fundamental market drivers will determine the the size of the interactive entertainment software market. The most compelling of these include the widening age demographic of the interactive game consumer, rapid growth of teen and twenty-something population, Growth of the female gamer market, penetration of Nintendo Wii among people over 40, and the increasing disposable incomes of teens and pre-teens. The trends will continue to drive sales growth in both the hardware and software sectors.
The primary driver behind the industry’s growth is the dramatic expansion in age profile of the interactive game consumer.
The first mass-market generation of interactive consumers (and now the oldest) started playing video games with the release of the Atari home console during the late 1970s. It is estimated that the age range of consumers in this period was approximately between 8-20. Since the 1970s succeeding generations of video game consumers have embraced more advanced systems and complex technology. Some older consumers drop out of the market each year, replaced by a large number of children receiving their first DS or Playstation consoles. The mean number of the original generation of ‘Atari Kids’ is now approaching 40, with an emerging group of ‘Nintendads’ right behind them and many still play games on PC or home consoles. The age demographic of 90% of the gamers is believed to be in the range of 6- 40 years of age, dramatically older than the 1970s generation.
As the high end of the gamer age range increases, the number of overall video game consumers continues to increase . More important, people over 22 typically are employed, and have a significant amount of disposable income. People in their 20s are also generally quite self-indulgent, and we believe that they are willing to spend a large portion of their disposable income on entertainment. As the average age of video game consumers expands beyond 22, it is expected to see an acceleration in the spending per user. This phenomenon differentiates the next generation console cycle from past cycles.
There will be a continuing expansion of the age demographic for at least another 20 years, as the oldest gamers stay interested in games well into their 60s and children continue to embrace games.
Female Market
The largest area of future growth is likely to be the female market. Over the next two years the ‘mass market’ phase of the current console cycle should segue into the ‘casual’ phase of the next generation cycle. Accordingly, it is expected to see an overall industry wide trend towards games with non-violent focus. As more games target mass-market, it is expected that the trend toward more female gamers to continue. It is estimated that currently only 31% of all primary gamers in households are female. The Entertainment Software Association (ESA) estimates that female users (either primary or secondary) make up only 35% of the console market and 43% of the PC market. An increase of 5% penetration in these platform compositions by female gamers could translate into as much as $1 billion of incremental annual revenues to the industry each year. (Source: WedBush Morgan Securities: Industry report May 2007)
| | | | | | | (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 (1) |
| Age of Pirates: Caribbean Tales | | Akella (Russia) | | PC | | Released Q3 2006 |
| Infernal | | Metropolis (Poland) | | PC | | Released Q1 2007 |
| Ancient Wars: Sparta | | World Forge (Russia) | | PC | | Released Q2 2007 |
| Xyanide Resurrection | | Playlogic Game Factory (NL) | | PSP | | Released Q3 2007 |
| Evil Days Of Luckless John | | 3A Entertainment (Great Britain) | | PC | | Released Q3 2007 |
| Xyanide: Resurrection | | Playlogic Game Factory (NL) | | PS2 | | Released Q3 2007 |
| Obscure 2 | | Hydravision (F) | | PC | | Released Q3 2007 |
| Obscure 2 | | Hydravision (F) | | PS2 | | Released Q3 2007 |
| Obscure 2 | | Hydravision (F) | | Wii | | Released Q1 2008 |
| Xyanide: Resurrection | | Playlogic Game Factory (NL) | | PC | | Released Q1 2008 |
| Dragon Hunters | | Engine software (NL) | | DS | | Released Q1 2008 |
| Aggression 1914 | | Buka (Russia) | | PC | | Released Q1 2008 |
| Dimensity | | Dagger Studio (Bulgaria) | | PC | | Released Q2 2008 |
| Red Bull Break Dancing | | Smack Down Productions (F) | | DS | | Released Q2 2008 |
| Simon the Sorcerer 4 | | RTL /Silverstyle Studio (GER) | | PC | | Released Q2 2008 |
| Worldshift | | RTL Games (Germany) | | PC | | Released Q2 2008 |
| Stateshift | | Engine Software (NL) | | PC | | Released Q2 2008 |
| Building & Co | | Electrogames (F) | | PC | | Released Q3 2008 |
| | | | | | | |
| | | | | | | |
| Under development | | | | | | |
| Vertigo | | Icon Games Entertainment Ltd (GB) | | PC, Wii | | Q1 2009 |
| Pool Hall Pro | | Icon Games Entertainment Ltd (GB) | | PC, Wii | | Q1 2009 |
| Sudoku Ball Detective | | White Bear (NL) | | Wii/PC/DS | | Q2 2009 |
| Age of Pirates 2: City of abandoned ships | | Akella (Russia) | | PC | | Q1 2009 |
| Infernal returns | | Metropolis (Poland) | | Xbox360 | | Q2 2009 |
| Obscure 2 | | TBA | | DS | | Q2 2009 |
| Undisclosed Title | | TBA | | DS, PC | | Q3 2009 |
| Undisclosed Title | | TBA | | Xbox360, PC | | Q3 2009 |
| TCFU | | Engine Software (NL) | | DS | | Q3 2009 |
| TCFU | | Revisotronic | | PC, PS2, Wii, | | Q3 2009 |
| Zooloretto | | White Bear (NL) | | PC, Wii, DS | | Q3 2009 |
| Undisclosed Title | | TBA | | Wii, DS | | Q3 2009 |
| Fairytale Fights | | TBA | | PS3, Xbox360, PC | | Q4 2009 |
| Undisclosed Title | | TBA | | PS3, Xbox360, PC | | Q1 2010 |
| The Strategist | | Humagade/Canada | | DS | | Q2 2010 |
______________
1 Released in the US only
Material agreements
We entered into the following material agreements in the fiscal year ended December 31, 2008:
Sudoku Ball Detective: On November 24, 2008, we announced the acquisition of Sudoku Ball ™ Detective on Wii, DS and PC to be released in Q2 2009.
Sony development agreement. On October 27, 2008, we announced that we continued our collaboration with Sony Computer Entertainment Europe (SCEE). The project will be developed at Playlogic’s in-house studio Playlogic Gamefactory BV over a period up to mid 2009. The scope and content of the project will remain undisclosed until further notice by SCEE Ltd.
Microsoft Xbox 360 license. On October 15, 2008, we received the worldwide publishers license on the Xbox 360.
Fairytale Fights. On August 19, 2008, we announced that our in-house studio Playlogic Gamefactory B.V. is working on Fairytale Fights. Fairytale Fights is planned for a Q4 2009 release and will be available on PS3, Xbox360 and PC.
$3.0 million in equity: On June 27, 2008, we successfully closed a $3.0 million in equity through a private placement. This raise was made with accredited investors based in the Netherlands.
Building & Co. On June 24, 2008, we announced the acquisition of the strategic management sim Building & Co. co-produced by Palludio Games, Elektro Games and Creative Patterns. The game is planned to be released in Q3 2008.
PlayV Ltd Joint-Venture. On May 29, 2008, we announced the set up of a joint-venture with Virgin Play S.A. The joint-venture is called PlayV Ltd and holds office in Luton, United Kingdom. PlayV Ltd, a sales, marketing and distribution business, will bring PC, console and handheld products from both parties to the UK market and also offer flexible pro-active PR, marketing and sales solutions to additional development and publishing partners looking to penetrate the UK retail market with their products.
Worldshift. On April 25, 2008, we announced the acquisition of the real time strategy game Worldshift for PC from the German publisher Black Inc , a label of RTL Games. Worldshift will be released in Q2 2008.
$7.0 million equity and loan. On March 20, 2008, we announced the private placement of $3.0 million in equity and $4.0 million in a long-term loan with accredited investors in the Netherlands. The loan bears an annual interest of 7% and has a 2.5 year term.
Dragon Hunters. On March 14, 2008, we announced that Dragon Hunters for Nintendo DS would be released in April 2008.
Sales and Distribution
Our sales expectations for each game are based mostly upon similar or competitive products and the success that those products have achieved. We also work with our distributors to generate realistic unit sales figures and revenues based upon their experience, and after giving presentations to and consulting with the retail stores in each of our global territories.
Generally, we aim to release our titles simultaneously across a range of hardware formats, rather than exclusively for one platform. We believe this allows us to spread the development risk and increase the sales potential, with only a minimal increase in development time and resources spent.
We seek to increase sales and maximize profit potential of all our games by reducing the wholesale and recommended retail prices of our products at various times during the life of a product. Price reductions may occur at anytime in a product's life cycle, but we expect they will typically occur six to nine months after a product's initial launch. We also employ various other marketing methods designed to promote consumer awareness and sales, such as attendance at trade and consumer shows, and we intend to organize in-store promotions, point of purchase displays and co-operative advertising.
Playlogic games are distributed worldwide by local distribution partners. Distribution costs per game are low since Playlogic does not have the costs of a physical distribution network of its own.
In each territory Playlogic decides on strategic partners for physical distribution of a game. This distribution partner must have all necessary listings at local retail.
Playlogic delivers finished manufactured products to distribution partners. Delivery of finished products instead of licensing a game enables Playlogic to a much higher margin and quality control. In emerging markets Playlogic’s games are manufactured under licenses held by local distribution partners. In countries in which we currently do not have a console publishing license, we enter into co-publishing arrangements with our business partners, who manufacture, finalize and distribute the finished games to the retail stores.
Local distribution partners of Playlogic sell and deliver the games to retail stores and take care of reorders. Playlogic’s local distribution partners only get rights of offline distribution on the manufactured products.
We retain all rights of further exploitation of a digital entertainment product such as digital distribution, OEM-/Premium sales, and merchandising.
Worldwide major games portals and platforms will offer Playlogic’s products for Games-on-Demand and Purchase-by-Download. To play games on demand end-users pay for a time limited access to a package of games a monthly subscription, similar to video rental stores in the past. Playlogic games are offered as well for purchase by download. The end user has the choice between trying the game for a limited time (for instance one hour) before buying or direct download. The time limitation is defined by us for each game individually dependent on the genre. Hosting and payment fulfillment are completed by external technology partners.
Playlogic will pursue a variety of digital distribution strategies for delivering entertainment products to the end-user, including mobile games, in-flight entertainment, and set-top boxes.
Furthermore, in 2009 Playlogic will be selling their products online through our own website in a specifically designed store. Both digital downloads as well as finished products will be available to consumers on the Playlogic website.
Competition
Competition in the entertainment software industry is based on product quality and features, brand name recognition, access to distribution channels, effectiveness of marketing and price. We compete for both licenses and game sales with the other international games publishing houses, including Electronic Arts, Take Two Interactive, Activision, THQ and Ubisoft. Many of our competitors have greater financial, technical and personnel resources than we do and are able to carry larger inventories and make higher offers to licensors and developers for commercially desirable properties than we can. Further, many of our competitors, including the ones mentioned above, have the financial resources to withstand significant price competition and to implement extensive advertising and marketing campaigns.
Retailers have limited shelf space and promotional resources, and an increasing number of games titles compete for adequate levels of shelf space and promotional support: the competition is intense. We expect competition for retail shelf space to continue to increase, which may require us to increase marketing expenditures to maintain our current levels of sales.
Competitors with more extensive ranges and popular titles may have greater bargaining power with retailers. Accordingly, we may not be able to achieve the levels of support or shelf space that such competitors receive. Similarly, as competition for popular properties increase, our cost of acquiring licenses for such properties is also likely to increase, possibly resulting in reduced margins. Prolonged price competition, increased licensing costs or reduced margins would cause our profits to decrease.
We have an advantage over our competitors concerning digital distribution; we do not have our own physical distribution network. Therefore we can easily switch to digital distribution, whereas our peers need to use its existing physical distribution network as well. For instance, the agreement we signed in February 2006 with Macrovision illustrates Playlogic’s strategic focus on digital distribution in the future. We signed the agreement with Macrovision’s Trymedia Games division for the digital distribution of Playlogic’s entertainment products. As a leading secure digital distribution services provider and operator of the world's largest distribution network for downloadable games, Macrovision will distribute selected Playlogic products on its network. We will also incorporate the Trymedia technology into our recently re-launched website www.playlogicgames.com , offering customers easy and secure access to some of its latest game releases, as well as the option to try-before-you-buy selected titles.
Intellectual Property
Like other entertainment companies, our business is based on the creation, acquisition, exploitation and protection of intellectual property. Each of our products embodies a number of separately protected intellectual properties. Our products are copyrighted as software, our product names are trademarks of ours and our products may contain voices and likenesses of third parties or the musical compositions and performances of third parties. Our products may also contain other content licensed from third parties, such as trademarks, fictional characters, storylines and software code.
Our products are susceptible to unauthorized copying. Our primary protection against unauthorized use, duplication and distribution of our products is copyright and trademark. We typically own the copyright to the software code as well as the brand or title name trademark under which our products are marketed.
Our business is dependent on licensing and publishing arrangements with third parties, and if we cannot continue to license popular properties on commercially reasonable terms, our business could be harmed. Our software may be subject to legal claims that could be costly and time consuming and cause a material adverse effect on our business. Acquiring licenses to create games based on movies could be very expensive. If we spend a significant amount of resources to acquire such licenses and the resulting games are not successful, our business may be materially harmed.
We own or have licensed trademarks and copyrights of the following games:
| | | Games | Platform | Area |
| 1. | | Alpha Black Zero | PC | Worldwide |
| 2. | | Airborne Troops | PS2 | Worldwide |
| | | | PC | Worldwide |
| 3. | a. | Xyanide Resurection | PSP | Worldwide |
| | b. | Xyanide Mobile | Mobile Phones | Worldwide |
| 4. | | Cyclone Circus | PS2 | Worldwide |
| 5. | | World Racing 2 | PS2 | Worldwide |
| | | | Xbox | Worldwide |
| | | | PC | Worldwide |
| 6. | | Knights of the Temple 2 | PS2 | Worldwide |
| | | | Xbox | Worldwide |
| | | | PC | Worldwide |
| 7. | | Gene Troopers | PS2 | Worldwide |
| | | | Xbox | Worldwide |
| | | | PC | Worldwide |
| 8. | | Age of Pirates: Caribbean Tales | PC | Worldwide (1) |
| 9 | | Ancient Wars: Sparta | PC | Worldwide (2) |
| 10. | | Infernal | PC, Xbox360 | Worldwide (3) |
| 11. | | Evil days of Luckless John | PC | Worldwide |
| 12. | | Obscure2 | PC,PS2,Wii | Worldwide |
| 13. | | Fairytale Fights | PS3, Xbox360, PC | Worldwide |
| 14. | | Age of Pirates 2: City of Abandoned Ships | PC | Worldwide |
| 15 | | Dimensity | PC | Worldwide |
| 16. | | Young Archeologists | DS | Worldwide |
| 17. | | Crazy Garage | DS | Worldwide |
| 18. | | The Strategist | PC, Wii, DS | Worldwide |
| | | | | |
_____________
(1) Excluding former USSR, Poland, Check, Slovak and South Africa
(2) Excluding former USSR
(3) Excluding Japan, former USSR
Employees
As of December 31, 2008, we employed 90 full-time employees and 6 part-time employees. All of our employees are based in the Netherlands and have executed employment agreements with us, which are governed by the law of the Netherlands. Substantially all of the employment contracts are running for an indefinite period of time. As to the senior executives mentioned under Item 10, the Company may terminate the employment upon a six-month notice, and a senior executive may terminate the employment upon a three-month notice. As to non-executive employees, the Company may terminate the employment upon a two-month notice, and the employee may terminate the employment upon a one-month notice. We are obliged to continue to pay base salary and fringe benefits to our employees during the notice period. We typically pay an annual base salary and allow our staff certain benefits. Our employees are entitled to 26 vacation days a year. 13 of our employees are entitled to a company car. Two of our senior non-Dutch executives are entitled to receive allowances for housing, and home leave travel cost. With the exception of the disclosures made under Item 10, we did not grant any bonuses during 2007. Under Dutch law, we are obliged to pay the employees in the event of illness 100% of base salary from the first day of illness reporting for a maximum period of 52 weeks, calculated from this first day of illness. After the lapse of the period of 52 weeks, we pay 70% of the base pay during a period with a maximum of 52 weeks counted from the first day of the 53rd week following the date of illness reporting. We currently do not have any pension plan or other retirement schedule. The costs associated with employer’s contribution to the Dutch social security system are per employee in the range of 15% of annual base pay.
ITEM 1A. RISK FACTORS
An investment in our common stock involves substantial risks and uncertainties and our actual results and future trends may differ materially from our past performance due to a variety of factors, including, without limitation, the risk factors identified below. The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition would suffer. In that event, the trading price of our common stock could decline, and our shareholders may lose part or all of their investment in our common stock. The discussion below and elsewhere in this report also includes forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements as a result of the risks discussed below.
WE HAVE A LIMITED OPERATING HISTORY, WE HAVE EXPERIENCED LOSSES IN PRIOR YEARS AND WE MAY NOT BE ABLE TO MAINTAIN PROFITABILITY ON A CONSISTENT BASIS.
We commenced operations in April 2002. Accordingly, we have a limited operating history and our business strategy may not be successful. Our failure to implement our business strategy or an unsuccessful business strategy could materially adversely affect our business, financial condition and operations.
For the year 2008 we recorded net revenue of $9.0 million and showed a net loss of $9.5 million. We had a net consolidated profit in 2007of $0.7 million and net consolidated losses of $12,548,400 in 2006, $9,674,004 in 2005, $20,162,853 in 2004, $7,657,536 in 2003 and $2,199,945 in 2002. The net consolidated losses of $20,162,853 in 2004 included a one-time expense of $9,824,400 related to the grant of options to some of our shareholders in 2004.
We may not be able to be profitable on a consistent basis. The report of Playlogic's independent auditors on the December 31, 2008 financial statements include an explanatory paragraph indicating there could be uncertainties about Playlogic's ability to continue as a going concern.
WE ARE DEPENDENT ON FINANCING BY THIRD PARTIES, AND IF WE ARE NOT ABLE TO OBTAIN THE NECESSARY FINANCING FOR OUR OPERATIONS, OUR BUSINESS WILL BE SIGNIFICANTLY HARMED, AND WE MAY NEED TO CEASE OPERATIONS.
We expect that our current cash balance and cash generated from operations will be sufficient to cover our working capital costs through the second quarter of 2008. We will need to obtain additional financing from third parties. We expect our capital requirements to increase over the next several years as we continue to develop new products, 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 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. The Company is currently in the process of increasing the liquidity of the Company. If we do not obtain the necessary financing in the future, this could impact our results.
MANY OF OUR TITLES HAVE SHORT LIFECYCLES AND MAY FAIL TO GENERATE SIGNIFICANT REVENUES .
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, our profitability depends upon our 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 our ability to introduce and sell our software could adversely affect our future operating results.
A SIGNIFICANT PORTION OF OUR REVENUES ARE DERIVED FROM A LIMITED NUMBER OF TITLES. IF WE FAIL TO DEVELOP NEW, COMMERCIALLY SUCCESSFUL TITLES, OUR BUSINESS MAY BE HARMED.
For the year ended December 31, 2008, three titles, Obscure II, Dragon Hunters and Red Bull BC One accounted for approximately 41% of our revenues. For the year ended December 31, 2007 three titles, Ancient Wars: Sparta, Infernal and Obscure II accounted for approximately 60% of our revenues. For the year ended December 31, 2006, two titles, Age of Pirates: Caribbean Tales and World Racing 2, accounted for approximately 60% of our revenues for the year ended December 31, 2005, three titles, World Racing 2, Gene Troopers, Knights of the Temple 2 accounted for approximately 60% of our revenues. For the year ended December 31, 2004, one title, Alpha Black Zero accounted for 100% of our revenues. We did not have any revenue in 2003 or 2002. Our future titles may not be commercially viable. We also may not be able to release new titles within scheduled release times or at all. If we fail to continue to develop and sell new, commercially successful titles, our revenues and profits may decrease substantially and we may incur losses.
OUR BUSINESS IS DEPENDENT ON LICENSING AND PUBLISHING ARRANGEMENTS WITH THIRD PARTIES, AND IF WE CANNOT CONTINUE TO LICENSE POPULAR PROPERTIES ON COMMERCIALLY REASONABLE TERMS, OUR BUSINESS WILL BE HARMED.
Our success depends on our ability to identify and exploit new titles on a timely basis. We have entered into agreements with third parties to acquire the rights to publish and distribute interactive entertainment software. These agreements typically require us to make advance payments, pay royalties and satisfy other conditions. Our advance payments may not be sufficient to permit developers to develop new software successfully. In addition, software development costs, promotion and marketing expenses and royalties payable to software developers have increased significantly in recent years and reduce the potential profits derived from sales of our software. Future sales of our titles may not be sufficient to recover advances to software developers and we may not have adequate financial and other resources to satisfy our contractual commitments. If we fail to satisfy our obligations under these license agreements, the agreements may be terminated or modified in ways that may be burdensome to us. Our profitability depends upon our ability to continue to license popular properties on commercially feasible terms. Numerous companies compete intensely for properties and we may not be able to license popular properties on favorable terms or at all in the future.
ACQUIRING LICENSES TO CREATE GAMES BASED ON MOVIES MAY BE VERY EXPENSIVE. IF WE SPEND A SIGNIFICANT AMOUNT OF RESOURCES TO ACQUIRE SUCH LICENSES AND THE RESULTING GAMES ARE NOT SUCCESSFUL, OUR BUSINESS MAY BE MATERIALLY HARMED.
Many current video game titles are based on popular motion pictures. Some of these games have been successful, but many have not. We do not have any such games in the development stage as of yet.
WE ARE EXPOSED TO SEASONALITY IN THE PURCHASES OF OUR PRODUCTS AND IF WE FAIL TO RELEASE PRODUCTS IN TIME DURING PERIODS OF HIGH CONSUMER DEMAND, SUCH AS THE HOLIDAYS, OUR REVENUES MAY BE NEGATIVELY AFFECTED.
The interactive entertainment software industry is highly seasonal, with the highest levels of consumer demand occurring during the year-end holiday buying season. Additionally, in a platform transition period, sales of game console software products can be significantly affected by the timeliness of the introduction of game console platforms by the manufacturers of those platforms, such as Sony, Microsoft and Nintendo. The timing of hardware platform introduction is also often tied to holidays and is not within our control. If a hardware platform is released unexpectedly close to the holidays, this would result in a shortened holiday buying season and could negatively impact the sales of our products. Delays in development, licensor approvals or manufacturing can also affect the timing of the release of our products, causing us to miss key selling periods such as the year-end holiday buying season.
WE CONTINUALLY NEED TO DEVELOP NEW INTERACTIVE ENTERTAINMENT SOFTWARE FOR VARIOUS OPERATING SYSTEMS AND IF DEVELOPERS OF OPERATING SYSTEMS FACE FINANCIAL OR OPERATIONAL DIFFICULTIES, WE MAY NOT BE ABLE TO RELEASE OUR TITLES AND MAY INCUR LOSSES.
We depend on third-party software developers and our internal development studios to develop new interactive entertainment software within anticipated release schedules and cost projections. Many of our titles are externally developed. If developers experience financial difficulties, additional costs or unanticipated development delays, we will not be able to release titles according to our schedule and may incur losses.
The development of new interactive entertainment software is a lengthy, expensive and uncertain process. Considerable time, effort and resources are required to complete development of our proposed titles. We have in the past and may in the future experience delays in introducing new titles. Delays, expenses, technical problems or difficulties could force the abandonment of or material changes in the development and commercialization of our proposed titles. In addition, the costs associated with developing titles for use on new or future platforms may increase our development expenses.
DEVELOPING GAMES FOR THE NEXT GENERATION GAME CONSOLES BY SONY, MICROSOFT AND NINTENDO WILL LIKELY BE MORE EXPENSIVE AND TIME CONSUMING FOR US AND OUR STUDIOS. IF WE ARE NOT ABLE TO PRODUCE GAMES FOR THESE CONSOLES IN A COST-EFFECTIVE MANNER, OUR BUSINESS MAY BE SIGNIFICANTLY HARMED.
Each of Sony, Nintendo and Microsoft are expected to release next generation game consoles in the next few years. These new consoles will likely be more powerful, and games for these consoles will have greater graphics and features. With this increased power and capabilities, there are likely to be increased costs to develop games and it is likely that each game will need larger development teams. Budgets for next generation games are likely to be twice those of games for current consoles and development teams may need to increase three-fold. The rising costs may make it prohibitively expensive for small game publishers like us to take the risk of creating new, unproven games. If we cannot create games for the next generation consoles in a cost effective manner, our business is likely to be significantly harmed. WE DEPEND ON SONY, NINTENDO AND MICROSOFT FOR THE MANUFACTURING OF PRODUCTS THAT WE DEVELOP FOR THEIR HARDWARE PLATFORMS. ACCORDINGLY, ANY OF THEM COULD CAUSE UNANTICIPATED DELAYS IN THE RELEASE OF OUR PRODUCTS AS WELL INCREASES TO OUR DEVELOPMENT, MANUFACTURING, MARKETING OR DISTRIBUTION COSTS, WHICH COULD MATERIALLY HARM OUR BUSINESS AND FINANCIAL RESULTS.
Generally, when we develop interactive entertainment software products for hardware platforms offered by Sony, Nintendo or Microsoft, the products are manufactured exclusively by that hardware manufacturer or their approved replicator. We pay a licensing fee to the hardware manufacturer for each copy of a product manufactured for that manufacturer's game platform.
The agreements with these manufacturers include certain provisions such as approval rights over all products and related promotional materials and the ability to change the fee they charge for the manufacturing of products, that allow them substantial influence over our costs and the release schedule of our products. In addition, since each of the manufacturers is also a publisher of games for its own hardware platforms and manufactures products for all of its other licensees, a manufacturer may give priority to its own products or those of our competitors in the event of insufficient manufacturing capacity. Accordingly, Sony, Nintendo or Microsoft could cause unanticipated delays in the release of our products as well increase our development, manufacturing, marketing or distribution costs, which could materially harm our business and financial results.
WE PARTLY DEPEND ON INDEPENDENT DEVELOPERS, AND WE MAKE ADVANCE PAYMENTS TO THEM PRIOR TO THE COMPLETION OF THE PRODUCT. THERE IS NO ASSURANCE THAT WE CAN RECOUP THESE PAYMENTS IF WE DO NOT ACCEPT THE PRODUCT FROM A THIRD PARTY DEVELOPER.
We make advance payments to independent software developers prior to completion of the games, which are for the development of intellectual property related to our games. The advance payments become due when the developer meets agreed milestones.
Upon termination of the contract for any reason prior to the completion of a game, the advance payments are repayable by the independent software developers, who then remain the sole owner of the source material and intellectual property. These advance payments that are due prior and after completion of the product are partly capitalized and expensed as cost of goods sold at the higher of the contractual or effective royalty rate based on net product sales. However, there is no assurance that the independent developer will return the advance payments to us, and if they do not, our business may suffer.
WE MAY FAIL TO ANTICIPATE CHANGING CONSUMER PREFERENCES, AND IF WE DO, OUR RESULTS OF OPERATIONS MAY BE MATERIALLY HARMED.
Our business is speculative and is subject to all of the risks generally associated with the interactive entertainment software industry, which has been cyclical in nature and has been characterized by periods of significant growth followed by rapid declines. Our future operating results will depend on numerous factors beyond our control, including:
| | · | the popularity, price and timing of new software and hardware platforms being released and distributed by us and our competitors; |
| | · | international, national and regional economic conditions, particularly economic conditions adversely affecting discretionary consumer spending; |
| | · | changes in consumer demographics; |
| | · | the availability of other forms of entertainment; and |
| | · | critical reviews and public tastes and preferences, all of which change rapidly and cannot be predicted. |
In order to plan for acquisition and promotional activities we must anticipate and respond to rapid changes in consumer tastes and preferences. A decline in the popularity of interactive entertainment software or particular platforms could cause sales of our titles to decline dramatically. The period of time necessary to develop new game titles, obtain approvals of manufacturers and produce CD-ROMs or game cartridges is unpredictable. During this period consumer appeal of a particular title may decrease, causing projected sales to decline.
RAPIDLY CHANGING TECHNOLOGY AND PLATFORM SHIFTS COULD HURT OUR OPERATING RESULTS.
The interactive software market and the PC and video game industries in general are associated with rapidly changing technology, which often leads to software and platform obsolescence and significant price erosion over the life of a product. The introduction of new platforms and technologies can render existing software obsolete or unmarketable. We expect that consumer demand of software for platforms of older generation will decrease as more advanced platforms are introduced. As a result, our titles developed for such platforms may not generate sufficient sales to make such titles profitable. Obsolescence of software or platforms could leave us with increased inventories of unsold titles and limited amounts of new titles to sell to consumers which would have a material adverse effect on our operating results.
We have devoted and will continue to devote significant development and marketing resources on products designed for new-generation video game systems, such as Xbox 360 and PlayStation 3. If PlayStation 3 and/or Xbox 360 do not achieve wide acceptance by consumers or Sony/Microsoft is unable to ship a significant number of PlayStation 3/Xbox 360 units in an timely fashion, or if our titles fail to sell through, we will have spent a substantial amount of our resources for this platform without corresponding revenues, which would have a material adverse effect on our business, operating results and financial condition.
We need to anticipate technological changes and continually adapt our new titles to emerging platforms to remain competitive in terms of price and performance. Our success depends upon our ability and the ability of third-party developers to adapt software to operate on and to be compatible with the products of original equipment manufacturers and to function on various hardware platforms and operating systems. If we design titles to operate on new platforms, we may be required to make substantial development investments well in advance of platform introductions and we will be subject to the risks that any new platform may not achieve initial or continued market acceptance.
A number of software publishers who compete with us have developed or are currently developing software for use by consumers over the Internet. Future increases in the availability of such software or technological advances in such software or the Internet could result in a decline in platform-based software and impact our sales. Direct sales of software by major manufacturers over the Internet would adversely affect our distribution business.
IF OUR PRODUCTS CONTAIN DEFECTS, OUR BUSINESS COULD BE HARMED SIGNIFICANTLY.
Software products as complex as the ones we publish may contain undetected errors when first introduced or when new versions are released. Despite extensive testing prior to release, we cannot be certain that errors will not be found in new products or releases after shipment which could result in loss of or delay in market acceptance. This loss or delay could significantly harm our business and financial results.
RETURNS OF OUR TITLES MAY ADVERSELY AFFECT OUR OPERATING RESULTS.
Our arrangements with retailers for published titles require us to accept returns for stock balancing, markdowns or defects. We establish a reserve for future returns of published titles at the time of sales, based primarily on these return policies and historical return rates and we recognize revenues net of returns.
Our distribution arrangements with retailers only give them the right to return titles to us or to cancel firm orders in case of reorders, although we do accept returns for stock balancing, markdowns and defects. We sometimes negotiate accommodations to retailers, including price discounts, credits and returns, when demand for specific titles falls below expectations.
Our sales returns and allowances for the year ended December 31, 2008 were $150,000. If return rates for our published titles significantly exceed our estimates, our operating results will be materially adversely affected.
OUR BUSINESS IS COMPETITIVE.
Competition in our industry is intense and new products are regularly introduced. We compete for both licenses to properties and the sale of interactive entertainment software with Sony, Nintendo and Microsoft, each of which is the largest developer and marketer of software for its platforms. Sony, Microsoft and Nintendo currently dominate the industry and have the financial resources to withstand significant price competition and to implement extensive advertising campaigns, particularly for prime-time television. These companies may also increase their own software development efforts or focus on developing software products for third-party platforms.
In addition, we compete with domestic public and private companies, international companies, large software companies and media companies. Many of our competitors have far greater financial, technical, personnel and other resources than we do and many are able to carry larger inventories, adopt more aggressive pricing policies and make higher offers to licensors and developers for commercially desirable properties than we can. Our titles also compete with other forms of entertainment such as motion pictures, television and audio and DVDs featuring similar themes, on-line computer programs and forms of entertainment which may be less expensive or provide other advantages to consumers.
Retailers typically have limited shelf space and promotional resources and competition is intense among an increasing number of newly introduced interactive entertainment software titles for adequate levels of shelf space and promotional support. Competition for retail shelf space is expected to increase, which may require us to increase our marketing expenditures just to maintain current levels of sales of our titles. Competitors with more extensive lines and popular titles frequently have greater bargaining power with retailers. Accordingly, we may not be able to achieve the levels of support and shelf space that such competitors receive. Similarly, as competition for popular properties increases, our cost of acquiring licenses for such properties is likely to increase, possibly resulting in reduced margins. Prolonged price competition, increased licensing costs or reduced operating margins would cause our profits to decrease significantly.
Our products are sold internationally through third-party distribution and licensing arrangements. Our sales are made primarily on a purchase order basis without long-term agreements or other forms of commitments. The loss of, or significant reduction in sales to, any of our principal retail customers or distributors could significantly harm our business and financial results. We continue to focus on good investments in games and put focus on cost control throughout the year.
WE MAY BE BURDENED WITH PAYMENT DEFAULTS AND UNCOLLECTIBLE ACCOUNTS IF OUR DISTRIBUTORS OR RETAILERS CANNOT HONOR THEIR CREDIT ARRANGEMENT S WITH US.
Distributors and retailers in the interactive entertainment software industry have from time to time experienced significant fluctuations in their businesses and a number of them have failed. The insolvency or business failure of any significant retailer or distributor of our products could materially harm our business and financial results. We typically make sales to most of our retailers and some distributors on unsecured credit, with terms that vary depending upon the customer's credit history, solvency, credit limits and sales history, as well as whether we can obtain sufficient credit insurance. Although, as in the case with most of our customers, we have insolvency risk insurance to protect us against our customers' bankruptcy, insolvency or liquidation, this insurance contains a significant deductible and a co-payment obligation and the policy does not cover all instances of non-payment. In addition, although we maintain a reserve for uncollectible receivables, the reserve may not be sufficient in every circumstance. As a result, a payment default by a significant customer could significantly harm our business and financial results. We are currently investigating to insure our debtors in order to limit the risks.
WE MAY NOT BE ABLE TO MAINTAIN OUR DISTRIBUTION RELATIONSHIPS WITH KEY VENDORS, AND IF WE DO NOT, OUR RESULTS OF OPERATIONS MAY BE MATERIALLY HARMED
We distribute interactive entertainment software products and provide related services in the Benelux countries, France, Germany, the United Kingdom, and other European countries and the United States, for a variety of entertainment software publishers, many of which are our competitors, and/or hardware manufacturers. These services are generally performed under limited term contracts. Although we expect to use reasonable efforts to retain these vendors, we may not be successful in this regard.
OUR SOFTWARE MAY BE SUBJECT TO LEGAL CLAIMS WHICH COULD BE COSTLY AND TIME CONSUMING AND CAUSE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
In prior years lawsuits were filed against numerous video game companies by the families of victims who were shot and killed by teenage gunmen in attacks perpetrated at schools. In these lawsuits plaintiffs alleged that the video game companies manufactured and/or supplied these teenagers with violent video games, teaching them how to use a gun and causing them to act out in a violent manner. Both lawsuits have been dismissed. It is possible, however, that similar, additional lawsuits may be filed in the future. If such future lawsuits are filed and ultimately decided against us and our insurance carrier does not cover the amounts we are liable for, it could have a material adverse effect on our business and financial results. Payment of significant claims by insurance carriers may make such insurance coverage materially more expensive or unavailable in the future, thereby exposing our business to additional risk.
IN MANY OF OUR KEY TERRITORIES, OUR BUSINESS, OUR PRODUCTS AND OUR DISTRIBUTION CHANNELS ARE SUBJECT TO INCREASING REGULATION IN AREAS RELATING TO CONTENT, CONSUMER PRIVACY AND ONLINE DELIVERY. IF WE DO NOT SUCCESSFULLY COMPLY WITH THESE REGULATIONS, OUR BUSINESS MAY SUFFER.
Legislation is continually being introduced that may affect both the content of our products and their distribution. For example, privacy laws in the United States and Europe impose various restrictions on our web sites. Those rules vary by territory although the Internet recognizes no geographical boundaries. Other countries, such as Germany, have adopted laws regulating content both in packaged goods and those transmitted over the Internet that are stricter than current United States laws. In the United States, the federal and several state governments are considering content restrictions on products such as ours, as well as restrictions on distribution of such products. Any one or more of these factors could harm our business by limiting the products we are able to offer to our customers and by requiring additional differentiation between products for different territories to address varying regulations. This additional product differentiation would be costly.
IF WE DO NOT CONSISTENTLY MEET OUR PRODUCT DEVELOPMENT SCHEDULES, WE WILL EXPERIENCE FLUCTUATIONS IN OUR OPERATING RESULTS.
Product development schedules, particularly for new hardware platforms, high-end multimedia PCs and the Internet, are difficult to predict because they involve creative processes, use of new development tools for new platforms and the learning process, research and experimentation associated with development for new technologies. We have in the past experienced development delays for several of our products. Failure to meet anticipated production or “go live” schedules may cause a shortfall in our revenues and profitability and cause our operating results to be materially different from expectations. Delays that prevent release of our products during peak selling seasons may reduce lifetime sales of those products.
OUR EXPANSION MAY STRAIN OUR OPERATIONS.
We have expanded through internal growth and acquisitions of titles, which has placed and may continue to place a significant strain on our management, administrative, operational, and financial and other resources. We intend to release a number of titles on current and new platforms. Furthermore, we have expanded our publishing and distribution operations, increased our advances to developers and manufacturing expenditures, enlarged our work force and expanded our presence on international markets. To successfully manage this growth, we must continue to implement and improve our operating systems as well as hire, train and manage a substantial and increasing number of management, technical, marketing, administrative and other personnel. We may be unable to effectively manage rapidly expanded operations which are geographically dispersed.
We have acquired rights to various properties and businesses, and we may pursue opportunities by making selective acquisitions consistent with our business strategy. We may be unable to successfully integrate any new personnel, property or business into our operations. If we are unable to successfully integrate future personnel, properties or businesses into our operations, we may incur significant charges.
Our publishing and distribution activities require significant amounts of capital. We may seek to obtain additional debt or equity financing to fund the cost of expansion. The issuance of equity securities would result in dilution to the interests of our shareholders.
A LIMITED NUMBER OF CUSTOMERS MAY ACCOUNT FOR A SIGNIFICANT PORTION OF OUR SALES, AND THE LOSS OF OUR RELATIONSHIPS WITH PRINCIPAL CUSTOMERS OR A DECLINE IN SALES TO PRINCIPAL CUSTOMERS COULD HARM OUR OPERATING RESULTS.
Sales to our four largest customers accounted for approximately 63% of our revenues for the year ended December 31, 2008. Sales to our four largest customers accounted for approximately 76% of our revenues for the year ended December 31, 2007. Sales to our four largest customers accounted for approximately 88% of our revenues for the year ended December 31, 2006. Sales to our three largest customers accounted for approximately 65% of our revenues for the year ended December 31, 2005. The loss of our relationships with principal customers or a decline in sales to principal customers could harm our operating results.
RATING SYSTEMS FOR INTERACTIVE ENTERTAINMENT SOFTWARE, POTENTIAL LEGISLATION AND CONSUMER OPPOSITION COULD INHIBIT SALES OF OUR PRODUCTS.
The home video game industry requires interactive entertainment software publishers to provide consumers with information relating to graphic violence or sexually explicit material contained in software titles. Certain countries have also established similar rating systems as prerequisites for sales of interactive entertainment software in such countries. We believe that we comply with such rating systems and display the ratings received for our titles. Our software titles generally receive a rating of "G" (all ages), "E10-Plus" (age 10 and over) or "T" (age 13 and over), although certain of our titles receive a rating of "M" (age 17 and over), which may limit the potential markets for these titles.
In the United States, there have been several legislative proposals that if adopted would result in the regulation of interactive entertainment software, motion picture and recording industries, including a proposal to adopt a common rating system for interactive entertainment software, television and music containing violence and sexually explicit material and an inquiry by the U.S. Federal Trade Commission with respect to the marketing of such material to minors. Consumer advocacy groups have also opposed sales of interactive entertainment software containing graphic violence and sexually explicit material by pressing for legislation in these areas and by engaging in public demonstrations and media campaigns. If any groups were to target our titles, we might be required to significantly change or discontinue a particular title. In addition, certain retailers, such as U.S.-based retailers Wal-Mart Stores Inc., Sears Inc., including its Kmart and Sears’s division, and Target, a division of Dayton Hudson Corporation, have declined to sell interactive entertainment software containing graphic violence or sexually explicit material, which also limits the potential markets for certain of our games. Such restrictions or impairments may also occur in other geographic markets and as a result limit the potential for certain of our games in those markets. Furthermore, because of the content in some of our titles, religious or other advocacy groups could pressure retailers not to sell or carry our titles which could impair marketing or sales efforts with certain retailers and as a consequence limit sales or potential sales for certain of our games in affected areas.
WE ARE SUBJECT TO RISKS AND UNCERTAINTIES OF INTERNATIONAL TRADE, AND IF ANY OF THESE RISKS MATERIALIZE, OUR RESULTS OF OPERATIONS MAY BE HARMED.
Sales in European markets, primarily Germany, France and the Benelux, have accounted for an increasing portion of our revenues. In 2008, sales in Europe accounted for approximately 80% of our revenues and sales in the United States accounted for the remaining 20% of our revenues. We are subject to risks inherent in international trade, including:
| | · | increased credit risks; |
| | · | tariffs and duties; |
| | · | fluctuations in foreign currency exchange rates; |
| | · | shipping delays; and |
| | · | international political, regulatory and economic developments, all of which can have a significant impact on our operating results. |
WE ARE DEPENDENT UPON OUR KEY EXECUTIVES AND PERSONNEL, AND IF WE FAIL TO HIRE AND RETAIN NECESSARY PERSONNEL AS NEEDED, OUR BUSINESS WILL BE SIGNIFICANTLY IMPAIRED .
Our success is largely dependent on the personal efforts of certain key personnel. The loss of the services of one or more of these key employees could adversely affect our business and prospects. Our success is also dependent upon our ability to hire and retain additional qualified operating, marketing, technical and financial personnel. Competition for qualified personnel in the computer software industry is intense, and we may have difficulty hiring or retaining necessary personnel in the future. If we fail to hire and retain necessary personnel as needed, our business will be significantly impaired.
FLUCTUATIONS IN FOREIGN EXCHANGE RATES AND INTEREST RATES COULD HARM OUR RESULTS OF OPERATIONS
We are exposed to currency risks and interest rate risks. We are particularly exposed to fluctuations in the exchange rate between the U.S. dollar and the Euro, as we incur manufacturing costs and price our systems predominantly in Euro while a portion of our revenues and cost of sales is denominated in U.S. dollars.
In addition, a substantial portion of our assets, liabilities and operating results are denominated in Euros, and a minor portion of our assets, liabilities and operating results are denominated in currencies other than the Euro and the U.S. dollar. Our consolidated financial statements are expressed in U.S. dollars. Accordingly, our results of operations are exposed to fluctuations in various exchange rates.
Furthermore, a strengthening of the Euro, particularly against the U.S. dollar could lead to intensified price-based competition in those markets that account for the majority of our sales, resulting in lower prices and margins and an adverse impact on our business, financial condition and results of operations.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE.
The market price of the common stock may be highly volatile. Disclosures of our operating results, announcements of various events by us or our competitors and the development and marketing of new titles affecting the interactive entertainment software industry may cause the market price of the common stock to change significantly over short periods of time.
SOME OF OUR EXISTING SHAREHOLDERS CAN EXERT CONTROL OVER US AND MAY NOT MAKE DECISIONS THAT ARE IN THE BEST INTERESTS OF ALL SHAREHOLDERS.
As of December 31, 2008, officers, directors, and shareholders holding more than 5% of our outstanding shares collectively controlled approximately 56% of our outstanding common stock. As a result, these shareholders, if they act together, would be able to exert a significant degree of influence over our management and affairs and over matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. Accordingly, this concentration of ownership may harm the market price of our ordinary shares by delaying or preventing a change in control of us, even if a change is in the best interests of our other shareholders.
In addition, the interests of management shareholders and shareholders holding more than 5% of our outstanding shares may not always coincide with the interests of our other shareholders, and accordingly, they could cause us to enter into transactions or agreements that we would not otherwise consider.
THE COMPANY IS INVOLVED IN A NUMBER OF LEGAL PROCEEDINGS RELATED TO ITS ORDINARY COURSE OF BUSINESS. THE OUTCOME OF THESE PROCEEDINGS IS UNCERTAIN AND MAY ADVERSELY AFFECT THE COMPANIES FINANCIAL POSITION.
Although we believe that we has adequate legal claims or defenses in place and/or provided adequate accruals for related costs such that the ultimate outcome will not have a material adverse impact on our future financial position or results from operation the outcome of these legal proceedings is not sure.
IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US, OR OUR OFFICERS AND DIRECTORS.
Service of process upon our directors and officers, most of whom reside outside the United States, may be difficult to obtain within the United States. In addition, because substantially all of our assets and all of our directors and officers are located outside the United States, any judgment obtained in the United States against us or any of our directors and officers may not be collectible within the United States.
THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN. IF THE COMPANY DOES NOT OBTAIN ANY NECESSARY FINANCING, WE MAY NEED TO CEASE OPERATIONS.
The Company’s management believes that in order to satisfy its working capital requirements through the second quarter of 2008, it will need to obtain additional financing from third parties. If the Company does not obtain any necessary financing in the future, we may need to cease operations. There is no legal obligation for either management or significant shareholders to provide additional future funding. Consequently, there is substantial doubt about our ability to continue as a going concern. We have no current plans, proposals, arrangements or understandings with respect to the sale or issuance of additional securities prior to the location of a merger or acquisition candidate. Accordingly, there can be no assurance that sufficient funds will be available to us to allow us to cover the expenses related to such activities.
WE MAY BE SUBJECT TO REGULATORY SCRUTINY AND SUSTAIN A LOSS OF PUBLIC CONFIDENCE IF WE ARE UNABLE TO SATISFY REGULATORY REQUIREMENTS RELATING TO OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING AND/OR IF WE HAVE MATERIAL INTERNAL CONTROL WEAKNESSES WHICH MAY RESULT IN MATERIAL FINANCIAL REPORTING ERRORS
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to perform an evaluation of our internal controls over financial reporting beginning with our annual report filed for a fiscal year ending on or after December 15, 2007 and have our independent registered public accounting firm attest to such evaluation for fiscal years ending on or after December 15, 2009. Compliance with these requirements can be expensive and time-consuming.
While we believe that we met and will continue to be able to meet the applicable deadlines, no assurance can be given that we will meet the required deadlines in future years. If we fail to timely complete this evaluation, or if our auditors cannot timely attest to our evaluation when we are required to have such attestation, or if we have material internal control weaknesses which may result in material financial reporting errors, we may be subject to regulatory scrutiny and a loss of public confidence in our internal controls. In addition, failure to provide the required management report would render our annual report materially deficient. As a result, we would not be timely or current in our Exchange Act reporting. This would result in us not being eligible to file new Form S-3 or Form S-8 registration statements and the loss of the availability of Rule 144. Because the filing of the annual report constitutes the Section 10(a)(3) update for any effective Forms S-3 or S-8, we also would be required to suspend any sales under already effective registration statements. However, now that have amended our annual report to provide the required management's report on whether or not internal control is effective, we would be able file new Forms S-8 and resume making sales under already effective Forms S-8, and shareholders can avail themselves of Rule 144 (assuming all other conditions to use of the form or rule are satisfied). Although amending the annual report to provide management's report may result in us becoming current in our Exchange Act reports, it would remain untimely and we would not be eligible to file new Forms S-3.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTY
We do not own any real estate. Currently, we lease properties in Breda and Amsterdam, The Netherlands.
Our offices located at Hambroeklaan 1 in Breda are leased by our subsidiary, Playlogic Game Factory, from Neglinge BV pursuant to a lease agreement, which expires on October 1, 2013. Playlogic Game Factory has an option to extend the lease agreement. If this option is exercised, the lease agreement will expire on October 1, 2018. The lease property spans 1,600 square meters and may only be used as office space. At signing of the lease agreement, the lessor committed itself to invest $440,000 (€300,000) in the lease property which amount shall be repaid by Playlogic Game Factory B.V. in ten years. Payment is due on a quarterly basis and amounts to $44,000 (€30,000) per year.
We lease our offices located at the WTC Amsterdam, Strawinskylaan 1041, 1077 XX Amsterdam, the Netherlands pursuant to a lease agreement, which expires on July 31, 2013. The lease property spans 870 square meters and may only be used as office space. Payment is due on a quarterly basis and amounts to $100,000 (€72,000) per quarter.
I TEM 3. LEGAL PROCEEDINGS
On November 27, 2007, we have won the legal proceedings in copyrights to the game Ancient Wars: Sparta. So has decided the District Court of Amsterdam in the case of Playlogic Entertainment against WorldForge/Visionvale Ltd. from Cyprus and Burut Co. from Russia.
The provisional judge of the District Court of Amsterdam concludes that all the copyrights to the game Ancient Wars: Sparta always belonged to Playlogic pursuant to the agreement with WorldForge / Visionvale and Burut. The judge ruled in Playlogic’s favor on all counts and WorldForge / Visionvale and Burut have to pay a penalty of € 10,000 each time they state the contrary or refrain from publishing rectifications of former wrong statements.
Furthermore, the Company is involved in a number of minor legal actions incidental to its ordinary course of business.
With respect to the above matters, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the holders of our common stock during the year. During the fiscal year ending December 31, 2008, no other matters were submitted to a vote of holders of our common stock through the solicitation of proxies or otherwise.
PART II
I TEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Since August 2, 2005, our common stock has been quoted on the Over-the-Counter (“OTC”) Bulletin Board, an electronic stock listing service provided by The NASDAQ Stock Market, Inc., under the symbol PLGC.OB (our symbol had been DNRE.OB from January 2003 until May 2005, and it was DNRR.OB from May 2005 until August 2, 2005).
As of December 31, 2008, there were approximately 450 holders of record of our common stock.
The price range of our common stock during the past two fiscal years is shown below. High and low prices given here refer to the high and low bid quoted on the OTC Bulletin Board. These prices reflect our 1-for-10 reverse stock split effective April 15, 2005. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
| | | |
| Fiscal 2007 | High | Low |
| | | |
| First Quarter | $1.01 | $0.36 |
| Second Quarter | $1.01 | $0.45 |
| Third Quarter | $1.01 | $0.64 |
| Fourth Quarter | $1.10 | $0.65 |
| | | |
| | | |
| Fiscal 2008 | High | Low |
| | | |
| First Quarter | $1.40 | $0.71 |
| Second Quarter | $1.49 | $0.81 |
| Third Quarter | $1.12 | $0.40 |
| Fourth Quarter | $0.85 | $0.15 |
The source for the high and low closing bids quotations is http://finance.yahoo.com and does not reflect inter-dealer prices. Such quotations are without retail mark-ups, mark-downs or commissions, and may not represent actual transactions and have not been adjusted for stock dividends or splits.
The Company has never declared or paid dividends on its common stock and anticipates that for the foreseeable future it will not pay dividends on its common stock.
Unregistered Sales of Equity Securities
Each issuance set forth below was made in reliance upon the exemptions from registration requirements under Section 4(2) of the Securities Act of 1933, as amended. When appropriate, we determined that the purchasers of securities described below were sophisticated investors who had the financial ability to assume the risk of their investment in our securities and acquired such securities for their own account and not with a view to any distribution thereof to the public. Where required by applicable law, the certificates evidencing the securities bear legends stating that the securities are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements.
Common stock
During the year ended December 31, 2007, the Company sold 3,182,609 units at $1.15 per share 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. Furthermore, the Company sold 270,000 shares to an unrelated third party at par value for facilitating the share issuances.
During the year ended December 31, 2007, the Company issued 9,147,861 units at $0.80 per share 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 which was paid directly by subscriber to vendors.
During the year ended December 31, 2007, 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.
The above transactions can be summarized as follows:
| Issuance price | | | Cash | | | Settlement of vendor payables | | | Debt conversion | | | Total | | | Units | |
| $ | 1.15 | | | $ | 2,735,019 | | | $ | 635,961 | | | $ | 289,020 | | | $ | 3,660,000 | | | $ | 3,182,609 | |
| $ | 0.80 | | | | - | | | | 2,288,471 | | | | 5,024,899 | | | | 7,313,370 | | | | 9,147,861 | |
| $ | 0.90 | | | | | | | | | | | | 538,604 | | | | 538,604 | | | | 600,000 | |
| $ | par | | | | 270 | | | | | | | | | | | | 270 | | | | 270,000 | |
| | | | | $ | 2,735,289 | | | $ | 2,924,432 | | | $ | 5,852,523 | | | $ | 11,512,244 | | | $ | 13,200,470 | |
On September 24, 2008, the Company sold 2,250,000 shares of its common stock to an accredited investor based in the Netherlands at $0.67 per share or gross proceeds of $1,500,000, pursuant to the terms of a subscription agreement dated September 24, 2008. The terms of the subscription agreement included warrants to purchase 300,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The warrants may be exercised starting September 25, 2008 and expire on September 24, 2012.
On June 2008, the Company sold 2,608,696 shares of its common stock to an accredited investor based in the Netherlands at $ 1.15 per share or gross proceeds of $3,000,000, pursuant to the terms of a subscription agreement dated June 27, 2008. The Company will pay a placement fee of 7% or $210,000, which has been recorded as a reduction of the gross proceeds. The terms of the subscription agreement included warrants to purchase 500,000 shares of the Company’s common stock at an exercise price of $2.00 per share. The warrants may be exercised starting June 28, 2008 and expire on June 27, 2013.
On March 2008, the Company sold 3,000,000 shares of its common stock to an accredited investor based in the Netherlands at $ 1.00 per share or gross proceeds of $3,000,000, pursuant to the terms of a subscription agreement dated March 27, 2008. The Company has paid a total of $260,000 placement fee, which has been recorded as a reduction of the gross proceeds. The terms of the subscription agreement included warrants to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $2.00 per share. The warrants may be exercised starting March 28, 2008 and expire on March 27, 2013.
Stock option plan
On August 28, 2007, the Company granted to Willy J. Simon, the Company’s Chairman and Non Executive Director, 112,500 options to purchase shares of the Company’s common stock at an exercise price of $1.35 per share. A total of 112,500 shares of these options will vest on April 1, 2008. The options will expire after 3 years.
On August 28, 2007, the Company granted to George M. Calhoun, one of the Company’s Non Executive Directors, 62,500 options to purchase shares of the Company’s common stock at an exercise price of $1.35 per share. A total of 62,500 shares of these options will vest on April 1, 2008. The options will expire after 3 years.
On August 28, 2007, the Company granted to Erik L.A. van Emden, one of the Company’s Non Executive Directors, 62,500 options to purchase shares of the Company’s common stock at an exercise price of $1.35 per share. A total of 62,500 shares of these options will vest on April 1, 2008. The options will expire after 3 years.
On August 28, 2007, the Company granted a number of employees and officers a total of 725,000 options (in accordance with the table below) to purchase shares of the Company’s common stock at an exercise price of $1.35 per share. These options will vest for 33,33% on August 28, 2009, and the remaining options will vest in two equal installments on August 28, 2010 and August 28, 2011. The options will expire after 4 years.
| W.M Smit, Chief Executive Officer | | | 200,000 | |
| R.W. Smit, Executive Vice President | | | 200.000 | |
| D. Morel, Chief Technology Officer | | | 100.000 | |
| P.Y. Thiercelin, Director of Sales | | | 75.000 | |
| B. Mulderij, Marketing Manager | | | 75.000 | |
| M. Janse, Executive Producer | | | 25.000 | |
| O. Klooster, Assistant Controller | | | 25.000 | |
| I. Frid, Managing Director | | | 15.000 | |
| L. Leatomu, PA to the CEO | | | 10.000 | |
| | | | | 725.000 |
On June 4, 2008, the Board of Directors has agreed to grant 1,140,000 options to key employees. This grant is in accordance with the 2006 approved Employee Stock Option Plan. The options have an exercise price of $2.00 per share. These options vest ratably over three years and will expire in 4 years. The fair value of the options totaled $164,160 or $0.144 per share, of which $19,760 was recorded during the nine months ended September 30, 2008.
The fair value of options granted was estimated at the grant date using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The following table summarizes the assumptions and variables used to compute the weighted average fair value of stock option grants:
| Risk-free interest rate | 4.5% | |
| Dividend yield | 0% | |
| Volatility factor | 38.56% | |
| Weighted-average expected life | 4 Years | |
Option grants
On June 4, 2008, the Company granted to Willy J. Simon, the Company’s Chairman and Non Executive Director, 80,000 options to purchase shares of the Company’s common stock at an exercise price of $2.00 per share. The options have a 4 year term and will vest in accordance with the stock option plan in 3 equal installments, the first starting one year after the date of granting.
On June 4, 2008, the Company granted to George M. Calhoun, one of the Company’s Non Executive Directors, 40,000 options to purchase shares of the Company’s common stock at an exercise price of $2.00 per share. The options have a 4 year term and will vest in accordance with the stock option plan in 3 equal installments, the first starting one year after the date of granting.
On June 4, 2008, the Company granted to Erik L.A. van Emden, one of the Company’s Non Executive Directors, 40,000 options to purchase shares of the Company’s common stock at an exercise price of $2.00 per share. The options have a 4 year term and will vest in accordance with the stock option plan in 3 equal installments, the first starting one year after the date of granting.
On June 4, 2008, the Company granted to Willem M. Smit, one of the Company’s Non Executive Directors, 40,000 options to purchase shares of the Company’s common stock at an exercise price of $2.00 per share. The options have a 4 year term and will vest in accordance with the stock option plan in 3 equal installments, the first starting one year after the date of granting.
On June 4, 2008, the Company granted a number of employees and officers a total of 940,000 options (in accordance with the table below) to purchase shares of the Company’s common stock at an exercise price of $2.00 per share. These options will vest for 33,33% on June 4, 2009, and the remaining options will vest in two equal installments on June 4, 2010 and June 4, 2011. The options will expire after 4 years.
| W.M Smit, Chief Executive Officer | | | 200,000 | |
| R.W. Smit, Executive Vice President | | | 400.000 | |
| D. Morel, Chief Technology Officer | | | 100,000 | |
| P.Y. Thiercelin, Chief Marketing & Sales Officer | | | 100,000 | |
| Other employees | | | 140,000 | |
| | | | | 940,000 |
Issuer Purchase of Equity Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Overview
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.
We have released the following games to date: | | | | | | |
| | | | | | |
| Game | | Studio | | Platform | |
| Completed Games | | | | | |
| | | | | | |
| Alpha Black Zero | | Khaeon (NL) | | PC | |
| Airborne Troops | | Widescreen Games (F) | | PS2, PC | |
| Cyclone Circus | | Playlogic Game Factory (NL) | | PS2 | |
| Xyanide | | Overloaded (NL) | | Mobile Phones | |
| World Racing 2 | | Synetic (D) | | PS2, Xbox, PC | |
| Knights of the Temple 2 | | Cauldron (SK) | | PS2, Xbox, PC | |
| Gene Troopers | | Cauldron (SK) | | PS2, Xbox, PC | |
| Xyanide | | Playlogic Game Factory (NL) | | Xbox | |
| Age of Pirates: Caribbean Tales | | Akella (Russia) | | PC | |
| Infernal | | Metropolis (Poland) | | PC | |
| Ancient Wars: Sparta | | Visionvale (Cyprus) | | PC | |
| Evil days of Luckless John | | 3A entertainment (British Virgin Islands) | | PC | |
| Xyanide Resurrection | | Playlogic Game Factory (NL) | | PSP | |
| Obscure II | | Hydravision (France) | | PC, PS2, Wii | |
| Dragon Hunters | | Futurikon (France) | | DS | |
| Red Bull BC One | | Smack Down Productions (France) | | DS | |
| Aggression: Europe 1914 | | Buka (Cyprus) | | PC | |
| Simon the Sorcerer 4 | | RTL Media (Germany) | | PC | |
| Dimensity | | Boriana (Bulgaria) | | PC | |
| Worldshift | | RTL Media (Germany) | | PC | |
| Building & Co | | Elektro Games (France) | | PC | |
| Stateshift | | Engine Software (NL) | | PC | |
Management’s Overview of Historical and Prospective Business Trends
Increased Console Installed Base. As consumers purchase the current generation of consoles, either as first time buyers or by upgrading from a previous generation, the console installed base increases. As the installed base for a particular console increases, we believe we will generally able to increase our unit volume. However, since Microsoft introduced its Xbox 360 and because consumers anticipate the next generation of consoles of Sony and Nintendo, unit volumes often decrease.
Software Prices. As current generation console prices decrease, we expect more value-oriented consumers to become part of the interactive entertainment software market. We believe that hit titles will continue to be launched at premium price points and will maintain those premium price points longer than less popular games. However, as a result of a more value-oriented consumer base, and a greater number of software titles being published, we expect average software prices to gradually come down, which we expect to negatively impact our gross margin. To offset this, as the installed base increases, total volume of software sales are expected to increase, compensating for the lower margins on software sales.
Increasing Cost of Titles. Hit titles have become increasingly more expensive to produce and market as the platforms on which they are played continue to advance technologically and consumers demand continual improvements in the overall game play experience. We expect this trend to continue as we require larger production teams to create our titles, the technology needed to develop titles becomes more complex, we continue to develop and expand the online gaming capabilities included in our products and we develop new methods to distribute our content via the Internet. Any increase in the cost of licensing third-party intellectual property used in our products would also make these products more expensive to publish.
Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reporting periods. The most significant estimates and assumptions relate to the recoverability of prepaid royalties, capitalized software development costs and intangibles, inventories, realization of deferred income taxes and the adequacy of allowances for returns, price concessions and doubtful accounts. Actual amounts could differ significantly from these estimates.
Results of Operations
Comparison of Fiscal 2008 to Fiscal 2007
Revenues . Revenues for Fiscal 2008 were $9,024,196 as compared to $10,099,746 for Fiscal 2007. This decrease of approximately 10% in revenues is primarily the result of the fact that the Company had to postpone some of its Q3 and Q4 titles to 2009. Therefore, we have not release new games during the 4th quarter of 2008, causing the Company to depend on sell through of existing titles.
Research and development expenses . Research and development expenses totaled $460,038 for Fiscal 2008. For Fiscal 2007, research and development expenses totaled $542,215. This represents a decrease of $82,177 or 15%. This decrease is due to a higher amount of capitalized personnel expenses in our development studio in Fiscal 2008 for the game we are developing in-house. Furthermore, the expenses in 2007 contained R&D expenses for the Sony contract as well as the feasibility of the game we are developing in-house.
Selling, marketing, general and administrative expenses . Selling, marketing, general and administrative expenses totaled $7,187,881 for the Fiscal 2008. For fiscal 2007, selling, general and administrative expenses totaled $4,451,357. The increase of costs is due to the start of the distribution activities in the UK. Furthermore, we have spent more money on marketing of our products. Also, as a result of the move of our corporate headquarters in Amsterdam, we have recorded incidental expenses.
Depreciation . Depreciation expense totaled $384,960, for Fiscal 2007. For Fiscal 2007, depreciation expense totaled $297,292. The increase of $87,668 or 29% is caused by additions to the fixed assets during the year 2008. The Company has moved offices in May 2008 and had to invest in leasehold improvements as well as furniture.
Asset impairment charges. We review our Capitalized Software whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Asset impairment charges totaled $4,500,000 for fiscal 2008 versus $68,566 in Fiscal 2007. The economic crisis in which the world is since Q3 2008 has impacted our sales and management believes it is prudent to impair some of its titles that have been released to market, to ensure the amounts capitalized can be fully recovered with future sales.
Interest expense . Interest expense totaled $679,504 for Fiscal 2008. For Fiscal 2007, interest expense totaled $1,164,250. This represents a decrease of $484,746 and is primarily the result of the restructuring of our debt position. We have converted a large part of the 2007 in September 2007 into equity. Furthermore, due to capital raises in March 2008 and June 2008, we were able to repay remaining expensive loans.
Net Result . Our net loss for Fiscal 2008 was $9,478,797 . For Fiscal 2007 we had a net profit that totaled $743,729. The decrease of the net result is primarily due to lower revenues, a $4.5 million one time impairment charge , straight line amortization on some of our games as well as higher operating expenses due to increased number of employees as well as move of offices.
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 $(371,231) for the Fiscal 2008 and $(617,751) for Fiscal 2007.
Equity . The total stockholders’ deficit as of December 31, 2008 amounted to $(2,319,679) s oppose to a stockholders’equity of $695,753 as of December 31, 2007. The decrease in equity is mainly caused by the loss for the year amounting to $9,478,797. The Company has sold $7,500,000 (gross) new equity during 2008.
Liquidity and Capital Resources
As of December 31, 2008, our cash balance was $81,978 as compared to $349,464 at December 31, 2007.
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 December 31, 2008 was $380,993, as compared to $671,148 at December 31, 2007.
Off Balance Sheet Arrangements
Except the operating lease obligations mentioned below we do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.
Contractual Obligations
We have the following contractual obligations associated with its lease commitments and other contractual obligations per December 31, 2008:
| Contractual Obligations | | Payments Due By Period (in thousands) | |
| | | Total | | | Less than 1 Year | | | 1-3 Years | | | 3-5 Years | | | More than 5 Years | |
| Long-Term Debt Obligations | | $ | 4,230 | | | $ | 2,546 | | | $ | 1,592 | | | | 92 | | | | - | |
| Capital Lease Obligations | | | - | | | | - | | | | - | | | | - | | | | - | |
| Operating lease Obligations (Including Rent) | | $ | 3,955 | | | $ | 934 | | | $ | 1,701 | | | $ | 1,415 | | | | - | |
| Purchase obligations | | $ | 3,088 | | | $ | 3,088 | | | | | | | | | | | | - | |
| Other contractual obligations | | | | | | | | | | | | | | | | | | | - | |
| Total | | $ | 11,273 | | | $ | 6,568 | | | $ | 3,293 | | | $ | 4,800 | | | | - | |
Summary of Significant Accounting Policies
Accounts receivable
Accounts receivable are shown after deduction of a provision for bad and doubtful debts where appropriate.
Software Development Costs
Capitalized software development costs include payments made to independent software developers under development agreements, as well as direct costs incurred for internally developed products. We account for software development costs in accordance with SFAS No. 86 “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Software development costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable.
We utilize both internal development teams and third-party software developers to develop our products.
We capitalize internal software development costs and other content costs subsequent to establishing technological feasibility of a title. Amortization of such costs as a component of cost of sales is recorded on a title-by-title basis based on the greater of the proportion of current year sales to the total of current and estimated future sales for the title or the straight-line method over the remaining estimated useful life of the title. At each balance sheet date, we evaluate the recoverability of capitalized software costs based on undiscounted future cash flows and charge to cost of sales any amounts that are deemed unrecoverable. Our agreements with third-party developers generally provide us with exclusive publishing and distribution rights and require us to make advance payments that are recouped against royalties due to the developer based on the contractual amounts of product sales, adjusted for certain costs.
Prepaid royalties
We capitalize external software development costs (prepaid royalties) and other content costs subsequent to establishing technological feasibility of a title.
Advance payments are amortized as royalties in cost of sales on a title-by-title basis based on the greater of the proportion of current year sales to the total of current and estimated future sales for that title or the contractual royalty rate based on actual net product sales as defined in the respective agreements. At each balance sheet date, we evaluate the recoverability of advanced development payments and unrecognized minimum commitments not yet paid to determine the amounts unlikely to be realized through product sales. Advance payments are charged to cost of sales in the amount that management determines is unrecoverable in the period in which such determination is made or if management determines that it will cancel a development project.
Revenue Recognition
We evaluate the recognition of revenue based on the criteria set forth in SOP 97-2, “Software Revenue Recognition”, as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions” and Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”, as revised by SAB 104, “Revenue Recognition”. We evaluate revenue recognition using the following basic criteria:
| | · | Evidence of an arrangement: We recognize revenues when we have evidence of an agreement with the customer reflecting the terms and conditions to deliver products. |
| | · | Delivery: Delivery is considered to occur when the products are shipped and risk of loss has been transferred to the customer. |
| | · | Fixed or determinable fee: If a portion of the arrangement fee is not fixed or determinable, we recognize that amount as revenues when the amount becomes fixed or determinable. |
| | · | Collection is deemed probable: At the time of the transaction, we conduct a credit review of each customer involved in a significant transaction to determine the creditworthiness of the customer. Collection is deemed probable if we expect the customer to be able to pay amounts under the arrangement as those amounts become due. If we determine that collection is not probable, we recognize revenues when collection becomes probable (generally upon cash collection). |
Product Revenues
Product revenues, including sales to resellers and distributions, are recognized when the above criteria are met. We reduced product revenues for estimated customer returns by distributing our products through experienced distributors with whom we had previously worked.
New Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, or SFAS 159. SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value. It is expected to expand the use of fair value measurements which is consistent with the Financial Accounting Standards Board’s long-term measurement objectives for accounting for financial instruments. SFAS 159 is effective for our first fiscal year that begins after November 15, 2007, which is our fiscal year 2009 that begins in January 2008. The Company is currently evaluating the impact of this statement to its financial position and results of operations.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), ‘’Business Combinations’’, or SFAS No. 141R. SFAS No. 141R will change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Accordingly, any business combinations we engage in will be recorded and disclosed following existing GAAP until January 1, 2009. We expect SFAS No. 141R will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time. We are still assessing the impact of this pronouncement.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements--An Amendment of ARB No. 51, or SFAS No. 160" ("SFAS No. 160"). SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company believes that SFAS 160 should not have a material impact on the consolidated financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"). SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this statement is not expected to have a material effect on the Company's future financial position or results of operations.
In May, 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles", ("SFAS No. 162"). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS No. 162 will be effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board's amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles". The FASB has stated that it does not expect SFAS No. 162 will result in a change in current practice. The application of SFAS No. 162 will have no effect on the Company's financial position, results of operations or cash flows.
Also in May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts--an interpretation of FASB Statement No. 60" ("SFAS No. 163"). SFAS No. 163 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Company is currently evaluating the impact of SFAS No. 163 on its financial statements but does not expect it to have an effect on the Company's financial position, results of operations or cash flows.
In May 2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 applies to convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years after December 15, 2008, and must be applied on a retrospective basis. Early adoption is not permitted. The adoption of this statement is not expected to have a material effect on the Company's future financial position or results of operations.
In June 2008, the FASB issued FASB Staff Position ("FSP") EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, Earnings per Share. Under the guidance of FSP EITF 03-6-1, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings-per-share pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and all prior-period earnings per share data presented shall be adjusted retrospectively. Early application is not permitted. The Company is assessing the potential impact of this FSP on the earnings per share calculation.
In June 2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF 07-5"). EITF 07-5 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early application is not permitted. The Company is assessing the potential impact of this EITF 07-5 on the financial condition and results of operations.
Related Party Transactions
See below Part III.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risks in the ordinary course of our business, primarily risks associated with interest rate and foreign currency fluctuations.
Current loans the Company had loans with shareholders at normal interest rates varying from 7% to 12% depending on the term of the loan. The long term loan bears a 7% annual interest.
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 year ended December 31, 2008, our foreign currency translation adjustment loss was approximately $3.4 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data appear in a separate section of this report starting on Page F-1. We provide details of our valuation and qualifying accounts in "Note 18—Supplementary Financial Information" to the consolidated financial statements. All schedules have been omitted since the information required to be submitted has been included on the consolidated financial statements or notes thereto or has been omitted as not applicable or not required.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. 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 the end of the period covered by this report 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.
Inherent Limitations Over Internal Controls
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Management, including our Chief Executive Officer and Interim Chief Financial Officer, does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods is subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2008.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to the attestation by the company’s registered public accounting firm pursuant to the temporary rules of the SEC that permit us to only provide management’s report in this annual report
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during 2008, 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.
ITEM 9B. OTHER INFORMATION
None.
PART III
Our directors and executive officers are as follows:
| Age | Position | |
| | | | |
| Willem M. Smit | 62 | Director, President, and Chief Executive Officer | |
| Willy J. Simon | 58 | Chairman of the Board of Directors | |
| George M. Calhoun | 56 | Member of the Board of Directors | |
| Erik L.A. van Emden | 60 | Member of the Board of Directors | |
| Ruud Spoor | 45 | Member of the Board of Directors | |
| Rogier W. Smit | 34 | Executive Vice President | |
| Wilbert Knol | 41 | Chief Financial Officer (ad interim up to March 18, 2009) | |
| Marcel Noordeloos | 40 | Chief Financial Officer (ad interim as of March 18, 2009) | |
| Dominique Morel | 34 | Chief Technology Officer | |
| Pierre-Yves Thiercelin | 33 | Chief Marketing & Sales Officer | |
Biographical Information
The principal occupations and brief summary of the background of each director and executive officer are as follows:
Willem M. Smit has been the Chief Executive Officer of Playlogic International since 2001. In July 2005, he became Chief Executive Officer of the Company. In 1976, he founded Datex Software B.V., where he grew the company over nine years from 20 to 900 employees. Datex went public in 1985 and it merged with Getronics in 1987. Since that time, Mr. Smit has been a private investor in various companies. He is the father of Rogier W. Smit, the Company's Executive Vice President.
Willy J. Simon has been on Playlogic International N.V.'s Supervisory Board (which is similar to the board of directors of a US company) since 2003. In July 2005, he became Chairman and Non Executive Director of the Company. He currently serves as a Non-Executive Director of Redi & Partners Ltd., a hedge fund of hedge funds. He served among others as Director of IMC Holding and Chairman of Bank Oyens & van Eeghen. Moreover he acted as an Advisor to the Board of NIB Capital. From 1997-2001, he was an executive member of the Board of Fortis Bank NL.
George M. Calhoun became Non Executive Director of the Company in November 2005. George Calhoun is currently serving on the faculty of the Howe School of Technology Management at the Stevens Institute of Technology in Hoboken, New Jersey. He was Chairman and CEO of Illinois Superconductor Corporation from 1999 until 2002. He has more than 23 years of experience in high-tech wireless systems development, beginning in 1980 as part of the team that organized Inter Digital Communications Corporation, where he participated in the development of the first commercial application of digital TDMA radio technology, and introduced the first wireless local loop system to the North American telecommunications industry. Dr. Calhoun holds a Ph.D. in Systems Science from the Wharton School at the University of Pennsylvania, as well as a B.A. from the same university.
Erik L.A. van Emden has been on Playlogic International N.V.’s Supervisory Board since December 2003. In July 2005, he became Non Executive Director of the Company. Since 1993 Van Emden has been an attorney and partner with Bosselaar & Strengers, a law firm based in Utrecht, the Netherlands, which focuses on large and medium-sized companies. The firm specializes in practices including employment, liability & insurance, real estate and corporate. Van Emden specializes in corporate law and is coordinator of the corporate law practice group. Previously, Van Emden was Board Member of the Amsterdam Stock Exchange and Member of the Executive Board of Credit Lyonnais Bank Nederland N.V. He also held positions at Barclays Bank and Algemene Bank Nederland. In addition, Van Emden currently serves as a Director of several private Dutch companies.
Ruud Spoor joined the Board of Playlogic in July 2008. Mr. Spoor is serving as the fourth non-executive director on the Board of Playlogic Entertainment, Inc. Since 2007, Mr. Spoor has been the director of BL Capital B.V., an investment firm located in ‘s Hertogenbosch, the Netherlands. Prior to BL Capital, Mr. Spoor was Commercial Director Corporate Clients of ABN-AMRO in the Netherlands. Spoor also currently serves as a director or as a member of the supervisory board in several Dutch companies.
Rogier W. Smit co-founded Playlogic International N.V. and Playlogic Game Factory B.V. in 2001. He has worked in various management positions at those two companies since then. He has been Playlogic International N.V.'s Executive Vice President and Chief Operating Officer since 2002.
Wilbert Knol became the Company's Chief Financial Officer ad interim on November 1, 2006 following Jan Willem Kohne’s resignation as CFO per the same date. Mr. Knol has held several financial and operational positions with among others Hill Rom a division of Hillebrand Industries Inc. (NYSE) (1999-2005) and Coopers & Lybrand (1992-1997). Mr. Knol received his RA Degree (the Dutch equivalent of a CPA Degree) from Amsterdam University the Netherlands in 1999. Mr. Knol was interim Chief Financial Officer until March 18, 2009.
Marcel Noordeloos became the Company's Chief Financial Officer ad interim on March 18, 2009 replacing Wilbert Knol at that date. Mr. Noordeloos has held several financial and operational positions with among others Nike EMEA Headquarters (2002-2006) and PricewaterhouseCoopers (1992-2001). Mr. Noordeloos holds an RA Degree (the Dutch equivalent of a CPA Degree) from the University of Amsterdam, the Netherlands in 1999.
Dominique Morel has joined the Company as Chief Technology Officer in September 2005. He has a key strategic role in our business development, evaluation process and current and future line-up. Before Morel joined the company, he was Project Evaluation & Business Development Manager of Atari Europe. In this position he signed major deals (Next-Gen, PC, PS2). He also initiated and established the "Business Opportunities On-line Database" for Atari worldwide. In this period with Atari he has acquired an extensive network in the European developer community. Prior to this, Morel worked as Project Evaluation & Game Play Consulting Manager for Atari/Infogrames, which involved analyzing and ensuring the Game Play and Game Design Consulting for over 120 published games. All together Morel worked with Atari for more than 10 years and has been an important internal consultant for many production decisions for Atari worldwide.
Pierre-Yves Thiercelin has joined the Company as International Sales Director in March 2007 and was promoted to Chief Marketing and Sales Officer on in January 2008. Mr. Thiercelin has over 9 years experience in international trade working for various video games companies such as Midway, Novalogic and Ignition and also for non video games companies such as Samsung.
The directors named above will serve until the next annual meeting of our stockholders or until his successor is duly elected and has qualified. Directors will be elected for one-year terms at the annual stockholders meeting. There is no arrangement or understanding between any of our directors or officers and any other person pursuant to which any director or officer was or is to be selected as a director or officer, and there is no arrangement, plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current directors to our Board of Directors. There are also no arrangements, agreements or understandings between non-management stockholders that may directly or indirectly participate in or influence the management of our affairs.
Indemnification of Officers and Directors
Our Certificate of Incorporation provides that we will indemnify any officer or director, or former officer or director, to the fullest extent permitted by law. Our bylaws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of our Company. We will also bear the expenses of such litigation for any of our directors, officers, employees, or agents, upon such person's promise to repay us therefore if it is ultimately determined that any such person shall not have been entitled to indemnification.
Conflicts of Interest
Our officers, directors and principal stockholders may actively negotiate for the purchase of a portion of their common stock as a condition to, or in connection with, a proposed merger or acquisition transaction. It is anticipated that a substantial premium may be paid by the purchaser in conjunction with any sale of shares by our officers, directors and principal stockholders made as a condition to, or in connection with, a proposed merger or acquisition transaction. The fact that a substantial premium may be paid to members of our management to acquire their shares creates a conflict of interest for them and may compromise their state law fiduciary duties to our other stockholders. In making any such sale, members of our management may consider their own personal pecuniary benefit rather than our best interests and the best interests of our other stockholders, and the other stockholders are not expected to be afforded the opportunity to approve or consent to any particular buy-out transaction involving shares held by members of our management.
Although our management has no current plans to cause the Company to do so, it is possible that we may enter into an agreement with an acquisition candidate requiring the sale of all or a portion of the common stock held by our current stockholders to the acquisition candidate or principals thereof, or to other individuals or business entities, or requiring some other form of payment to our current stockholders, or requiring the future employment of specified officers and payment of salaries to them. It is more likely than not that any sale of securities by our current stockholders to an acquisition candidate would be at a price substantially higher than that originally paid by such stockholders. Any payment to current stockholders in the context of an acquisition involving our Company would be determined entirely by the largely unforeseeable terms of a future agreement with an unidentified business entity.
Involvement in Certain Legal Proceedings
During the past five years, no present or former director, executive officer or person nominated to become a director or an executive officer of our Company:
| | 1. | was a general partner or executive officer of any business against which any bankruptcy petition was filed, either at the time of the bankruptcy or two years prior to that time; |
| | 2. | was convicted in a criminal proceeding or named subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
| | 3. | was subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or |
| | 4. | was found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated. |
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 and regulations of the SEC there under require the Company’s executive officers and directors, and persons who own more than ten percent of a registered class of the Company’s equity securities, to file reports of initial ownership and changes in ownership with the SEC. Based solely on its review of copies of such forms received by the Company, or on written representations from certain reporting persons that no other reports were required for such persons, the Company believes that during 2008, all of the Section 16(a) filing requirements applicable to its executive officers, directors and ten percent stockholders were complied with on a timely basis.
Information Concerning the Board of Directors and the Audit Committee
During 2008, the Company's Board of Directors had five Directors. During 2008 the Board met five times on an executive base.
Audit Committee
The Company established an Audit Committee on October 31, 2005. Messrs. Calhoun (Chairman), Van Emden and Simon are the members of the Audit Committee.
The Audit Committee assists the Board of Directors in its oversight of the integrity of the Company's accounting, auditing and reporting practices. The Board of Directors has determined that Mr. Simon possesses the attributes to be considered financially sophisticated and has the background to be considered an "audit committee financial expert" as defined by the rules and regulations of the SEC. The Audit Committee will meet with the Company's independent accountants at least annually to review the results of the Company's annual audit and discuss the financial statements. The Committee will also meet quarterly with our independent accountants to discuss the results of the accountants' quarterly reviews as well as quarterly results and quarterly earnings releases; recommend to the Board that the independent accountants be retained; and receive and consider the accountants' comments as to internal controls, adequacy of staff and management performance and procedures in connection with audit and financial controls.
The Audit Committee will review all financial reports prior to filing with the SEC. The specific responsibilities in carrying out the Audit Committee's oversight role are set forth in the Audit Committee's Charter. All of the members of the Audit Committee are independent directors as contemplated by Section 10A (m)(3) of the Securities and Exchange Act, as amended.
During 2008 the Audit Committee met four times.
Compensation Committee
The Company's Compensation Committee is responsible for establishing and administering the Company's policies involving the compensation of all of its executive officers. This committee consists of Messrs. Van Emden (Chairman), Calhoun and Simon and was formed on December 15, 2005. The Compensation Committee operates pursuant to a charter approved by the Company's Board of Directors.
During 2008 one meeting was held by the Compensation Committee. Nominating and Governance Committee
The Company's Nominating and Governance Committee selects nominees for the Board of Directors. This committee consists of Messrs. Simon (Chairman), Calhoun and Van Emden and was formed on December 15, 2005. The Nominating and Governance committee utilizes a variety of methods for identifying and evaluating nominees for director. Candidates may also come to the attention of the Nominating and Governance committee through current board members, professional search firms and other persons. The Nominating and Governance committee operates pursuant to a charter approved by the Board of Directors.
During 2008 no meetings were held by the Governance Committee
Code of Business Conduct and Ethics
The Company's board of directors has adopted in December 2005 a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees and an additional Code of Business Ethics that applies to our Chief Executive Officer and senior financial officers.
The Company plans to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating to amendments to or waivers from provisions of these codes by describing on our Internet website, located at http://www.playlogicinternational.com, within four business days following the date of a waiver or a substantive amendment, the nature of the amendment or waiver, the date of the waiver or amendment, and the name of the person to whom the waiver was granted.
Information on the Company’s internet website is not, and shall not be deemed to be, a part of this 10-K or incorporated into any other filings the Company makes with the SEC.
Director Nomination
Criteria for Board Membership. In selecting candidates for appointment or re-election to the Board, the Nominating and Governance Committee considers the appropriate balance of experience, skills and characteristics required of the Board of Directors, and seeks to insure that at least a majority of the directors are independent under the rules of the NASDAQ Stock Market, and that members of the Company’s Audit Committee meet the financial literacy and sophistication requirements under the rules of the NASDAQ Stock Market and at least one of them qualifies as an “audit committee financial expert” under the rules of the Securities and Exchange Commission. Nominees for director are selected on the basis of their depth and breadth of experience, integrity, ability to make independent analytical inquiries, understanding of the Company’s business environment, and willingness to devote adequate time to Board duties.
Stockholder Nominees. The Nominating Committee will consider written proposals from stockholders for nominees for director. Any such nominations should be submitted to the Nominating Committee c/o the Secretary of the Company and should include the following information: (a) all information relating to such nominee that is required to be disclosed pursuant to Regulation 14A under the Securities Exchange Act of 1934 (including such person’s written consent to being named in the Proxy Statement as a nominee and to serving as a director if elected); (b) the names and addresses of the stockholders making the nomination and the number of shares of the Company’s common stock which are owned beneficially and of record by such stockholders; and (c) appropriate biographical information and a statement as to the qualification of the nominee, and should be submitted in the time frame described in the Bylaws of the Company and under the caption, “Stockholder Proposals for the Next Annual Meeting” below.
Process for Identifying and Evaluating Nominees. The Nominating Committee believes the Company is well-served by its current directors. In the ordinary course, absent special circumstances or a material change in the criteria for Board membership, the Nominating Committee will renominate incumbent directors who continue to be qualified for Board service and are willing to continue as directors. If an incumbent director is not standing for re-election, or if a vacancy on the Board occurs between annual stockholder meetings, the Nominating Committee will seek out potential candidates for Board appointment who meet the criteria for selection as a nominee and have the specific qualities or skills being sought. Director candidates will be selected based on input from members of the Board, senior management of the company and, if the nominating committee deems appropriate, a third-party search firm. The Nominating Committee will evaluate each candidate's qualifications and check relevant references; in addition, such candidates will be interviewed by at least one member of the nominating committee. Candidates meriting serious consideration will meet with all members of the Board. Based on this input, the Nominating Committee will evaluate which of the prospective candidates is qualified to serve as a director and whether the committee should recommend to the Board that this candidate be appointed to fill a current vacancy on the Board, or presented for the approval of the stockholders, as appropriate.
The Company has never received a proposal from a stockholder to nominate a director. Although the Nominating Committee has not adopted a formal policy with respect to stockholder nominees, the committee expects that the evaluation process for a stockholder nominee would be similar to the process outlined above.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation for the fiscal years ended December 31, 2006, 2007 and 2008 received by the individual who served as Playlogic International's Chief Executive Officer during 2008 and Playlogic International’s other most highly compensated executive officers whose total annual salary and bonus for fiscal year 2008 exceeded $100,000 (the “Named Officers”).
Summary Compensation Table
| | | Long-Term | Payouts | All Other Compensation |
| | Annual Compensation | Compensation Awards | | |
| Name and Principal Position as of December 31, 2008 | Year | Salary €/($) | Bonus ($) | Other Annual Compensation ($) | Restricted Stock Awards (2) | Securities Underlying Options/SARs (#) | LTIP Payouts ($) | |
| | | | | | | | | |
Willem M. Smit (1) Chief Executive Officer | 2008 2007 2006 | €0 €0 €0 | | -- | | 240,000 200,000 (6) | -- | |
Sloterhof Investments N.V. (of which Mr. Willem M. Smit is the beneficial owner) Managing Director | 2008 2007 2006 | €0 €0 €0 | | -- | | | -- | |
Rogier W. Smit Executive Vice President | 2008 2007 2006 | €143,000/$210,000 €143,000/$196,098 €143,000/$188,559 | | -- | | 400,000 200,000 (7) | -- | |
| Wilbert Knol Chief Financial Officer a.i. | 2008 2007 2006 | €0/$0 €105,413/$144,554 €99,537/$131,249 | | | | 60,000 (5) | | |
| Dominique Morel Chief Technology Officer | 2008 2007 2006 | €143,000/$210,000 €143,000/$196,098 €143,000/$188,559 | 0 | -- | | 100,000 100,000 (4) 100,000 (4) | -- -- | |
Pierre-Yves Thiercelin International Sales Director (10) | 2008 2007 2006 | €143,000/$210,000 € 48,500/$66,500 - - | | -- | | 100,000 75,000 (8) | -- | |
_____________________
| (1) | Willem M. Smit, the Company's Chief Executive Officer, will not receive any salary until there are positive cash flows from operations. Currently, the Company only pays Mr. Smit for his business related expenses, and it provides him a company car. |
| (2) | Calculated by multiplying the amount of restricted stock by the restated value for Dutch income tax purposes of the restricted stock grant ($.70 per share). |
| (3) | In connection with Mr. Layer’s employment arrangement, we sold 364,556 restricted shares to Mr. Layer, our Chief Marketing & Sales Officer at an aggregate price of $1. The restricted shares have two years’ lock-up period during which Mr. Layer cannot sell the shares. |
| (4) | We granted to Mr. Morel, 100,000 options to purchase shares of our common stock at an exercise price of $3.50 per share. A total of 25,000 shares of these options vested on October 1, 2007, and the remaining options will vest in three equal installments on October 1, 2008, October 1, 2009 and October 1, 2010 |
| (5) | We granted to Mr. Knol, 60,000 options to purchase shares of our common stock at an exercise price of $2.50 per share. A total of 20,000 shares of these options will vest on May 4, 2008, and the remaining options will vest in two equal installments on May 4, 2009, May 4, 2010. |
| (6) | We granted to Mr. W.M. Smit 200,000 options to purchase shares of our common stock at an exercise price of $1.30 per share. A total of 66,666 shares of these options will vest on August 28, 2009, and the remaining options will vest in two equal installments on August 28, 2010 and August 28, 2011. |
| (7) | We granted to Mr. R.W. Smit and Mr. D. Morel, 200,000 resp 100,000 options, respectively, to purchase shares of our common stock at an exercise price of $1.30 per share. A total of 100,000 shares of these options will vest on August 28, 2009, and the remaining options will vest in two equal installments on August 28, 2010 and August 28, 2011. |
| (8) | We granted to Mr. P.Y. Thiercelin, 75,000 options to purchase shares of our common stock at an exercise price of $1.30 per share. A total of 25,000 shares of these options will vest on August 28, 2009, and the remaining options will vest in two equal installments on August 28, 2010 and August 28, 2011. Mr. Thiercelin joined the Company in March 2007 as International Sales Director. |
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
We established a stock option plan for employees that became effective in August 2007.
The following table contains information concerning the grant of stock options under individual employment arrangements with the Executive Officers made during the fiscal year of 2008.
Name (1) | Grant and approval date | Closing Price on Grant date | Number of Securities Underlying Options/SARs granted | Percentage of Total Options/SARs granted to employees in fiscal year | Exercise or Base Price ($/Sh) | Expiration date |
| | | | | | | |
| Willem M. Smit (Chief Executive Officer) | June 4, 2008 | $1.00 | 240,000 | 21% | $2.00 | June 4, 2012 |
| Rogier W. Smit (Executive vice President) | June 4, 2008 | $1.00 | 400,000 | 35% | $2.00 | June 4, 2012 |
| Dominque Morel (CTO) | June 4, 2008 | $1.00 | 100,000 | 9% | $2.00 | June 4, 2012 |
| W. Simon (Chairman of the Board of Directors) | June 4, 2008 | $1.00 | 80,000 | 7% | $2.00 | June 4, 2012 |
| E. van Emden (member of the Board of Directors) | June 4, 2008 | $1.00 | 40,000 | 3.5% | $2.00 | June 4, 2012 |
| G. Calhoun (member of the Board of Directors) | June 4, 2008 | $1.00 | 40,000 | 3.5% | $2.00 | June 4, 2012 |
| Pierre-Yves Thiercelin (International Sales Director) | June 4, 2008 | $1.00 | 100,000 | 9% | $2.00 | June 4, 2012 |
____________
(1) See applicable footnotes to above Summary Compensation Table. |
Option Exercises and Holdings
During the fiscal year ended December 31, 2008, no options were exercised.
Directors’ Compensation
Each non-employee director is paid an annual cash retainer in the amount of $30,000 ($36,000 for the Chairman) for attending the meetings of the Board of Directors or its committees at which there is a quorum, whether in person or by telephone. In addition, all directors are eligible for reimbursement of their expenses in attending meetings of the Board of Directors or its committees. The non-employee directors have received stock options in 2007 as disclosed in the table above. The options have a three year term and vest on April 1, 2008. The stock price on the day of the option grant was $0.75.
Employment Agreements
Mr. Rogier W. Smit, Executive Vice President has an employment agreement for an indefinite period, but can be terminated by the Company upon twelve months notice or by Mr. Smit upon six months notice. Mr. Smit´s base salary amounts to $15,400 (€11,000) per month. In addition to his salary, Mr. Smit is entitled to a company car. Pursuant to the agreement, Mr. Smit is also subject to confidentiality, non-competition and invention assignment requirements.
Mr. Dominique Morel, Chief Technology Officer, has an employment agreement for an indefinite period but can be terminated by the Company upon six months notice or by Mr. Morel upon 3 months notice. Mr. Morel’s base salary will be $15,400 (€11,000) per month. In addition to his salary, Mr. Morel is entitled to a company car. Pursuant to the agreement, Mr. Morel was granted 100,000 options to purchase shares of common stock of the Company at an exercise price of $3.50 per share. 25,000 of these options vested on October 1, 2007, and 25,000 of the remaining options will vest on October 1, 2008, October 1, 2009 and October 1, 2010. Pursuant to the agreement, Mr. Morel is also subject to confidentiality, non-competition and invention assignment requirements.
Mr. Wilbert Knol, Interim Chief Financial Officer, has an employment agreement is for an indefinite period but can be terminated by the Company upon two months notice or by Mr. Knol upon 1 months notice. Mr. Knol ’s base salary as CFO a.i. is $13,700 (€9,336) per month. In addition to his salary, Mr. Knol is entitled to a company car. Pursuant to the agreement w e granted to Mr. Knol, 60,000 options to purchase shares of our common stock at an exercise price of $2.50 per share. A total of 20,000 shares of these options will vest on May 4, 2008, and the remaining options will vest in two equal installments on May 4, 2009, May 4, 2010. Pursuant to the agreement, Mr. Knol is also subject to confidentiality, non-competition and invention assignment requirements. The interim contract with Mr. Knol was not extended as of March 18, 2009.
Mr. Marcel Noordeloos, Interim Chief Financial Officer as of March 18, 2009, has an employment agreement is for an indefinite period but can be terminated by the Company upon two months notice or by Mr. Noordeloos upon 1 months notice. Mr. Noordeloos’ base salary as CFO a.i. is $15,400 (€11,000) per month. In addition to his salary, Mr. Noordeloos is entitled to a company car. Pursuant to the agreement w e granted to Mr. Noordeloos, 100,000 options to purchase shares of our common stock at an exercise price of $0.60 per share. A total of 33,333 shares of these options will vest on January 23, 2010, and the remaining options will vest in two equal installments on January 23, 2011 and January 23, 2012. Pursuant to the agreement, Mr. Noordeloos is also subject to confidentiality, non-competition and invention assignment requirements.
Mr. Pierre-Yves Thiercelin, Chief Marketing and Sales Officer, joined Playlogic in March 2007 and actively contributes to the further development of the company’s distribution network. Mr. Thiercelin has over 9 years experience in international trade working for various video games companies such as Midway, Novalogic and Ignition and also for non video games companies such as Samsung. Mr. Thiercelin’s base salary as Chief Marketing and Sales Officer. is $15,400 (€11,000) per month. In addition to his salary, Mr. Noordeloos is entitled to a company car.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of December 31, 2008, information concerning the ownership of all classes of common stock of the Company of (i) all persons known to the Company to beneficially own 5% or more of the Company’s common stock, (ii) each director of the Company, (iii) the Named Executive Officers and (iv) all directors and executive officers of the Company as a group. Share ownership includes shares issuable upon exercise of outstanding options that are exercisable within 60 days of December 31, 2008.
Name and Address (1) | | Number of Shares of Common Stock | | | Percentage of Common Stock | |
| | | | | | | |
Sloterhof Investments N.V. Pietermaai 15 Curacao, Netherlands Antilles | | | 7,303,357 | | | | 15.7 | % |
Castilla Investments B.V. Concertgebouwplein 13 1071 LL Amsterdam The Netherlands | | | 1,777,496 | | | | 3.8 | % |
Wind Worth Luxembourg Holding S.A.H 19 Rue de l’Industrie 8069 Betrange Luxembourg | | | 2,138,874 | | | | 4.6 | % |
W.M. Smit (2) | | | 7,303,357 | | | | 15.7 | % |
R.W. Smit (3) | | | 1,777,496 | | | | 3.8 | % |
BL Capital BV Zuiderkruis 1 5215 MV ’s Hertogenbosch The Netherlands | | | 9,639,541 | | | | 20.7 | % |
Opportunity Fund Brabant B.V. Vughterweg 47 5211 CK ‘sHertogenbosch The Netherlands | | | 7,969,948 | | | | 17.2 | % |
| E.L.A. van Emden | | | 0 | | | | * | |
| W.J. Simon | | | 87,494 | | | | * | |
| G.M. Calhoun | | | 25,500 | | | | * | |
| All directors and executive officers as a group | | | 9,193,847 | | | | 19.8 | % |
*Less than 1%
___________
(1) Unless otherwise indicated, the address is our address at Strawinskylaan 1041, 1077 XX Amsterdam, The Netherlands.
(2) Includes shares held by Sloterhof Investments N.V. a company beneficially owned by Mr. W.M. Smit.
(3) Includes shares held by Castilla Investments B.V. a company beneficially owned by Mr. R.W. Smit.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Effective January 1, 2006 the Company entered into a service agreement with Altaville Investments N.V., a company beneficially owned by its CEO Willem M. Smit. The Company pays for certain services among others house keeping and cleaning services provided by Altaville to the Company at an annual aggregate amount of approximately $66,000 which is paid in 4 quarterly installments.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees.
The aggregate fees billed by Cordovano & Honeck for professional services rendered for the review of financial statements included in the Company's Forms 10-QSB for the quarters ended March 31, 2008, June 30, 2008 and September 30, 2008 as included in the Company’s Forms 10-Q as well as for the audit of the financial statements ended December 31, 2008 as included in the Company’s 10-K were $115,000
The aggregate fees billed by DVR Accountants for professional services rendered for assistance in the review of financial statements included in the Company's Forms 10-Q for the quarter ended March 31, 2008, June 30, 2008 and September 30, 2008 as well as for the audit of the financial statements ended December 31, 2008 as included in the Company’s 10-K were $44,000.
Audit-Related Fees.
No fees were billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements, for the years ended December 31, 2008.
Tax Fees.
The aggregate fees billed for tax compliance, tax advice or tax planning services by DRV for the fiscal year ended December 31, 2008 were $15,000
All Other Fees.
There were no fees billed for products and services, other than the services described in the paragraphs captions “Audit Fees”, “Audit-Related Fees”, and “Tax Fees” above for the years ended December 31, 2008.
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
| | (a) | Documents filed as part of Form 10-KSB |
1. Financial Statements:
The following financial statements of the Company are submitted in a separate section pursuant to the requirements of Form 10-K, Part I, Item 8 and Part IV, Items 14(a) and 14(d):
Index to Consolidated Financial Statements
Consolidated Balance Sheet
Consolidated Statements of Operations and Comprehensive Income
Consolidated Statement of Changes in Shareholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Schedules Supporting Financial Statements:
All schedules are omitted because they are not required, are inapplicable, or the information is otherwise shown in the consolidated financial statements or notes to the consolidated financial statements.
3. Exhibits:
Exhibit Index
| Exhibit 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15-14(a) | Filed Herewith |
| Exhibit 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15-14(a) | Filed Herewith |
| Exhibit 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed Herewith |
| Exhibit 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed Herewith |
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. |
| | | |
| Dated: March 31, 2009 | By: | /s/ Willem M. Smit |
| | Willem M. Smit Chief Executive Officer |
| | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | | Capacity in Which Signed | Date |
| | | | |
| /s/Willy J.. Simon | | Chairman of the Board | March 31, 2009 |
| Willy J. Simon | | | |
| | | | |
| /s/ Willem M. Smit | | Director and Chief Executive Officer | March 31, 2009 |
| Willem M. Smit | | | |
| | | | |
| /s/ Marcel W.J. Noordeloos | | Interim Chief Financial Officer (Principal Financing and Accounting Officer) | March 31, 2009 |
| Marcel W.J. Noordeloos | | | |
| | | | |
| /s/ Erik L.A. van Emden | | Director | March 31, 2009 |
| Erik L.A. van Emden | | | |
| | | | |
| /s/ George M. Calhoun | | Director | March 31, 2009 |
| George M. Calhoun | | | |
| | | | |
| /s/ Ruud Spoor | | Director | March 31, 2009 |
| Ruud Spoor | | | |
CONTENTS
| | Page |
| | |
| Reports of Independent Registered Public Accounting Firms | F-2 |
| | |
| Consolidated Balance Sheets as of December 31, 2008 and 2007 | F-3 |
| | |
| Consolidated Statements of Operations for the years ended December 31, 2008 and 2007 | F-4 |
| | |
| Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 2008 and 2007 | F-5 |
| | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007 | F-6 |
| | |
| Notes to the Consolidated Financial Statements | F-7 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Playlogic Entertainment, Inc.
We have audited the accompanying consolidated balance sheets of Playlogic Entertainment, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of operations and comprehensive loss, changes in shareholders equity, and cash flows for the years ended December 31, 2008 and 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over consolidated financial reporting. Our audits included consideration of internal control over consolidated financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over consolidated financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Playlogic Entertainment, Inc. as of December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for the years ended December 31, 2008 and 2007 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the financial statements, the Company has working capital deficit and recurring negative operating cash flows during the years ended December 31, 2008 and 2007, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Cordovano and Honeck LLP
Cordovano and Honeck LLP
Englewood, Colorado
March 31, 2009
| PLAYLOGIC ENTERTAINMENT INC. AND SUBSIDIARIES | |
| CONSOLIDATED BALANCE SHEETS | |
| | | | | | | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| ASSETS | | | | |
| Current Assets | | | | | | |
| Cash and cash equivalents | | $ | 81,978 | | | $ | 349,464 | |
| Receivables | | | | | | | | |
| Trade, net of allowance for doubtful accounts | | | 380,993 | | | | 671,148 | |
| Officers | | | 109,876 | | | | 78,754 | |
| Value Added Taxes from foreign governments | | | 71,783 | | | | 50,620 | |
| Current portion of software development costs | | | 5,179,976 | | | | 6,244,843 | |
| Inventory finished product | | | 812,020 | | | | - | |
| Intellectual property licenses | | | 1,905,947 | | | | - | |
| Prepaid expenses and other receivables | | | 560,765 | | | | 892,855 | |
| | | | | | | | | |
| Total current assets | | | 9,103,338 | | | | 8,287,684 | |
| | | | | | | | | |
| | | | | | | | | |
| Property and equipment, net of accumulated depreciation | | | 1,226,134 | | | | 753,768 | |
| | | | | | | | | |
| Other assets | | | | | | | | |
| Software development costs, net of current portion | | | 3,401,058 | | | | 1,040,510 | |
| Restricted cash | | | 210,000 | | | | - | |
| | | | | | | | | |
| Total other assets | | | 3,611,058 | | | | 1,040,510 | |
| | | | | | | | | |
| Total Assets | | $ | 13,940,530 | | | $ | 10,081,962 | |
| | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS' DEFICIT | | | | | |
| | | | | | | | | |
| Current Liabilites | | | | | | | | |
| Accounts and notes payable | | | | | | | | |
| Accounts payable | | $ | 5,453,262 | | | $ | 4,785,678 | |
| Note payable to bank | | | - | | | | 1,056,552 | |
| Note payable, other | | | - | | | | 397,845 | |
| Other current liabilities | | | | | | | | |
| Current maturities of long-term debt | | | 3,342,000 | | | | 44,205 | |
| Accrued liabilities | | | 1,896,466 | | | | 2,142,754 | |
| Deferred revenues | | | - | | | | 148,750 | |
| Indebtedness to related party | | | 3,794,000 | | | | 589,400 | |
| | | | | | | | | |
| Total current liabilities | | | 14,485,728 | | | | 9,165,184 | |
| | | | | | | | | |
| | | | | | | | | |
| Non Controlling interest in Joint-Venture | | | (371,857 | ) | | | - | |
| | | | | | | | | |
| Long-term debt, less current maturities | | | 2,146,338 | | | | 221,025 | |
| | | | | | | | | |
| Total Liabilities | | | 16,260,209 | | | | 9,386,209 | |
| | | | | | | | | |
| 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. 46,391,275 and 38,532,580 shares issued and outstanding, respectively | | | 46,392 | | | | 38,533 | |
| Additional paid-in capital | | | 61,229,130 | | | | 54,081,832 | |
| Deferred Compensation-Employee Stock Options | | | 580,572 | | | | 374,571 | |
| Accumulated Other Comprehensive Loss | | | (3,955,083 | ) | | | (3,057,297 | ) |
| Accumulated deficit | | | (60,220,690 | ) | | | (50,741,886 | ) |
| Total Shareholders' Equity/(Deficit) | | | (2,319,679 | ) | | | 695,753 | |
| | | | | | | | | |
| Total Liabilities and Shareholders' Equity | | $ | 13,940,530 | | | $ | 10,081,962 | |
The accompanying notes are an integral part of these consolidated financial statements
| PLAYLOGIC ENTERTAINMENT INC. AND SUBSIDIARIES | |
| CONSOLIDATED STATEMENTS OF OPERATIONS | |
| | | | | | | |
| | | | | | | |
| | | Year ended December 31 | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| Net revenues | | | | | | |
| Sales, net of returns and allowances | | $ | 9,024,196 | | | $ | 10,099,746 | |
| | | | | | | | | |
| Cost of sales | | | | | | | | |
| Direct costs and license fees | | | (3,330,955 | ) | | | (2,673,675 | ) |
| Amortisation of software development costs | | | (2,237,151 | ) | | | (2,386,223 | ) |
| | | | (5,568,105 | ) | | | (5,059,898 | ) |
| | | | | | | | | |
| Gross profit | | | 3,456,091 | | | | 5,039,848 | |
| | | | | | | | | |
| Operating expenses | | | | | | | | |
| Research and development | | | 460,038 | | | | 542,215 | |
| Selling and marketing | | | 871,122 | | | | 1,020,674 | |
| General and administrative | | | 6,316,759 | | | | 3,430,683 | |
| Depreciation | | | 384,960 | | | | 297,292 | |
| Asset impairment charges | | | 4,500,000 | | | | 68,566 | |
| Total operating expenses | | | 12,532,879 | | | | 5,359,430 | |
| | | | | | | | | |
| Loss from operations | | | (9,076,788 | ) | | | (319,582 | ) |
| | | | | | | | | |
| Other income/(expense) | | | | | | | | |
| Gain on debt restructuring | | | - | | | | 850,411 | |
| Interest expense | | | (679,504 | ) | | | (1,164,250 | ) |
| Realized and unrealized exchange profit | | | (412,360 | ) | | | 1,377,150 | |
| | | | | | | | | |
| Profit/(loss) before provision for income taxes | | | (10,168,653 | ) | | | 743,729 | |
| | | | | | | | | |
| Equity in non controlling interest | | | 689,856 | | | | | |
| | | | | | | | | |
| Provision for Income Taxes | | | - | | | | - | |
| | | | | | | | | |
| Net Profit /(loss) | | | (9,478,797 | ) | | | 743,729 | |
| | | | | | | | | |
| Other comprehensive income/(loss) | | | | | | | | |
| Foreign currency adjustment | | | (371,231 | ) | | | (104,667 | ) |
| | | | | | | | | |
| Comprehensive Income/(Loss) | | $ | (9,850,028 | ) | | $ | 639,062 | |
| | | | | | | | | |
| Net profit per weighted-average share of common stock outstanding, computed on Net Profit | | | | | | | | |
| - basic and fully diluted | | | (0.22 | ) | | | 0.03 | |
| | | | | | | | | |
| Weighted-average number of shares of common stock outstanding | | | | | | | | |
| - basic and fully diluted | | | 42,758,577 | | | | 29,410,954 | |
The accompanying notes are an integral part of these consolidated financial statements
| PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES | |
| CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Additional | | | | | | Accumulated Other Comprehensive Loss | | | | | | | |
| | | Common stock | | | Paid-in | | | Deferred Compensation | | | Accumulated | | | | |
| | | Shares | | | Par Value | | | Capital | | | deficit | | | Total | |
| Balances at December 31, 2006 | | | 25,332,109 | | | $ | 25,332 | | | $ | 42,596,112 | | | $ | 414,040 | | | $ | (2,439,541 | ) | | $ | (51,485,615 | ) | | $ | (10,889,672 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | - | |
| Common stock issued for cash | | | 2,648,278 | | | | 2,649 | | | | 2,732,370 | | | | | | | | | | | | | | | | 2,735,019 | |
| Issuing costs | | | | | | | | | | | (113,052 | ) | | | | | | | | | | | | | | | (113,052 | ) |
| Common stock issued to settle vendor payables | | | 3,413,598 | | | | 3,414 | | | | 2,921,018 | | | | | | | | | | | | | | | | 2,924,432 | |
| Common stock issued in exchange for debt | | | 7,138,595 | | | | 7,139 | | | | 5,845,384 | | | | | | | | | | | | | | | | 5,852,523 | |
| Capital contributed to support operations | | | | | | | | | | | 100,000 | | | | | | | | | | | | | | | | 100,000 | |
| Stock options issued pursuant to Employee Compensation Plan | | | | | | | | | | | | | | | (39,469 | ) | | | | | | | | | | | (39,469 | ) |
| Change in currency translation adjustment | | | | | | | | | | | | | | | | | | | (617,757 | ) | | | | | | | (617,757 | ) |
| Net profit for the period | | | | | | | | | | | | | | | | | | | | | | | 743,729 | | | | 743,729 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balances at December 31, 2007 | | | 38,532,579 | | | | 38,533 | | | | 54,081,831 | | | | 374,571 | | | | (3,057,291 | ) | | | (50,741,892 | ) | | | 695,753 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash | | | 7,858,696 | | | | 7,859 | | | | 7,492,141 | | | | | | | | | | | | | | | | 7,500,000 | |
| Capital contributed to support operations | | | | | | | | | | | 100,000 | | | | | | | | | | | | | | | | 100,000 | |
| Issuing costs | | | | | | | | | | | (963,432 | ) | | | | | | | | | | | | | | | (963,432 | ) |
| Stock options issued pursuant to Employee Compensation Plan | | | | | | | | | | | | | | | 206,001 | | | | | | | | | | | | 206,001 | |
| Discount on debt | | | | | | | | | | | 518,590 | | | | | | | | | | | | | | | | 518,590 | |
| Change in currency translation adjustment | | | | | | | | | | | | | | | | | | $ | (897,792 | ) | | | | | | | (897,792 | ) |
| Net result for the year | | | | | | | | | | | | | | | | | | | | | | $ | (9,478,798 | ) | | | (9,478,798 | ) |
| Balances at December 31, 2008 | | $ | 46,391,275 | | | $ | 46,392 | | | $ | 61,229,130 | | | $ | 580,572 | | | $ | (3,955,083 | ) | | $ | (60,220,690 | ) | | $ | (2,319,679 | ) |
The accompanying notes are an integral part of these consolidated financial statements
| PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |
| | |
| | | Year ended December 31, | |
| | | 2008 | | | 2007 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net Profit / (Loss) | | $ | (9,478,797 | ) | | | 743,729 | |
| Adjustments to reconcile net loss to net cash used in operating activities | | | | | | | | |
| Depreciation | | | 388,372 | | | | 287,292 | |
| Amortization of software development | | | 2,237,151 | | | | 1,343,229 | |
| Impairment of software development | | | 4,500,000 | | | | | |
| Bad debt expense | | | 109,004 | | | | - | |
| Expense charges for stock options | | | 206,000 | | | | (39,469 | ) |
| Management fees contributed as capital | | | 100,000 | | | | 100,000 | |
| Non-cash interest charge on warrants | | | 147,000 | | | | | |
| | | | | | | | | |
| (Increase)/ Decrease in cash attributable to changes in operating assets and liabilities | | | | | | | | |
| Cash paid for software development | | | (10,158,820 | ) | | | (1,981,477 | ) |
| Restricted cash | | | (220,663 | ) | | | 160,105 | |
| Accounts receivable - trade and other | | | (824,400 | ) | | | 154,940 | |
| Inventory finished product | | | (878,317 | ) | | | - | |
| Prepaid expenses and other | | | (33,237 | ) | | | (17,345 | ) |
| Increase / (Decrease) in | | | | | | | | |
| Deferred revenues | | | (148,506 | ) | | | (1,234,181 | ) |
| Accounts payable - trade | | | 1,058,186 | | | | (67,904 | ) |
| Payroll taxes payable | | | 444,737 | | | | (208,661 | ) |
| Other current liabilities | | | (512,745 | ) | | | (2,714,705 | ) |
| Net cash used in operating activities | | $ | (13,065,035 | ) | | $ | (3,474,447 | ) |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Cash paid to acquire property and equipment | | | (864,078 | ) | | | (69,180 | ) |
| Net cash used in investing activities | | | (864,078 | ) | | | (69,180 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Payments on bank line of credit | | | (1,054,821 | ) | | | (880,805 | ) |
| Borrowings under short term loans | | | - | | | | 2,564,353 | |
| Cash repaid on short term notes | | | (397,192 | ) | | | (967,177 | ) |
| Principal payments on long-term debt | | | (22,066 | ) | | | (41,138 | ) |
| Cash received from shareholder loans | | | 8,986,499 | | | | | |
| Proceeds from sales of common stock | | | 6,536,568 | | | | 2,788,939 | |
| Net cash provided by financing activities | | | 14,048,988 | | | | 3,464,172 | |
| | | | | | | | | |
| Effect of foreign exchange on cash | | | (387,363 | ) | | | 410,486 | |
| | | | | | | | | |
| Increase/(Decrease) in Cash | | | (267,488 | ) | | | 331,031 | |
| Cash at beginning of period | | | 349,465 | | | | 18,433 | |
| | | | | | | | | |
| Cash at end of period | | $ | 81,978 | | | $ | 349,464 | |
| | | | | | | | | |
| Supplemental disclosures of interest and income taxes paid | | | | | | | | |
| Interest paid during the period | | $ | - | | | $ | 1,331,716 | |
| Income taxes paid (refunded) | | | - | | | | - | |
| | | | | | | | | |
| Supplemental disclosures of non-cash investing and financing activities | | | | | | | | |
| Common stock issued to repay notes payable | | $ | - | | | $ | 5,852,523 | |
| Cost of acquiring capital paid with issuance of common stock | | $ | 963,432 | | | $ | 113,052 | |
| Payments paid to vendors directly by equity subscribers | | $ | - | | | $ | 2,924,432 | |
The accompanying notes are an integral part of these consolidated financial statements
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Playlogic Entertainment, Inc. (“Playlogic,” the “Company” or “we”) develops and publishes interactive software games designed for video game consoles, handheld platforms and personal computers. We currently offer our products primarily in versions that operate on the Sony PlayStation 2 (“PS2”), Sony PlayStation 3 (“PS3”), Nintendo Wii (“Wii”), and Microsoft Xbox 360 (“Xbox360”) console systems, Nintendo Game Boy Advance (“GBA”), Sony PlayStation Portable (“PSP”), and Nintendo Dual Screen (“NDS”) hand-held devices, and the personal computer (“PC”).
We develop and publish action/adventure, racing, simulation, first-person action, and other software games to casual players, game enthusiasts, children, adults, and mass-market consumers. Our principal sources of revenue are derived from publishing operations. Publishing revenues are derived from the sale of internally developed software titles or software titles developed by third parties. Our publishing business involves the development, marketing, and sale of products directly through distributors or through licensing arrangements, under which we receive royalties.
We sell our products globally, focusing on the United States, Europe and Asia.
We have opened a joint-venture distribution office in the United Kingdom that became operational during Q4 2008. We have a 60% share in this company that will serve primarily the UK market through direct retail sales. The Company has invested Euro 300,000 (or USD 420,000) in setting up this company. We hold 300 out of 500 shares of this joint-venture company. The company is named PlayV Limited.
Management acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce consolidated financial statements which present fairly the consolidated financial condition, results of operations and cash flows of the Company for the respective periods being presented
Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of net revenue and expenses during the reporting periods. The most significant estimates and assumptions relate to the recoverability of software development costs, licenses and intangibles, and the adequacy of allowances for returns, price concessions and doubtful accounts. Actual amounts could differ significantly from these estimates.
Principles of consolidation
The consolidated financial statements include the consolidated financial statements of Playlogic Entertainment, Inc. a Delaware corporation, Playlogic International N.V. (a corporation domiciled in The Netherlands) and its wholly-owned subsidiary Playlogic Game Factory B.V. (a corporation domiciled in The Netherlands). Furthermore, we have a 60% share in a joint-venture founded in the UK that became operational in the fourth quarter of 2008. All inter-company accounts and transactions have been eliminated in consolidation.
For reporting purposes, the Company operated in only one industry for all periods presented in the accompanying consolidated financial statements and makes all operating decisions and allocates resources based on the best benefit to the Company as a whole.
Basis of presentation – Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. At December 31, 2008 and 2007, we had a working capital deficit of approximately $2,320,000 and $877,000, respectively, resulting from recurring negative operating cash flow which raised substantial doubts about our ability to continue as a going concern. Our continued existence as a going concern is dependent upon our ability to generate sufficient cash flows to support our ongoing operations by meeting our current obligations as they come due and servicing our long-term debt on a timely basis.
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 to six 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.
The Company anticipates future sales of equity securities to raise working capital to support and preserve the integrity of the corporate entity. However, there is no assurance that the Company will be able to obtain additional funding through the sales of additional equity securities or, that such funding, if available, will be obtained on terms favorable to or affordable by the Company.
If no additional operating capital is received during the next twelve months, the Company will be forced to rely on existing cash in the bank and upon 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.
Currency translation
The accompanying consolidated financial statements are reported in U.S. Dollars. Accounts of foreign operations are translated into U.S. dollars using exchange rates at the balance sheet date for assets and liabilities accounts and average prevailing exchange rates during the period for revenue and expense accounts. Adjustments resulting from translation are included in other comprehensive income (loss). Realized and unrealized transaction gains and losses are included in income in the period in which they occur, except on inter-company balances considered to be long term. Transaction gains and losses on inter-company balances considered to be long term are recorded in other comprehensive income.
Comprehensive income (loss) is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. The Company’s items of other comprehensive income (loss) are foreign currency translation adjustments, which relate to investments that are permanent in nature and therefore do not require tax adjustments.
The Euro is the functional currency of our operating subsidiaries domiciled in The Netherlands. We translate Euro into US Dollars, in accordance with the following table:
| Financial statement element | Applicable rate | |
| Balance sheet date * | |
| Liabilities | Balance sheet date * | |
| Equity | Historical | |
| Revenues | Annual average** | |
| Expenses | Annual average** | |
| Gains | Annual average** | |
| Losses | Annual average** | |
*$1,4000 and $1.4735 at December 31, 2008 and 2007, respectively
** Average for the year ended December 31, 2008 was $1.4711
Average for the year ended December 31, 2007 was $1.3713
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Cash and cash equivalents
The Company considers all highly liquid securities with original maturities of three months or less when acquired to be cash equivalents. The restricted cash represents a bank guarantee that we have given in respect to the lease of the offices in the WTC Amsterdam.
Concentration of Credit Risk
Financial instruments which potentially subject us to concentration of credit risk consist principally of accounts receivable. Our customer base includes distributors and retailers. We perform ongoing credit evaluations of our customers and maintain an allowance for potential credit losses. We generally do not require collateral or other security from our customers. Our four largest customers accounted for 77%, and 76% of consolidated net revenues in each of the two years ended December 31, 2008, and 2007 respectively. As of December 31, 2008 and 2007, the four largest customers accounted for 35% and 53%, respectively, of our consolidated accounts receivable balance. Except for the largest customers noted above, all receivable balances from the remaining individual customers are less than 10% of the Company’s consolidated net receivable balance. Management believes that the receivable balances from these largest customers do not represent a significant credit risk based on past collection experience. We are currently investigating to insure our debtors in order to limit credit risks.
Fair Value of Financial Instruments
The estimated fair values of financial instruments have been determined using available market information and valuation methodologies described below. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein may not be indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their short-term nature. Short-term investments are carried at fair value with fair values being estimated based on quoted market prices.
Accounts receivable - trade
Our customers are located principally within Europe. We typically make sales on account, with terms that vary depending upon the customer's credit history, liquidity, credit limits and sales history. From time to time, distributors and retailers in the interactive entertainment software industry have experienced significant fluctuations in their business operations and a number of them have failed. The failure of a significant customer could have a material negative impact on our cash flow. We consider accounts past due, based on the terms in the contract. Generally, the payment terms differ per contract depending on the country in which our customer is located. On average we consider account more than 45 days old to be past due.
Because of the credit risk involved, management has provided an allowance for doubtful accounts receivable, totaling $428,017 and $356,043 at December, 31, 2008 and 2007, respectively, which we believe will eventually become uncollectible. The main part of this amount has already been expensed in 2006. We recorded expenses for doubtful debt during the years ended 2008 and 2007 of approximately $88,000 and $-0-, respectively.
Property and equipment
Property and equipment is recorded at cost and depreciated on a straight-line basis, over the estimated useful lives (generally 3 to 10 years) of the respective asset. Leasehold improvements are depreciated over the lesser of the lease term or estimated useful life. Major additions and betterments are capitalized and depreciated over the estimated useful lives of the related assets. Maintenance, repairs, and minor improvements are charged to expense as incurred.
Impairment of Long-lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We assess these assets for impairment based on estimated undiscounted future cash flows from these assets. If the carrying value of the assets exceeds the estimated future undiscounted cash flows, a loss is recorded for the excess of the asset’s carrying value over the fair value. The Company did not recognize any impairment loss for long-lived assets for the years ended December 31, 2008 and 2007
Software game development costs
Capitalized software game development costs include payments made in the form of milestone payments to independent software developers under development agreements, as well as direct costs incurred for internally developed titles. We account for software development costs in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 86 Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Initially, we charge software development costs to research and development expense. We capitalize software game development costs after the technological feasibility of a title is established and such costs are determined to be recoverable against future revenues. Amortization of such costs, as a component of cost of sales, is recorded on a title-by-title basis based on the greater of the proportion of current year sales to the total of current and estimated future sales for the title or the straight-line method over the remaining estimated useful life of the title. At each balance sheet date, the Company evaluates the recoverability of capitalized software costs based on net undiscounted future cash flows and charges to operations any amounts that are deemed unrecoverable.
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Impairment
For the years ended December 31, 2008 and 2007, the Company recognized impairment charges of approximately of $4,500,000 and $69,000, respectively, and amortization charges of approximately $2,237,000 and $ 2,368,000 respectively.
The impairment charge recorded in 2008 is due to the worldwide economic crisis as well as to a change in the market from PC titles to console titles. More and more consumers are interested in console titles as oppose to PC titles. Management has assessed all titles in the portfolio, on a title by title basis. Only titles that have been released to market have been impaired.
Our agreements with third-party developers generally provide us with exclusive publishing and distribution rights in exchange for advance payments that are recouped against royalties due to the developer based on the contractual amounts of product sales, adjusted for certain costs.
Intellectual property licenses
Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology, music or other intellectual property or proprietary rights in the development of our products. Depending upon the agreement with the rights holder, we may obtain the rights to use acquired intellectual property in multiple products over multiple years, or alternatively, for a single product. Prior to the related product's release, we expense, as part of "cost of sales—intellectual property licenses," capitalized intellectual property costs when we believe such amounts are not recoverable. Capitalized intellectual property costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation.
Commencing upon the related product's release, capitalized intellectual property license costs are amortized to "cost of sales—intellectual property licenses" based on the ratio of current revenues for the specific product to total projected revenues for all products in which the licensed property will be utilized. As intellectual property license contracts may extend for multiple years, the amortization of capitalized intellectual property license costs relating to such contracts may extend beyond one year.
Inventory
Inventory is stated at the lower of average cost or market. We periodically evaluate the carrying value of our inventory and make adjustments as necessary. Estimated product returns are included in the inventory balance at their cost.
Research and development expenses
Research and development expenses are charged to operations as incurred and consist of the direct costs associated with developing software games prior to the establishment of technological feasibility of a specific game title. Research and development expenses totaled approximately $460,000 and $542,000 for the years ended December 31, 2008 and 2007, respectively.
Advertising expenses
We expense advertising costs as incurred. Advertising expense for the years ended December 31, 2008 and 2007 amounted to approximately $736,000, and $988,000, respectively.
Income Taxes
We utilize the asset and liability method of accounting for income taxes. At December 31, 2008 and 2007, the deferred tax asset and deferred tax liability accounts, as recorded when material, are entirely the result of temporary differences. Temporary differences generally represent differences in the recognition of assets and liabilities for tax and consolidated financial reporting purposes, primarily accumulated depreciation and amortization and the anticipated utilization of net operating loss carry forwards to offset current taxable income.
On January 1, 2007, we adopted FASB issued FIN 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The Company’s policy is to record estimated interest and penalties related to the underpayment of income taxes as income tax expense in the Statements of Operations. The Company had no changes in the carrying amount value of its tax assets or liabilities for any unrecognized tax benefits.
Share-Based Payment Arrangements
The Company records its share-based compensation in accordance with the provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS No. 123R, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant). The Company has estimated expected forfeitures, as required by SFAS No. 123R, and is recognizing compensation expense only for those awards expected to vest. The Company also followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure. For the years ended December 31, 2008and 2007, the Company recorded approximately $206,000 and $72,000 respectively, of stock-based compensation expense in connection with its adoption of SFAS 123(R). See Note J for a full discussion of the Company’s stock-based compensation arrangements.
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Earnings (loss) 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 would then share in the earnings of the Company.
Unexercised stock options to purchase 3,202.500 and 1,312,500 shares of the Company’s common stock as of December 31, 2008 and 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 9,714,864 shares and 6,402,778 shares of our common stock as of December 31, 2008 and 2007, respectively, were excluded from the computation of diluted earnings per share because the exercise of warrants would be anti-dilutive to earnings per share.
Revenue recognition
We earn sales revenue from the sale of internally developed interactive software titles and from the sale of titles developed by and/or licensed from third-party developers and from contractual development activities.
We recognize revenue in accordance with SOP 97-2, Software Revenue Recognition , as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions and U. S. Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements , as revised by SAB 104, Revenue Recognition .. As such, we recognize revenue when the following conditions are met:
| | | | 1. | Evidence of an arrangement: The Company recognizes revenue when it has evidence of an agreement with the customer reflecting the terms and conditions to deliver products. |
| | | | 2. | Delivery: Delivery is considered to occur when the products are shipped and risk of loss has been transferred to the customer. |
| | | | 3. | Fixed or determinable fee: If a portion of the arrangement fee is not fixed or determinable, the Company recognizes that amount as revenue when the amount becomes fixed or determinable. |
| | | | 4. | Collection is deemed probable: At the time of the transaction, we conduct a credit review of each customer involved in a significant transaction to determine the creditworthiness of the customer. Collection is deemed probable if the credit review shows that customer is able to pay amounts under the arrangement as those amounts become due. If we later determine that collection is not probable, we recognize revenue when collection becomes probable (generally upon cash collection). |
The Company defers revenues on sales which do not conform to the above listed criteria until such time that the billed amount is either paid or any attached right-of-return expires/terminates. Certain of the Company’s software products provide limited online functionality at no additional cost to the consumer. Currently, none of the Company’s products require an internet connection for use, and online functionality is perceived to be of only incidental value to the software product itself. When such functionality is provided to the consumer, the Company does not provide ongoing technical support, nor does it provide hosting services. As the online functionality features do not meet any of the criteria of EITF 00-21 ("Revenue Arrangements with Multiple Deliverables”), the Company does not defer revenue related to products containing outline features.
Revenue is recognized after deducting estimated reserves for returns, price concessions and other allowances. In circumstances when the Company does not have a reliable basis to estimate returns and price concessions or is unable to determine that collection of a receivable is probable, it defers the revenue until such time as it can reliably estimate any related returns and allowances and determine that collection of the receivable is probable.
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Allowances for Returns, Price Concessions and Other Allowances
Our policy is to accept returns and we grant price concessions in connection with our publishing arrangements. Following reductions in the price of its products, we grant price concessions which permit customers to take credits for unsold merchandise against amounts they owe us. Our customers must satisfy certain conditions to allow them to return products or receive price concessions, including compliance with applicable payment terms and confirmation of field inventory levels. We estimate future product returns and price concessions related to current period product revenue based upon, among other factors, historical experience and performance of the titles in similar genres, historical performance of a hardware platform, customer inventory levels, analysis of sell-through rates, sales force and retail customer feedback, industry pricing, market conditions and changes in demand and acceptance of its products by consumers. We make significant judgments and estimates in connection with establishing the allowance for returns and price concessions in any accounting period. We believe we can make reliable estimates of returns and price concessions. However, actual results may differ from initial estimates as a result of changes in circumstances, market conditions and assumptions. Adjustments to estimates are recorded in the period in which they become known.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), ‘’Business Combinations’’, or SFAS No. 141R. SFAS No. 141R will change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Accordingly, any business combinations we engage in beginning January 1, 2009 will be recorded and disclosed in according with SFAS No. 141R. We expect SFAS No. 141R to have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions at that time. We are still assessing the impact of this pronouncement.
In December 2007, the FASB issued SFAS No. 160, "Non controlling Interests in Consolidated Financial Statements--An Amendment of ARB No. 51, or SFAS No. 160" ("SFAS No. 160"). SFAS No. 160 establishes new accounting and reporting standards for the non controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company believes that SFAS 160 will not have a material impact on the consolidated financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"). SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this statement is not expected to have a material effect on the Company's future financial position or results of operations.
In May, 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles", ("SFAS No. 162"). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS No. 162 will be effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board's amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles". The FASB has stated that it does not expect SFAS No. 162 will result in a change in current practice. The application of SFAS No. 162 will have no effect on the Company's financial position, results of operations or cash flows.
Also in May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts--an interpretation of FASB Statement No. 60" ("SFAS No. 163"). SFAS No. 163 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Company is currently evaluating the impact of SFAS No. 163 on its financial statements but does not expect it to have an effect on the Company's financial position, results of operations or cash flows.
In May 2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 applies to convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years after December 15, 2008, and must be applied on a retrospective basis. Early adoption is not permitted. The adoption of this statement is not expected to have a material effect on the Company's future financial position or results of operations.
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In June 2008, the FASB issued FASB Staff Position ("FSP") EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, Earnings per Share. Under the guidance of FSP EITF 03-6-1, unvested share-based payment awards that contain non forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings-per-share pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and all prior-period earnings per share data presented shall be adjusted retrospectively. Early application is not permitted. The Company is assessing the potential impact of this FSP on the earnings per share calculation.
In June 2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF 07-5"). EITF 07-5 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early application is not permitted. The Company is assessing the potential impact of this EITF 07-5 on the financial condition and results of operations.
In September 2006, FASB issued Statement No. 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies when other accounting pronouncements require or permit assets and liabilities to be measured at fair value, but does not expand the use of fair value to new accounting transactions. SFAS 157 is effective for financial assets and liabilities for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 , and FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 . Collectively, the Staff Positions defer the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and liabilities, and amend the scope of SFAS 157. We do not expect the adoption of SFAS 157 to have a material impact on our financial statements.
Reclassifications
Certain 2007 amounts have been reclassified to conform to the 2008 presentation.
Components of comprehensive income (loss) are as follows:
| | | Years ended December 31, |
| | | 2008 | | | 2007 |
| | | | | | |
| Net income (loss) | | $ | (9,478,797 | ) | | $ | 743,729 |
| Foreign currency translation adjustment | | | (371,231 | ) | | | (614,751) |
| Comprehensive income (loss) | | $ | (9,850,028 | ) | | $ | 128,978 |
| | | | | | | | |
Property and equipment consists of the following at December 31, 2008 and 2007:
| | | 2008 | | | 2007 | |
| Computers and office equipment | | $ | 2,538,087 | | $ | 2,044,528 | |
| Leasehold improvements | | | 572,573 | | | 395,269 | |
| Software | | | 532,667 | | | 405,721 | |
| | | | 3,643,327 | | | 2,845,518 | |
| Less accumulated depreciation | | | (2,417,193) | | | (2,091,750) | |
| Net property and equipment | | $ | 1,226,134 | | $ | 753,768 | |
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense for the years ended December 31, 2008, and 2007, was $388,372, and $287,292, respectively.
NOTE D - SOFTWARE DEVELOPMENT COSTS
The following table provides the details of software development costs for the year ended December 31, 2008 and 2007
| | | December 31, | |
| | | 2008 | | | 2007 | |
| Beginning balance | | $ | 7,285,353 | | | $ | 4,463,430 | |
| Additions | | | 8,032,832 | | | | 4,593,036 | |
| | | | 15,318,185 | | | | 9,056,466 | |
| | | | | | | | | |
| Less: Amortization | | | (2,237,151 | ) | | | 2,386,223 | |
| Less: Write down | | | (4,500,000 | ) | | | 68,566 | |
| Less: Foreign exchange | | | 0 | | | | (683,676 | ) |
| | | | (6,737,151 | ) | | | (1,771,113 | ) |
| | | | | | | | | |
| Total software development costs | | $ | 8,581,034 | | | $ | 7,285,353 | |
| | | | | | | | | |
| Less: current portion | | | (5,179,976 | ) | | | (6,244,843 | ) |
| Non-current portion | | $ | 3,401,058 | | | $ | 1,040,510 | |
The amount of software development costs resulting from advance payments and guarantees to third-party developers were $4,906,000 and $6,407,000, respectively, at December 31, 2008 and 2007. In addition, software development costs totaling $8,717,000 and $1,795,870 at December 31, 2008 and 2007, respectively, were related to titles that have not been released. The non-current portion of the capitalized software development costs is expected to be amortized in 2010.
NOTE E - INVENTORY
As of December 31, 2008 and 2007, inventory consisted of:
| | | Years ended December 31, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| Finished Product Playlogic titles | | $ | 153,868 | | | $ | 0 | |
| Finished Product Third party titles | | | 658,152 | | | | 0 | |
| | | $ | 812,020 | | | $ | 0 | |
Finished product Playlogic titles are valued at cost of manufacturing. Finished product third parties titles are valued at the price paid to this third party. Overall, due to estimated lower market value an amount of USD 898,000 has been written off and charged to expenses during the year. The inventory is held at PlayV Ltd, United Kingdom, a 60% owned subsidiary of the Company. The amount has been included in the G&A expenses.
NOTE F - RELATED PARTY TRANSACTIONS
Common stock
On September 24, 2008, the Company sold 2,250,000 shares of its common stock to an entity controlled by a member of our board of directors based in the Netherlands at $0.67 per share or gross proceeds of $1,500,000, pursuant to the terms of a subscription agreement dated September 24, 2008. The terms of the subscription agreement included warrants to purchase 300,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The warrants may be exercised starting September 25, 2008 and expire on September 24, 2012.
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On June 2008, the Company sold 2,608,696 shares of its common stock to an entity controlled by a member of our board of directors based in the Netherlands at $ 1.15 per share or gross proceeds of $3,000,000, pursuant to the terms of a subscription agreement dated June 27, 2008. The Company will pay a placement fee of 7% or $210,000, which has been recorded as a reduction of the gross proceeds. The terms of the subscription agreement included warrants to purchase 500,000 shares of the Company’s common stock at an exercise price of $2.00 per share. The warrants may be exercised starting June 28, 2008 and expire on June 27, 2013.
On March 2008, the Company sold 3,000,000 shares of its common stock to an entity controlled by a member of our board of directors based in the Netherlands at $ 1.00 per share or gross proceeds of $3,000,000, pursuant to the terms of a subscription agreement dated March 27, 2008. The Company has paid a total of $260,000 placement fee, which has been recorded as a reduction of the gross proceeds. The terms of the subscription agreement included warrants to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $2.00 per share. The warrants may be exercised starting March 28, 2008 and expire on March 27, 2013.
Loans from shareholders
On December 11, 2008, the Company entered into a bridge loan agreement with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of € 1,200,000 (or $1,680,000). The loans bear interest at a rate of 10% per annum. Interest will be paid on a monthly basis, the principle amounts will be repaid on May 1, 1, 2009. The lenders have the right to convert the principle amount into equity at a price of $0.50 per share. No beneficial conversion feature was recognized since the fair value of the common stock was less than the conversion price at the commitment date.
On November 7, 2008, the Company entered into a bridge loan agreement with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of € 800,000 (or $1,120,000). The loans bear interest at a rate of 8% per annum. Interest will be paid on a monthly basis, the principle amounts will be repaid on April 1, 2009. Concurrent with these loan agreements of November 7, 2008, the Company issued to these shareholders warrants to purchase 400,000 shares of the Company’s common stock at an exercise price of $0.50 per share. The warrants may be exercised starting November 7, 2008 and expire on November 7, 2011.
In accordance with APB 14, we allocated the debt proceeds between the debt and detachable stock purchase warrants based on relative fair values. We have recognized a discount on the debt amounting to $28,590 which will be amortized over the term of the loan. During the year ended December 31, 2008, $9,530 was amortized as interest expense in the accompanying consolidated financial statements.
The fair value of the warrants was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| Risk-free interest rate | 2% | | |
| Dividend yield | 0% | | |
| Volatility factor | 43.8% | | |
| Weighted-average expected life | 3 years | | |
On May 19, 2008, the Company entered into a bridge loan agreement with a principal shareholder based in the Netherlands, pursuant to which the Company borrowed a principal amount of € 700,000 (or $980,000). On September 24, 2008, the Company amended the terms of the agreement. The loan now bears interest at a rate of 1% per month. Interest will be paid on a monthly basis. The principle amount will be repaid before December 31, 2009.
On March 27, 2008, the Company entered into a long term loan agreement with two shareholders based in the Netherlands, pursuant to which the Company borrowed the principal amount of $4,000,000. The loan bears compound interest at a rate of 7% per annum and has a 2.5 year term. The interest will be paid on a monthly basis and repayment of the principal will be done in 8 quarterly installments, starting in the fourth quarter of 2008. Under this loan agreement, the Company pledged as a collateral all Intellectual Property (IP) owned by the Company. The Company has paid a placement fee of 1% on this loan ($40,000). Concurrent with the loan agreement of March 27, 2008, the Company issued to these shareholders warrants to purchase 1,286,000 shares of the Company’s common stock at an exercise price of $1.20 per share. The warrants may be exercised starting March 28, 2008 and expire on March 27, 2013. The warrants will be exercised cashless and have a mandatory call clause when the stock price is $4.00.
In accordance with APB 14, we allocated the debt proceeds between the debt and detachable stock purchase warrants based on relative fair values. We have recognized a discount on the long term debt amounting to $490,000 which will be amortized over the term of the loan. During the year ended December 31, 2008, $147,000 was amortized as interest expense in the accompanying consolidated financial statements.
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The fair value of the warrants was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| Risk-free interest rate | 4.5% | |
| Dividend yield | 0% | |
| Volatility factor | 45.8% | |
| Weighted-average expected life | 5 years | |
Contributed capital
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.
Receivables due from officers
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 housekeeping and cleaning services provided by Altaville to the Company an annual aggregate amount of approximately $ 50,000 which is paid in 4 quarterly installments. There were $71,000 and $49,000 outstanding receivables due to our officer as of December 31, 2008 and 2007, respectively. The Company will offset these receivables against future costs (such as travel) paid by the officers.
NOTE G — ACCRUED LIABILITIES
Accrued liabilities can be specified as follows:
| | | December 31, | |
| | | 2008 | | | 2007 | |
| Payroll Taxes payable (a) | | $ | 710,198 | | | $ | 1,326,649 | |
| Interest payable | | | - | | | | 104,686 | |
| Royalties payable | | | 329,000 | | | | 200,391 | |
| Wages, salaries and related personnel costs | | | 257,454 | | | | 218,060 | |
| Board remuneration to be paid | | | 140,000 | | | | 134,089 | |
| Credit notes to be issued | | | 70,000 | | | | 0 | |
| Other accrued expenses | | | 389,814 | | | | 158,879 | |
| | | $ | 1,896,466 | | | $ | 2,142,754 | |
(a) Payroll taxes payable have been partly offset against VAT refund claimed, in accordance with Dutch law.
NOTE H - LONG-TERM DEBT
Long term debt includes a debt obligation on a license agreement that the Company will pay over a 2.5 year period. We have calculated the present value of this obligation and have recorded this amount as a payable. We have classified the amounts that have to be paid within a 1 year under current liabilities. We have calculated the present value of the obligation using an interest percentage of 8% per year ..
Long-term debt consists of the following note payable:
| | | December 31, | |
| | | 2008 | | | 2007 | |
| Long term loan with shareholders (See Note F) | | $ | 4,000,000 | | | $ | - | |
| Discount on loan term debt relating to warrants (See Note F) | | | (362,060 | ) | | | - | |
| Debt obligation on license agreement, net of discount of $147,049 | | | 1,619,938 | | | | - | |
| Note payable to landlord for leasehold improvements, payable in quarterly installments of approximately $11,050, matures in 2013, unsecured | | | 231,000 | | | | 265,230 | |
| Less: current maturities | | | (3,342,000 | ) | | | (44,205 | ) |
| | | $ | 2,146,338 | | | $ | 221,025 | |
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Future maturities of long-term debt are as follows:
| Year ending | | | | |
| December 31, | | | | |
| 2009 | | $ | 3,342,000 | | |
| 2010 | | | 2,342,000 | | |
| 2011 | | | 208,447 | | |
| 2012 | | | 42,000 | | |
| 2013 | | | 42,000 | | |
| Thereafter | | | 0 | | |
NOTE I - INCOME TAXES
The components of income tax (benefit) expense for each of the years ended December 31, 2008 and 2007, respectively, are as follows:
| | | Year Ended | |
| | | December 31, | |
| | | 2008 | | | 2007 | |
| Domestic: | | $ | | | | $ | | |
| Current | | | 0 | | | | 0 | |
| Deferred | | | 0 | | | | 0 | |
| | | | | | | | | |
| Foreign: | | | | | | | | |
| Current | | | 0 | | | | 0 | |
| Deferred | | | 0 | | | | 0 | |
| | | | | | | | | |
| State: | | | | | | | | |
| Current | | | 0 | | | | 0 | |
| Deferred | | | 0 | | | | 0 | |
| | | $ | 0 | | | $ | 0 | |
As of December 31, 2008, the Company has a net operating loss carry forward of approximately $700,000 to offset future United States taxable income and approximately $48,000,000 to offset future Netherlands taxable income. Subject to current United States regulations, the approximate $500,000 carry forward will begin to expire in 2020. The amount and availability of the net operating loss carry forwards may be subject to limitations set forth by the Internal Revenue Code and the Dutch Government. Factors such as the number of shares ultimately issued within a three year look-back period; whether there is a deemed more than 50 percent change in control; the applicable long-term tax exempt bond rate; continuity of historical business; and subsequent income of the Company all enter into the annual computation of allowable annual utilization of the United States carry forwards.
As of December 31, 2007, the Company has a net operating loss carry forward of approximately $500,000 to offset future United States taxable income and approximately $40,000,000 to offset future Netherlands taxable income. Subject to current United States regulations, the approximate $500,000 carry forward will begin to expire in 2020. The amount and availability of the net operating loss carry forwards may be subject to limitations set forth by the Internal Revenue Code and the Dutch Government. Factors such as the number of shares ultimately issued within a three year look-back period; whether there is a deemed more than 50 percent change in control; the applicable long-term tax exempt bond rate; continuity of historical business; and subsequent income of the Company all enter into the annual computation of allowable annual utilization of the United States carry forwards.
The Company's income tax expense (benefit) for the years ended December 31, 2008 and 2007, respectively, differed from the statutory rate of 26% as noted below:
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| | | Year ended December 31, | |
| | | 2008 | | | 2007 | |
| Statutory rate applied to result before income taxes | | $ | (8,918,992) | | | $ | 746,729 | |
| Increase (decrease) in income taxes resulting from: | | | | | |
| Foreign income taxes | | | 8,612,992 | | | | (707,260 | ) |
| State income taxes | | | - | | | | - | |
| Deferred income taxes | | | - | | | | - | |
| Non-deductible items: | | | 100,000 | | | | | |
| Stock option expenses | | | 206,000 | | | | (39,469 | ) |
| | | | | | | | | |
| Other, including reserve for deferred tax asset | | | | | | | | |
| and effect of graduated tax brackets | | | - | | | | 154,771 | |
| Total income tax expense (benefit) | | $ | - | | | $ | - | |
NOTE J - SHAREHOLDER’S EQUITY
Preferred stock
As of December 31, 2008, the Company has 20,000,000 shares of par value $0.001 preferred stock authorized but unissued. The rights, preferences, and restrictions of the preferred stock may be designated by the Board of Directors without further action by our shareholders.
During the year ended December 31, 2008 the Company sold a total of 7,858,696 shares as disclosed under Note F related party transactions. A total of 1,800,000 warrants were sold in combination with these share subscriptions.
During the year ended December 31, 2007, the Company sold 3,182,609 units at $1.15 per share 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. Furthermore, the Company sold 270,000 shares to an unrelated third party at par value for facilitating the share issuances.
During the year ended December 31, 2007, the Company issued 9,147,861 units at $0.80 per share 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 which was paid directly by subscriber to vendors.
During the year ended December 31, 2007, 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.
The above transactions can be summarized as follows:
| Issuance price | | | Cash | | | Settlement of vendor payables | | | Debt conversion | | | Total | | | Units | |
| $ | 1.15 | | | $ | 2,735,019 | | | $ | 635,961 | | | $ | 289,020 | | | $ | 3,660,000 | | | $ | 3,182,609 | |
| $ | 0.80 | | | | - | | | | 2,288,471 | | | | 5,024,899 | | | | 7,313,370 | | | | 9,147,861 | |
| $ | 0.90 | | | | | | | | | | | | 538,604 | | | | 538,604 | | | | 600,000 | |
| $ | par | | | | 270 | | | | | | | | | | | | 270 | | | | 270,000 | |
| | | | | $ | 2,735,289 | | | $ | 2,924,432 | | | $ | 5,852,523 | | | $ | 11,512,244 | | | $ | 13,200,470 | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Stock options
The Board of Directors of the Company approved an Employee Stock Option Plan on August 28, 2007. The plan allows the Company to grant to employees a maximum of 3% of the issued common stock per year and is intended to attract and retain talented or key employees.
On August 28, 2007, we granted to Willy J. Simon, the Company’s Chairman and Non Executive Director, 112,500 options to purchase shares of the Company’s common stock at an exercise price of $1.35 per share. A total of 112,500 shares of these options will vest on April 1, 2008. The options will expire after 3 years.
On August 28, 2007, we granted to George M. Calhoun, one of the Company’s Non Executive Directors, 62,500 options to purchase shares of the Company’s common stock at an exercise price of $1.35 per share. A total of 62,500 shares of these options will vest on April 1, 2008. The options will expire after 3 years.
On August 28, 2007, we granted to Erik L.A. van Emden, one of the Company’s Non Executive Directors, 62,500 options to purchase shares of the Company’s common stock at an exercise price of $1.35 per share. A total of 62,500 shares of these options will vest on April 1, 2008. The options will expire after 3 years.
On August 28, 2007, we granted to certain employees and officers a total of 725,000 options (in accordance with the table below) to purchase shares of the Company’s common stock at an exercise price of $1.35 per share. These options vest ratably over three years and will expire in 4 years.
On June 4, 2008, we granted to Willy J. Simon, the Company’s Chairman and Non Executive Director, 80,000 options to purchase shares of the Company’s common stock at an exercise price of $2.00per share. A total of 26,667 shares of these options will vest on June 4, 2010. The options will expire after 4 years.
On June 4, 2008, we granted to George M. Calhoun, one of the Company’s Non Executive Directors, 40,000 options to purchase shares of the Company’s common stock at an exercise price of $2.00 per share. A total of 13,333 shares of these options will vest on June 4, 2010. The options will expire after 4 years.
On June 4, 2008, we granted to Erik L.A. van Emden, one of the Company’s Non Executive Directors, 40,000 options to purchase shares of the Company’s common stock at an exercise price of $2.00 per share. A total of 40,000 shares of these options will vest on June 4, 2010. The options will expire after 4 years.
On June 4, 2008, we granted to certain employees and officers a total of 940,000 options (in accordance with the table below) to purchase shares of the Company’s common stock at an exercise price of $2.00 per share. These options vest ratably over three years and will expire in 4 years.
| Optionee | | Number of options granted on June 4, 2008 | | Number of options granted on August 23, 2007 |
| W.M. Smit, Chief Executive Officer | | | 200,000 | | 200,000 |
| R.W. Smit, Executive Vice President | | | 400,000 | | 200,000 |
| D. Morel, Chief Technology Officer | | | 100,000 | | 100,000 |
| P.Y. Thiercelin, Director of Sales | | | 100,000 | | 75,000 |
| B. Mulderij, Marketing Manager | | | 25,000 | | 75,000 |
| M. Janse, Executive Producer | | | 20,000 | | 25,000 |
| O. Klooster, Assistant Controller | | | 25,000 | | 25,000 |
| C. Neessen, Producer | | | 15,000 | | - |
| H.Minh Luu, Product Support Manager | | | 15,000 | | - |
| J. America, Producer | | | 15,000 | | - |
| P. Torkan, Associate Producer | | | 10,000 | | - |
| I. Frid, Managing Director | | | 10,000 | | 15,000 |
| L. Leatomu, PA to the CEO | | | 5,000 | | 10,000 |
| | | | 940,000 | | 725,000 |
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The fair value of options granted during 2008 and 2007 were estimated at the grant date using the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The following table summarizes the assumptions and variables used to compute the weighted average fair value of stock option grants:
| | 2008 | | 2007 |
| Risk-free interest rate | 4.5% | | 4.4% |
| Dividend yield | 0% | | 0% |
| Volatility factor | 38.56% | | 51.35% |
| Weighted-average expected life | 4 Years | | 4 Years |
A summary of our stock options for the two years ended December 31, 2008 and 2007 is as follows:
| | | Number of shares | | | Weighted-average exercise price | | | Weighted-average remaining contractual term (months) | | | Aggregate intrinsic value | |
| Outstanding at December 31, 2006 (none exercisable) | | | 350,000 | | | $ | 3.07 | | | | 32 | | | $ | 493,060 | |
| Granted | | | 962,500 | | | | 1.30 | | | | 29 | | | | 182,471 | |
| Exercised | | | - | | | | - | | | | - | | | | - | |
| Forfieted | | | - | | | | - | | | | - | | | | - | |
| Expired | | | - | | | | - | | | | - | | | | - | |
| Outstanding at December 31, 2007 | | | 1,312,500 | | | $ | 1.77 | | | | 30 | | | | 675,531 | |
| | | | | | | | | | | | | | | | | |
| Granted | | | 1,140,000 | | | | 2.00 | | | | 42 | | | | 151,506 | |
| Exercised | | | - | | | | - | | | | - | | | | - | |
| Forfieted | | | - | | | | - | | | | - | | | | - | |
| Expired | | | - | | | | - | | | | - | | | | - | |
| Outstanding at December 31, 2008 | | | 2,452,500 | | | $ | 1.87 | | | | 35 | | | $ | 827,037 | |
| Exercisable at December 31, 2008 | | | 377,500 | | | | 1.79 | | | | 30 | | | | 264,890 | |
| Vested at December 31, 2008 | | | 377,500 | | | | 1.79 | | | | 30 | | | | 264,890 | |
Options outstanding that are expected to vest are net of estimated future forfeitures. No options have been exercised during the year ended December 31, 2008. Total compensation cost recognized under share-based payment arrangements during the years ended December 31, 2008 and 2007 were $208,000 and $(39,000), respectively.
Total compensation cost not yet recognized as of December 31, 2008 and 2007 is presented in the table below:
| | | December 31, | | | Weighted –Average | |
| | | 2008 | | | 2007 | | | Remaining Vesting Period (Years) | |
| Stock option awards to employees | | $ | 100,724 | | | $ | 285,729 | | | | 34 | |
| Stock option awards to non-employees | | | 17,171 | | | | 43,587 | | | | 32.3 | |
| Total compensation costs | | $ | 117,895 | | | $ | 302,316 | | | | 33.7 | |
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Stock Warrants
A summary of the status of the Company’s outstanding common stock warrants as of December 31, 2008 and 2007:
| | | Number of Warrants | | Weighted Average Exercise Price | | Remaining Contractual Term | | Aggregate Intrinsic Value | |
| Outstanding at December 31, 2006 | | | 1,878,136 | | $ | 3.89 | | | 30.7 | | $ | 7,306 | |
| Granted | | | 4,150,728 | | | 1.73 | | | 40.0 | | | 8,389 | |
| Exercised | | | — | | | — | | | — | | | — | |
| Forfeited | | | — | | | — | | | — | | | — | |
| Expired | | | — | | | — | | | — | | | — | |
| Outstanding at December 31, 2007 | | | 6,028,864 | | | 2.60 | | | 36.2 | | | 15,695 | |
| Granted | | | 3,486,000 | | | 1.49 | | | 36.0 | | | 5,193 | |
| Exercised | | | — | | | — | | | — | | | — | |
| Forfeited | | | — | | | — | | | — | | | — | |
| Expired | | | (717,631) | | | 5.00 | | | — | | | 3,588 | |
| Outstanding and Exercisable at December 31, 2008 | | | 8,797,233 | | $ | 1.97 | | | 31.4 | | $ | 17,300 | |
NOTE K - COMMITMENTS AND CONTINGENCIES
Litigation
On November 27, 2007, the District Court of Amsterdam ruled in favor of the plaintiff (Playlogic) in the case of Playlogic Entertainment, Inc. vs. WorldForge/VisionVale Ltd.
The provisional judge of the District Court of Amsterdam concludes that all the copyrights to the game Ancient Wars: Sparta always belonged to Playlogic pursuant to the agreement with WorldForge / Visionvale and Burut. The judge ruled in Playlogic’s favor on all counts and WorldForge / Visionvale and Burut have to pay a penalty of € 10,000 ($15,815) each time they state the contrary or refrain from publishing rectifications of former wrong statements.
Moreover the Company is involved in a few minor legal actions incidental to its ordinary course of business.
With respect to the above matters, 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 consolidated financial position or results of operations .
Office leases
The Company has entered into a lease agreement with the World Trade Center in Amsterdam for a period of 5 years ending July 31, 2013. The lease requires annual payments of approximately $428,825 (€ 291,500) for the offices and $30,300 (€20,600) for parking spaces at the building, all payable in quarterly installments. The offices total approximately 8,000 square feet (or 900 square meter). This lease agreement contains an extension option, which if exercised by the Company, will extend the expiration date to July 31, 2018.The Company has negotiated a rent-free period with the WTC for the period up to December 31, 2008. First payments will start January 2009. The Company recognized $155,000 in rent expense from this lease agreement during the year 2008.
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
Future minimum non-cancelable lease payments on the above leases for office space are as follows:
| December 31, | | | | |
| 2009 | | $ | 399,000 | | |
| 2010 | | | 355,000 | | |
| 2011 | | | 355,000 | | |
| 2012 | | | 355,000 | | |
| 2013 | | | 355,000 | | |
| Thereafter | | | 355,000 | | |
| Total | | $ | 2,174,000 | | |
Transportation leases
The Company leases 10 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. The leases require monthly aggregate payments of approximately $ 15,000.
Future minimum non-cancelable lease payments on the above transportation leases are as follows:
| | | |
| 2008 | | $ | 79,500 | |
| 2009 | | | 37,400 | |
| 2010 and thereafter | | | - | |
| Total | | | 116,900 | |
Software development contracts
The Company has entered into seven (7) separate software development contracts with unrelated entities. These contracts require periodic payments of agreed-upon amounts upon the achievement of certain developmental milestones, as defined in each individual contract. All of these contracts have completion deadlines of less than one (1) year from the contract execution and will require an aggregate funding liability of approximately $3.2 million through completion.
NOTE L - SEGMENT INFORMATION AND REVENUE CONCENTRATIONS
The Company sells its products to wholesale distributors in various domestic and foreign markets. The following table shows the Company’s gross revenue composition:
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| | | For the year ended December 31, |
| | | 2008 | | 2007 |
| | | | | | | |
| Europe and United Kingdom | | | | | | |
| Customer A * | | 3,475,120 | 38.5% | | 2,320,721 | 23.0% |
| Customer B | | 645,357 | 7.2% | | 1,473,039 | 14.6% |
| Customer C | | 1,118,214 | 12.4% | | 512,799 | 5.1% |
| Customer D | | 0 | 0.0% | | 3,348,524 | 33.2% |
| Customer E | | 364,006 | 4.0% | | 0 | 0.0% |
| Customer F | | 374,578 | 4.2% | | 0 | 0.0% |
| Others | | 2,330,525 | 25.8% | | 2,208,296 | 21.9% |
| | | 8,307,800 | 92.1% | | 9,863,379 | 97.7% |
| Asia | | | | | | |
| Others | | 31,605 | 0.4% | | 73,603 | 0.7% |
| | | 31,605 | 0.4% | | 73,603 | 0.7% |
| | | | | | | |
| United States & Canada | | | | | | |
| Customer E | | 684,791 | 7.6% | | 162,764 | 1.6% |
| others | | 0 | 0.0% | | 0 | 0.0% |
| | | 684,791 | 7.6% | | 162,764 | 1.6% |
| | | | | | | |
| | | | | | | |
| Total | | 9,024,196 | 100.0% | | 10,099,746 | 100.0% |
* 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.
Debt restructuring
No gains were recorded from debt restructuring during 2008.
During the year ended December 31, 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 on a settlement of $197,000 based on agreed payments. The Company estimates the chance of a future successful capital raise to be probable.
During the year 2007, the Company negotiated discounts resulting in the following gains, as presented under gains on debt restructuring totaling $850,411 over 4 different vendors. The total gains from settlements are summarized as follows:
| Vendor | | Gain recognized in 2007 | |
| Vendor A | | $ | 100,000 | |
| Vendor B | | | 285,000 | |
| Vendor C | | | 115,000 | |
| Vendor D | | | 350,411 | |
| | | $ | 850,411 | |
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Loan penalty expense
During the year ended December 31, 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. 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).
NOTE N – SUBSEQUENT EVENTS
On January 23, 2009, the Company entered into a bridge loan agreement with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of € 1,500,000 (or $2,100,000). The loans bear interest at a rate of 10% per annum. Interest will be paid on a monthly basis, the principle amounts will be repaid on December 31, 2009. Concurrent with these loan agreements of January 23, 2009, the Company issued to these shareholders warrants to purchase 1,500,000 shares of the Company’s common stock at an exercise price of $0.50 per share. The warrants may be exercised cashless starting January 23, 2009 and expire on January 23, 2013.
F - 24
