ITEM 1. BUSINESS
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
The statements contained herein which are not historical facts are considered forward-looking statements under federal securities laws and may be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "potential," "predicts," "projects," "seeks," "will," or words of similar meaning and include, but are not limited to, statements regarding the outlook for the Company's future business and financial performance. Such forward-looking statements are based on the current beliefs of our management as well as assumptions made by and information currently available to them, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Actual outcomes and results may vary materially from these forward-looking statements based on a variety of risks and uncertainties including, but not limited to, those discussed under the heading "Item 1A.
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.
Risks relating to our business
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 states that in order to satisfy its working capital requirements through the second quarter of 2010, it will need to obtain additional financing from third parties. If the Company does not obtain any necessary financing in the next months, 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 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 April 2010. 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 short term, this will impact our business, our results and operations. If we do not obtain the necessary financing in the short term, we may need to cease operations.
We have experienced losses this year and in prior years and may not be able to become profitable on a consistent basis.
We commenced operations in April 2002. 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 2009 we recorded net revenue of $11.1 million and reported a net loss of $20.3 million. We had a net consolidated loss in 2008 of $9.5 million, net consolidated profit of $0.7 million in 2007 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 in the future. The report of Playlogic's independent auditors on the December 31, 2009 financial statements include an explanatory paragraph indicating there could be uncertainties about Playlogic's ability to continue as a going concern.
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We must publish "hit" titles in order to compete successfully in our industry.
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, 2009 two titles, Fairytale Fights and Infernal: Hells Vengeance and our first party developer contract with Sony Computer Entertainment Europe accounted for approximately 74% of our revenue. 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.
Competition in our industry is intense and a relatively small number of hit titles account for a large portion of total revenue in our industry. Hit products offered by our competitors may take a larger share of consumer spending than we anticipate, which could cause revenue generated from our products to fall below our expectations. If our competitors develop more successful products or services at lower price points or based on payment models perceived as offering better value (such as pay-for-play or subscription-based models), or if we do not continue to develop consistently high quality and well-received products and services, our revenue and profitability may decline.
Our business is competitive which means titles from other publishers take a big part of consumer spendings.
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.
If our competitors develop more successful products, or if we do not continue to develop consistently high-quality products, our revenues will decline.
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.
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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.
We are subject to product development risks which could result in delays and additional costs, and we must adapt to changes in software technologies.
We depend on our internal development studio and third party software developers to develop new interactive entertainment software within anticipated release schedules and cost projections. The development cycle for new titles generally ranges from 12 to more than 24 months. Development times and costs of current generation software have increased substantially as a result of the additional and enhanced features available in the newest games. If our third party software developers experience unanticipated development delays, financial difficulties or additional costs we will not be able to release titles according to our schedule and at budgeted costs. Certain of our licensing and marketing agreements also contain provisions that would impose penalties if we fail to meet agreed upon game release dates. There can be no assurance that our products will be sufficiently successful so that we can recoup these costs or make a profit on these products.
Additionally, in order to stay competitive, our internal development studio must anticipate and adapt to rapid technological changes affecting software development. Any inability to respond to technological advances and implement new technologies could render our products obsolete or less marketable.
The market for our titles is characterized by short product life cycles. The inability of our products to achieve significant market acceptance, delays in product releases or disruptions following the commercial release of our products may have a material adverse effect on our operating results.
The market for video games is characterized by short product lives and frequent introductions of new products. New products may not achieve significant market acceptance, generate sufficient sales or be introduced in a timely manner to permit us to recover development, manufacturing and marketing costs associated with these products. The life cycle of a title generally involves a relatively high level of sales during the first few months after introduction followed by a rapid decline in sales. Because revenue associated with an initial product launch generally constitutes a high percentage of the total revenue associated with the life of a product, delays in product releases or disruptions following the commercial release of one or more new products could have a material adverse effect on our operating results and cause our operating results to be materially different from our expectations.
Our business is subject to the continued popularity of current generation video game platforms and our ability to develop commercially successful products for these platforms.
We derive most of our revenue from the sale of products for play on video game platforms manufactured by third parties, such as Sony's PlayStation 3 and PSP, Microsoft's Xbox 360 and Nintendo's Wii and DS. The success of our business is subject to the continued popularity of these platforms and our ability to develop commercially successful products for these platforms.
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If the average price of our prior generation software titles continues to decline or if we are unable to sustain launch pricing on current generation titles, our operating results may suffer.
The interactive entertainment software and hardware industry is characterized by the introduction of new and enhanced generations of products and evolving industry standards. Current generation titles for the PS3, Xbox 360 and Wii have been offered at premium retail prices since the launch of such consoles. We expect to continue to price current generation titles at a premium level. However, circumstances may arise in which we may need to reduce prices for such titles. For example, the current economic downturn has reduced consumer demand and some of our competitors have temporarily dropped and may continue to drop the pricing of their games for promotional purposes. In addition, retailers have been increasingly funding their own promotional pricing programs. Continued promotional pricing could require us to reduce prices on our current generation titles. If we are unable to sustain launch pricing on these current generation titles, it will have a material adverse effect on our margins, profitability and operating results.
Consumer demand for software for prior generation platforms has declined as newer and more advanced hardware platforms achieve market acceptance. Consequently, pricing for prior generation titles across the industry has declined and we expect it to continue to decline. Furthermore, prior generation titles may be subject to price reductions earlier in their product life cycles than we experienced in prior years. As a result, we have reduced prices for our prior generation software titles and we expect to continue to reduce prices for such software titles, which will have a negative impact on our operating results. These changes may cause the value of our inventory to decline substantially or to become obsolete.
We depend on our key management and product development personnel.
Our continued success will depend to a significant extent on our senior management. We are also highly dependent on the expertise, skills and knowledge of certain of our employees in our in-house Studio, responsible for content creation and development of our Fairytale Fights titles. Although we entered into employment agreements with members of the creative team, we may not be able to continue to retain these personnel at current compensation levels, or at all.
The loss of the services of our executive officers or our key Studio employees could significantly harm our business. In addition, if one or more key employees were to join a competitor or form a competing company, we may lose additional personnel, experience material interruptions in product development, delays in bringing products to market and difficulties in our relationships with licensors, suppliers and customers, which would significantly harm our business. Failure to continue to attract and retain other qualified management and creative personnel could adversely affect our business and prospects.
The recent decline in consumer spending and other adverse changes in the economy have negatively affected our business and any further declines in consumer spending or other adverse changes in the economy could have a material adverse impact on our business and operating results.
Most of our products involve discretionary spending on the part of consumers. We believe that consumer spending is influenced by general economic conditions and the availability of discretionary income. This makes our products particularly sensitive to general economic conditions and economic cycles as consumers are generally more willing to make discretionary purchases, including purchases of products like ours, during periods in which favorable economic conditions prevail. As a result of the current national and global economic downturn, overall consumer spending has declined and retailers globally have taken a more conservative stance in ordering game inventory. Continued adverse economic conditions such as a prolonged U.S. or international general economic downturn, including periods of increased inflation, unemployment levels, tax rates, interest rates, energy prices or declining consumer confidence could also reduce consumer spending. Reduced consumer spending has and may continue to result in reduced demand for our products and may also require increased selling and promotional expenses, which has had and may continue to have an adverse impact on our business, financial condition and operating results. Furthermore, uncertainty and adverse changes in the economy could also increase the risk of material losses on our investments, increase costs associated with developing and publishing our products, increase the cost and availability of sources of financing, and increase our exposure to material losses from bad debts, any of which could have a material adverse impact on our financial condition and operating results. If economic conditions worsen, our business, financial condition and operating results could be adversely affected.
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Our quarterly operating results are dependent on the release of "hit" titles and are highly seasonal which may cause our quarterly operating results to fluctuate significantly.
We have experienced and may continue to experience wide fluctuations in quarterly operating results. The release of a "hit" title typically leads to a higher level of sales during the first few months after introduction followed by a rapid decline in sales. In addition, the interactive entertainment industry is highly seasonal, with sales typically higher during the fourth calendar quarter, due primarily to increased demand for games during the holiday season. Our failure or inability to produce "hit" titles or introduce products on a timely basis to meet seasonal fluctuations in demand could adversely affect our business and operating results. The uncertainties associated with software development, manufacturing lead times, production delays and the approval process for products by hardware manufacturers and other licensors make it difficult to predict the quarter in which our products will ship and therefore may cause us to fail to meet financial expectations.
We may not be able to adequately adjust our cost structure in a timely fashion in response to a sudden decrease in demand.
A significant portion of our selling and general and administrative expense is attributable to expenses for personnel and facilities. In the event of a significant decline in revenue, we may not be able to dispose of facilities, reduce personnel or make other changes to our cost structure without disruption to our operations or without significant termination and exit costs. Management may not be able to implement such actions in a timely manner, if at all, to offset an immediate shortfall in revenue and profit. Moreover, reducing costs may impair our ability to produce and develop software titles at sufficient levels in the future.
Returns of our published titles by our customers and price concessions granted to our customers 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.
If return rates for our published titles significantly exceed our estimates, our operating results will be materially adversely affected.
Increased sales of used video game products could lower our sales.
Certain of our larger customers sell used video games, which are generally priced lower than new video games. If our customers continue to increase their sales of used video games, it could negatively affect our sales of new video games and have an adverse impact on our operating results.
A limited number of customers account for a significant portion of our sales. The loss of a principal customer could seriously hurt our business.
Sales to our four largest customers accounted for approximately 80% of our revenues for the year ended December 31, 2009.
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. The loss of our relationships with principal customers or a decline in sales to principal customers, including as a result of a product being rated "AO" (age 18 and over), could materially adversely affect our business and operating results. Furthermore, our customers may also be placed into bankruptcy, become insolvent or be liquidated due to the current economic downturn, the global contraction of credit or for other factors. Bankruptcies or consolidations of certain large retail customers could seriously hurt our business, including as a result of uncollectible accounts receivable from such customers and the concentration of purchasing power among remaining large retailers.
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If our marketing and advertising efforts fail to resonate with our customers, our business and operating results could be adversely affected.
Our products are marketed worldwide through a diverse spectrum of advertising and promotional programs such as television and online advertising, print advertising, retail merchandising and website development. Our ability to sell our products and services is dependent in part on the success of these programs. If the marketing for our products and services fails to resonate with our customers, particularly during the holiday season or other key selling periods, or if advertising rates or other media placement costs increase, these factors could have a material adverse impact on our business and operating results.
We rely on a primary distribution service provider for a significant portion of our products and the failure of this service provider to perform as expected could harm our operating results.
We sell our products to our customers in the United States primarily through a Sales Rep organization U&I Entertainment. U&I Entertaiment ensures shipping through a distribution service provider, Ditan Distribution, LLC. Ditan provides shipping, receiving, warehouse management and related functions. If Ditan does not perform these services in a satisfactory manner, or if we desire or are required to replace either U&I Entertainment as our Sales Rep organization or Ditan as our primary distributor and are unable to do so, our sales and operating results could suffer.
The interactive entertainment software industry is highly competitive both for our publishing and distribution operations.
We compete for the sale of interactive entertainment software with Sony, Microsoft and Nintendo, each of which is a large developer and marketer of software for its own platforms. We also compete with other game publishers, such as Electronic Arts, Activision Blizzard, Take 2 Interactive, THQ, Capcom, Square Enix, Konami, Namco-Bandai, SEGA and Ubisoft. As our business is dependent upon our ability to develop hit titles, which require increasing budgets for development and marketing, the availability of significant financial resources has become a major competitive factor in developing and marketing software games. Some of our competitors have greater financial, technical, personnel and other resources than we do and are able to finance larger budgets for development and marketing and make higher offers to licensors and developers for commercially desirable properties. Our titles also compete with other forms of entertainment, such as motion pictures, television and audio and video products featuring similar themes, online computer programs and other entertainment, which may be less expensive or provide other advantages to consumers.
Our distribution business also operates in a highly competitive environment. Competition is based primarily on breadth, availability and quality of product lines; price; terms and conditions of sale; credit terms and availability; speed and accuracy of delivery; and effectiveness of sales and marketing programs.
Our competitors include regional, national and international distributors, as well as hardware manufacturers and software publishers. We may lose market share or be forced in the future to reduce our prices in response to our competitors. Our distribution business has been adversely affected by lower sales volume of software titles, the availability of certain hardware products and increased competition in the value software market.
Increased competition for limited shelf space and promotional support from retailers could affect the success of our business and require us to incur greater expenses to market our titles.
Retailers have limited shelf space and promotional resources and competition is intense among 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 to maintain desirable sales levels of our titles. Competitors with more extensive lines and more popular titles may have greater bargaining power with retailers. Accordingly, we may not be able, or we may have to pay more than our competitors, to achieve similar levels of promotional support and shelf space.
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Our business is dependent on our ability to enter into successful software development arrangements with third parties.
Our success depends on our ability to continually identify and develop new titles on a timely basis. We rely on third party software developers for the development of some of our titles. Quality third party developers are continually in high demand. Software developers who have developed titles for us in the past may not be available to develop software for us in the future. Due to the limited number of third party software developers and the limited control that we exercise over them, these developers may not be able to complete titles for us on a timely basis or within acceptable quality standards, if at all. We have entered into agreements with third parties to acquire the rights to publish and distribute interactive entertainment software as well as to use licensed intellectual properties in our titles. These agreements typically require us to make development payments, pay royalties and satisfy other conditions. Our development payments may not be sufficient to permit developers to develop new software successfully, which could result in material delays and significantly increase our costs to bring particular products to market. Software development costs, promotion and marketing expenses and royalties payable to software developers and third party licensors have increased significantly in recent years and reduce potential profits derived from sales of our software. Future sales of our titles may not be sufficient to recover development payments and advances to software developers and licensors, and we may not have adequate financial and other resources to satisfy our contractual commitments to such developers. If we fail to satisfy our obligations under agreements with third party developers and licensors, the agreements may be terminated or modified in ways that are burdensome to us, and have a material adverse affect on our financial condition and operating results.
We cannot publish our titles without the approval of hardware licensors that are also our competitors.
We are required to obtain licenses from Sony, Microsoft and Nintendo, which are also our competitors, to develop and publish titles for their respective hardware platforms. Our existing platform licenses require that we obtain approval for the publication of new titles on a title-by-title basis. As a result, the number of titles we are able to publish for these hardware platforms, our ability to manage the timing of the release of these titles and, accordingly, our net revenue from titles for these hardware platforms, may be limited. If a licensor chooses not to renew or extend our license agreement at the end of its current term, or if a licensor were to terminate our license for any reason or does not approve one or more of our titles, we may be unable to publish that title as well as additional titles for that licensor's platform. Termination of any such agreements or disapproval of titles could seriously hurt our business and prospects. We may be unable to continue to enter into license agreements for certain current generation platforms on satisfactory terms or at all. Failure to enter into any such agreement could also seriously hurt our business.
Our platform licensors control the fee structures for online distribution of our games on their platforms.
Certain platform licensors have retained the right to change the fee structures for online distribution of both paid content and free content (including patches and corrections) on their platforms. Each licensor's ability to set royalty rates makes it difficult for us to forecast our costs. Increased costs could negatively impact our operating margins. We may be unable to distribute our content in a cost-effective or profitable manner through this distribution channel, which could adversely impact our business and results of operations.
We submit our products for rating by the Entertainment Software Rating Board ("ESRB") in the United States and other voluntary or government ratings organizations in foreign countries. Failure to obtain a target rating for certain of our products could negatively impact our ability to distribute and sell those games, as could the re-rating of a game for any reason.
We voluntarily submit our game products to the ESRB, a U.S.-based non-profit and independent ratings organization. The ESRB system provides consumers with information about game content using a rating symbol that generally suggests the appropriate player age group and specific content descriptors, such as graphic violence, profanity or sexually explicit material. The ESRB may impose significant penalties on game publishers for violations of its rules related to rating or marketing games, including revocation of a rating or monetary fines up to $1 million. Other countries require voluntary or government backed ratings as prerequisites for product sales. In some instances, we may have to modify our products in order to market them under the target rating, which could delay or disrupt the release of our products. In addition, some of our titles may not be sold at all or without extensive edits in certain countries, such as Germany.
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In the United States, if the ESRB rates a game as "AO" (age 18 and older), platform licensors may not certify the game and retailers may refuse to sell it. In addition, some consumers have reacted to re-ratings or controversial game content by refusing to purchase such games, demanding refunds for games that they had already purchased, and refraining from buying other games published by us. If any of our games are re-rated by the ESRB or other foreign based ratings organizations, we could be exposed to litigation, administrative fines and penalties and other potential liabilities, and our operating results and financial condition could be significantly impacted.
We have implemented processes to comply with the requirements of the ESRB and other ratings organizations and properly display the designated rating symbols and content descriptions. Nonetheless, these processes are subject to human error, circumvention, overriding and reasonable resource constraints. If a video game we published were found to contain undisclosed pertinent content, the ESRB could re-rate a game, retailers could refuse to sell it and demand that we accept the return of any unsold copies or returns from customers, and consumers could refuse to buy it or demand that we refund their money. This could have a material negative impact on our operating results and financial condition. In addition, we may be exposed to litigation, administrative fines and penalties and our reputation could be harmed, which could impact sales of other video games we sell. If any of these consequences were to occur, our business and financial performance could be significantly harmed.
Content policies adopted by retailers, consumer opposition and litigation could negatively impact sales of our products.
Retailers may decline to sell interactive entertainment software containing what they judge to be graphic violence or sexually explicit material or other content that they deem inappropriate for their businesses. If retailers decline to sell our products based upon their opinion that they contain objectionable themes, graphic violence or sexually explicit material or other generally objectionable content, or if any of our previously "M" rated series products are rated "AO," we might be required to significantly change or discontinue particular titles which could seriously affect our business. Consumer advocacy groups have opposed sales of interactive entertainment software containing objectionable themes, violence or sexual material or other objectionable content by pressing for legislation in these areas and by engaging in public demonstrations and media campaigns. Additionally, although lawsuits seeking damages for injuries allegedly suffered by third parties as a result of video games have generally been unsuccessful in the courts, claims of this kind have been asserted against us from time to time and may be asserted and be successful in the future.
Our business and products are subject to potential legislation. The adoption of such proposed legislation could limit the retail market for our products.
Several proposals have been made for federal legislation to regulate our industry. Such proposals seek to prohibit the sale of products containing content included in some of our games. If any such proposals are enacted into law, it may limit the potential market for some of our games in the United States, and adversely affect our operating results. Other countries, such as Germany, have adopted laws regulating content both in packaged games and those transmitted over the Internet that are stricter than current United States laws. In the United States, proposals have also been made by numerous state legislators to regulate and prohibit the sale of interactive entertainment software products containing certain types of violent or sexual content to under 17 or 18 audiences. While such legislation to date has been enjoined by industry and retail groups, the adoption into law of such legislation in federal and/or in state jurisdictions in which we do significant business could severely limit the retail market for some of our games.
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.
Continued turmoil in the credit markets may affect our ability to raise additional capital.
Ongoing turmoil in the credit markets make it difficult for us to obtain financing, on acceptable terms or at all, for working capital, capital expenditures, acquisitions and other investments. Liquidity in credit markets has contracted significantly, making terms for certain financings less attractive. These difficulties could adversely affect our operations and financial performance.
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We are subject to risks and uncertainties of international trade, including fluctuations in the values of local foreign currencies against the dollar.
Sales in international markets, primarily in Europe, have accounted for a significant portion of our net revenue. We have also recently expanded our Asian operations in an effort to increase our geographical scope and diversify our revenue base. We are subject to risks inherent in foreign 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. All of our international sales are made in local currencies, which could fluctuate against the dollar. While we may use forward exchange contracts to a limited extent to seek to mitigate foreign currency risk, our operating results could be adversely affected by unfavorable foreign currency fluctuations.
We face risks from our international operations.
We are subject to certain risks because of our international operations, particularly as we seek to grow our business and presence outside of the United States. Changes to and compliance with a variety of foreign laws and regulations may increase our cost of doing business and our inability or failure to obtain required approvals could harm our international and domestic sales. Trade legislation in either the United States or other countries, such as a change in the current tariff structures, import/export compliance laws or other trade laws or policies, could adversely affect our ability to sell or to distribute in international markets. We incur additional legal compliance costs associated with our international operations and could become subject to legal penalties in foreign countries if we do not comply with local laws and regulations which may be substantially different from those in the United States. In many foreign countries, particularly in those with developing economies, it may be common to engage in business practices that are prohibited by United States laws and regulations, such as the Foreign Corrupt Practices Act, and by local laws, such as laws prohibiting corrupt payments to government officials. Although we implement policies and procedures designed to ensure compliance with these laws, there can be no assurance that all of our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, including those based in or from countries where practices which violate such laws may be customary, will not take actions in violation of our policies. Any such violation, even if prohibited by our policies, could have a material adverse effect on our business.
Our distribution business is dependent on suppliers to maintain an adequate supply of products to fulfill customer orders on a timely basis.
Our ability to obtain particular products in required quantities and to fulfill customer orders on a timely basis is important to the success of our distribution business. In most cases, we have no guaranteed price or delivery agreements with suppliers. Our distribution business has experienced, and may in the future experience, significant supply shortages from time to time due to the inability of certain manufacturers to supply products, such as the newest generation of platforms, on a timely basis. Further, manufacturers or publishers that currently distribute their products through us may decide to distribute, or to substantially increase their existing distribution, through other distributors, or directly to retailers. If we cannot obtain sufficient supplies of the products that we distribute, our net revenue could decline and we could incur losses.
Gross margins relating to our distribution business have historically been narrow, which increases the impact of variations in costs on our operating results.
As a result of intense price competition, the gross margins in our distribution business have historically been narrow and may continue to be narrow in the future. Accordingly, slight variations in operating costs and expenses could result in losses in our distribution business from period to period.
If we are unable to protect the Intellectual Property relating to our software, the commercial value of our products will be adversely affected and our competitive position could be harmed.
We develop proprietary software and have obtained the rights to publish and distribute software developed by third parties. We attempt to protect our software and production techniques under copyright, trademark and trade secret laws as well as through contractual restrictions on disclosure, copying and distribution. Our software is susceptible to piracy and unauthorized copying. Unauthorized third parties may be able to copy or to reverse engineer our software to obtain and use programming or production techniques that we regard as proprietary. Well organized piracy operations have also proliferated in recent years, resulting in the ability to download pirated copies of our software over the Internet. Although we attempt to incorporate protective measures into our software, piracy of our products could negatively impact our future profitability.
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If we infringe on or are alleged to infringe on the Intellectual Property rights of third parties, our business could be adversely affected.
With advances in technology, game content and software graphics are expected to continue to become more realistic. As a result, we believe that interactive entertainment software will increasingly become the subject of claims that such software infringes on the Intellectual Property rights of others. Although we believe that our software and technologies and the software and technologies of third party developers and publishers with whom we have contractual relations do not and will not infringe or violate proprietary rights of others, it is possible that infringement of proprietary rights of others may occur. Any claims of infringement, with or without merit, could be time consuming, costly and difficult to defend. Moreover, Intellectual Property litigation or claims could require us to discontinue the distribution of products, obtain a license or redesign our products, which could result in additional substantial costs and material delays.
Data breaches involving the source code for our products could adversely affect our revenues.
We securely store the source code for our interactive entertainment software products as it is created. A breach, whether physical, electronic or otherwise, of the systems on which such source code and other sensitive data is stored could lead to damage or piracy of our software. If we are subject to data security breaches, we may have a loss in sales or increased costs arising from the restoration or implementation of additional security measures which could materially and adversely affect our profitability.
Our software is susceptible to errors, which can harm our financial results and reputation.
The technological advancements of new hardware platforms result in the development of more complex software products. As software products become more complex, the risk of undetected errors in new products increases. We may need to produce and distribute patches in order to repair such errors, which could be costly and may distract our developers from working on new products. If, despite testing, errors are found in new products or releases after shipments have been made, we could experience a loss of or delay in timely market acceptance, product returns, loss of revenue, increases in costs relating to the repair of such errors and damage to our reputation.
Our ability to acquire licenses to Intellectual Property impacts our revenue and profitability. Competition for these licenses may make them more expensive and increase our costs.
Some of our products are based on or incorporate Intellectual Property owned by others. For example, our Aliens in the Attic title include rights licensed 20th Century Fox. Competition for these licenses is intense. If we are unable to maintain these licenses or obtain additional licenses on reasonable economic terms or with significant commercial value, our revenue and profitability could decline significantly. Competition for these licenses may also increase the advances, guarantees and royalties that we must pay to the licensor, which could significantly increase our costs and adversely affect our profitability. In addition, on certain Intellectual Property licenses, we are subject to guaranteed minimum payments, royalties or standards of performance and may not be able to terminate these agreements prior to their stated expiration. If such licensed products do not generate revenues in excess of such minimum guarantees, our profitability will be adversely impacted.
We may be required to record a significant charge to earnings if our capitalized software development costs becomes impaired.
We are required under generally accepted accounting principles to review our Capitalized Software Development costs for impairment at least annually or more frequently when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances, indicating a requirement to reevaluate whether our Capitalized Software Development costs continues to be recoverable, include a significant decline in stock price and market capitalization, slower growth rates in our industry or other materially adverse events. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our Capitalized Software Development costs is determined. This may adversely impact our operating results. During our fourth quarter of 2009, we recorded a charge of $6.0 million to our earnings due to the impairment of our Capitalized Software Development costs, and there can be no assurance that we will not have a further impairment of our goodwill or intangible assets in the future.
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Our reported financial results could be adversely affected by the application of existing or future accounting standards to our business as it evolves.
The frequency of accounting policy changes may continue to accelerate. For example, standards regarding software revenue recognition have and could further significantly affect the way we account for revenue related to our products and services. We expect that a significant portion of our games will be online enabled in the future, and we could be required to recognize the related revenue over an extended period of time rather than at the time of sale. As we enhance, expand and diversify our business and product offerings, the application of existing or future financial accounting standards, particularly those relating to the way we account for revenue, could have a significant adverse effect on our reported results although not necessarily on our cash flows.
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.
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;
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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.
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We may be burdened with payment defaults and uncollectible accounts if our distributors or retailers cannot honor their credit arrangements 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.
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.
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.
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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, 2009, officers, directors, and shareholders holding more than 5% of our outstanding shares collectively controlled approximately 60% 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.
Due to the Company’s current cash flow situation, we are in default on payments to some of our vendors. Some of these vendors have gone legal to collect their outstanding receivables. We are in continuous discussions with both vendors and collection agencies to settle the issues in a professional way. All amounts claimed have been recorded in the financial statements. We could incur costs for legal advice in some cases (if we hire external lawyers) which we will recongnize upon the date of the action. The Company is actively searching for new funding and/or financing, to resolve these matters.
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.
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 June 15, 2010. 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.
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Risks relating to our common stock
For purposes of this section "-Risks relating to our common stock," references to "the Company," "we," "our," and "us" refer only to Playlogic Entertainment, Inc. and not to its subsidiaries.
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 states that in order to satisfy its working capital requirements through the second quarter of 2010, it will need to obtain additional financing from third parties. If the Company does not obtain any necessary financing in the next months, 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.
Additional issuances of equity securities by us would dilute the ownership of our existing stockholders.
We may issue equity or equity-based securities (such as our convertible senior notes) in the future in connection with refinancing the Company, acquisitions or strategic transactions, to adjust our ratio of debt to equity, including through repayment of outstanding debt, to fund expansion of our operations or for other purposes. To the extent we issue additional equity securities, the percentage ownership of our existing stockholders would be reduced.
Future sales or other issuances of our common stock could adversely affect its market price.
The sale of substantial amounts of our common stock could adversely impact its price. As of April 15, 2010, we had outstanding approximately 69 million shares of our common stock, options to purchase approximately 4.5 million shares of our common stock and warrants to purchase approximately 17.8 million shares of our common stock. The sale or the availability for sale of a large number of shares of our common stock in the public market could cause the price of our common stock to decline.
Our stock price has been volatile and may continue to fluctuate significantly.
The market price of our common stock historically has been, and we expect will continue to be, subject to significant fluctuations. These fluctuations may be due to factors specific to us including those discussed in the risk factors in this section as well as others not currently known to us or that we currently do not believe are material, to changes in securities analysts' earnings estimates or ratings, to our results or future financial guidance falling below our expectations and analysts' and investors' expectations, to factors affecting the computer, software, entertainment, media or electronics industries, or to national or international economic conditions.
Stock markets, in general, have experienced over the years, and continue to experience, significant price and volume fluctuations that have affected market prices for companies such as ours and that may be unrelated or disproportionate to the operating performance of the affected companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance.
Delaware law, our charter documents and provisions of our debt agreements may impede or discourage a takeover, which could cause the market price of our shares to decline.
We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. Our Board has the power, without stockholder approval, to adopt a stockholder rights plan and/or to designate the terms of one or more series of preferred stock and issue shares of preferred stock. In addition, we may under certain circumstances involving a change of control, be obligated to repurchase all or a portion of our convertible senior notes and any potential acquirer would be required to assume our obligations related to any outstanding notes. We or any possible acquirer may not have available financial resources necessary to repurchase those notes. The ability of our Board to create and issue a new series of preferred stock and certain provisions of Delaware law, our certificate of incorporation and bylaws and the indenture governing our notes could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the market price of our common stock and the value of any outstanding notes.
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ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2.
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 $425,000 (€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 approximately $110,000 (€78,000) per quarter.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Litigation
Due to the Company’s cash flow situation, we are behind on payments to some of our vendors. Some of these vendors have gone legal to collect their outstanding receivables. We are in continuous discussions with both vendors and collection agencies to settle the issues in a professional way. A significant part of our accounts payable balance is overdue. All amounts claimed have been recorded in the financial statements as accounts payable. We could incur costs for legal advice in some cases (if we hire external lawyers) which we will recongnize upon the date of the action. If a vendor with a significant outstanding amount demands immediate payment in full, our ability to continue as a going concern could be at risk. The Company is actively searching for new funding and/or financing, to resolve these matters and we are in continuous open dialogue with the vendors involved.
In 2009, we have lost a lawsuit started by Visionvale, the developers of the title Ancient Wars: Sparta (released in 2007), in which Visionvale had claimed the final payment for the development of the title. Visionvale aldo claimed that the software development agreement was, because of non-payment, legally terminated and that the licensing rights reverted back to Visionvale. Playlogic has disputed that the agreement had been terminated and claimed that parties did not agree on a license but a transfer of IP rights. The court decided that the IP rights had been transferred to Playlogic, but Playlogic had to pay the remaining outstanding amounts, including interest and costs. The costs amounting to approximately $100,000 have been included in the Statement of Operations for the year 2009.
Visionvale has published the game as well and additionally they have published a sequel of the game, which both portray an infringement on the IP rights owned by Playlogic. We have not been granted any penalty payments by Visionvale for this infringement, on which we have appealed. We have recorded all costs related to this lawsuit in 2009, but have not recorded the potential benefit.
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 results of operations.
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We have started legal cases against a number of customers for non payment. Some relate to sales of our games in 2007. We have recorded these items as receivables in our books, but have provided the most part of this. The main lawsuits in which we claim money from our customers relate to:
Evolved: we entered into a license deal in 2006 for a number of our titles, to be sold in the USA. Although Evolved, even today, is selling our product, we have not received any payment from them. Evolved claims they had to incur costs on the titles that should have been paid by Playlogic and are offsetting the revenues against that.
Koch Media: We are facing a payment issue from our main customer for our distribution in the Europe, Koch Media. Amounts due for payment in December 2009 have not yet been paid by Koch to us. As Koch is a significant customer, we are facing cash flow issues over the last months. We have started legal proceedings against Koch Media Group. As the contract is written in accordance with Austrian Laws, we have hired an Austrian law firm to assist us in this matter. We are claiming a total of Euro 1.7 million (or approximately $2.4 million), which is build up on unpaid sales of our products plus damages from our side. We have not recorded the claim of damages in the financial statements.
ITEM 4.
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, 2009, no other matters were submitted to a vote of holders of our common stock through the solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 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 April 15, 2010, 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 quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
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.
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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. 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. 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
Transactions in 2008:
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.
Transactions in 2009:
On February 10, 2009, the Company sold 200,185 shares of its common stock to an accredited investor based in the Netherlands at nominal value of $0.001 per share or gross proceeds of $200, pursuant to the terms of a subscription agreement dated February 10, 2009.
On February 10, 2009, the Company sold 61,000 shares of its common stock to an accredited investor based in the Netherlands at nominal value of $0.001 per share or gross proceeds of $61, pursuant to the terms of a subscription agreement dated February 10, 2009.
On February 13, 2009, the Company sold 30,000 shares of its common stock to an accredited investor based in the Netherlands at nominal value of $0.001 per share or gross proceeds of $30, pursuant to the terms of a subscription agreement dated February 13, 2009.
On June 1, 2009, the Company issued 105,000 shares of its common stock for services provided by the PR and Marketing company the Company hired. This PR and Marketing company is based in the United States. The shares have a par value of $0.001 per share.
On September 1, 2009, the Company issued 115,000 shares of its common stock for services provided by the PR and Marketing company the Company hired. This PR and Marketing company is based in the United States. The shares have a par value of $0.001 per share.
On December 30, 2009, warrant holders exercised a total of 17,467,253 warrants with exercise prices between $0.40 and $0.60. The exercise was cashless and was calculated at an agreed upon stock price which was set on $1.25 per share. Consequently, the Company issued a total of 10,757,878 shares of common stock to two accredited investors based in the Netherlands at a nominal value of $0.001 per share.
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Stock option plan 2008
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.
Stock option plan 2009
On January 23, 2009, 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 $0.60 per share. A total of 26,667 shares of these options will vest on January 23, 2010 and the remaining 53,333 options will vest in 2 equal yearly installments on January 23, 2011 and January 23, 2012. The options will expire after 4 years.
On January 23, 2009, 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 $0.60 per share. A total of 13,333 shares of these options will vest on January 23, 2010 and the remaining 26,667 options will vest in 2 equal yearly installments on January 23, 2011 and January 23, 2012.. The options will expire after 4 years.
On January 23, 2009, 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 $0.60 per share. A total of 13,333 shares of these options will vest on January 23, 2010 and the remaining 26,667 options will vest in 2 equal yearly installments on January 23, 2011 and January 23, 2012. The options will expire after 4 years.
On January 23, 2009, the Company granted to Ruud Spoor, 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 $0.60 per share. A total of 13,333 shares of these options will vest on January 23, 2010 and the remaining 26,667 options will vest in 2 equal yearly installments on January 23, 2011 and January 23, 2012. The options will expire after 4 years.
On January 23, 2009, the Company granted to Willem M. Smit, the Company’s Executive Director, 40,000 options to purchase shares of the Company’s common stock at an exercise price of $0.60 per share. A total of 13,333 shares of these options will vest on January 23, 2010 and the remaining 26,667 options will vest in 2 equal yearly installments on January 23, 2011 and January 23, 2012. The options will expire after 4 years.
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On January 23, 2009, the Company granted to certain employees and officers a total of 1,082,500 options to purchase shares of the Company’s common stock at an exercise price of $0.60 per share. These options vest ratably over the first three years and will expire in 4 years.
On December 30, 2009, the Board of Directors approved a proposal from the Compensation Committee to grant our Chief Executive Officer Mr. Smit 5,000,000 warrants to purchase shares of the Company’s common stock at an exercise price of $0.60 per share. Mr. Smit is one of the founders of the Company and the percentage of ownership in the Company has decreased substantially due to new issuance of stock and warrants. The warrants will expire on December 30, 2013. Upon exercise, the warrants will be settled cashless. The market price of the underlying share on the date of grant was $0.35. The Company has recorded an expense of $575,000 in relation to this grant.
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:
Exercise of warrants
On December 30, 2009, two principal shareholders excercized a total of 17,467,253 warrants with exercize prices of $0.40, $0.50 and $0.60. These were cashless warrants, and were exercized at an agreed stock price of $1.25 resulting in 10,757,877 new shares of common stock.
Loans from shareholders 2008
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.
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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:
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, 2009, an amount of $196,000 (2008: $147,000) was amortized as interest expense in the accompanying consolidated financial statements.
Loans from shareholders 2009
Loan agreement 1
On January 23, 2009, the Company entered into two bridge loan agreements with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of €1,500,000 (€750,000 each) or $ 2,200,000 ($1,100,000 each)). These loans bear an interest of 10% per annum and will be paid on a monthly basis. The principle amounts have to be repaid on December 31, 2009. Under this loan agreement, the Company pledged as a collateral all Intellectual Property owned by the Company. Concurrent with these loan agreements, the Company issued to these shareholders warrants to purchase 1,500,000 (750,000 each) shares of the Company’s common stock at an exercise price of $0.50 per share. The warrants may be exercised starting January 23, 2009 and expire on January 22, 2013.
Loan agreement 2
On March 16, 2009, the Company entered into two bridge loan agreements with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of €250,000 (€125,000 each) or $ 365,000 ($182,500 each). These loans bear an interest of 10% per annum and will be paid on a monthly basis. The principle amount was initially to be repaid before the end of June 2009. As of July 31, 2009 this loan agreement has been renewed and the repayment date has been extended to September 1, 2009. Under this loan agreement, the Company pledged as a collateral all Intellectual Property and receivables owned by the Company. Concurrent with these loan agreements, the Company issued to these shareholders warrants to purchase 318,182 (159,091 each) shares of the Company’s common stock at an exercise price of $0.40 per share. The warrants may be exercised starting July 31, 2009 and expire on July 31, 2013. Upon exercise, the warrants will be settled cashless.
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In accordance with the contracts, the Company has issued additional 318,182 (159,091 each) cashless warrants at the same conditions as the Company has not repaid the principle amount to the loan provider on or before September 1, 2009. The Company has a verbal agreement with the loan providers to extend the term of the loan to April 1, 2010, and parties are currently working on renewal of the contract.
Loan agreement 3
On June 12, 2009, the Company entered into two bridge loan agreements with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of €3,900,000 (€1,950,000 each) or $ 5,700,000 ($2,850,000 each)). These loans bear an interest of 10% per annum and will be paid on a monthly basis. The principle amounts have to be repaid on September 1, 2009. Under this loan agreement, the Company pledged as collateral all Intellectual Property and accounts receivable owned by the Company. Concurrent with these loan agreements, the Company issued to these shareholders warrants to purchase 4,963,636 (2,481,818 each) shares of the Company’s common stock at an exercise price of $0.40 per share. The warrants may be exercised starting April 7, 2009 and expire on April 7, 2013. Upon exercise, the warrants will be settled cashless.
In accordance with the contracts, the Company has issued an additional 4,963,636 cashless warrants at the same conditions as the Company has not repaid the principle amount to the loan provider on or before September 1, 2009. The Company has a verbal agreement with the loan providers to extend the term of the loan to April 1, 2010, and parties are currently working on renewal of the contract.
Loan agreement 4
On July 30, 2009, the Company entered into two bridge loan agreements with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of €1,800,000 (€ 900,000 each) or $ 2,638,000 ($1,319,000 each)). These loans bear an interest of 10% per annum and will be paid on a monthly basis. The principle amounts have to be repaid on September 1, 2009. Under this loan agreement, the Company pledged as collateral all Intellectual Property and accounts receivable owned by the Company. Concurrent with these loan agreements, the Company issued to these shareholders warrants to purchase 2,290,908 (1,145,454 each) shares of the Company’s common stock at an exercise price of $0.40 per share. The warrants may be exercised starting July 30, 2009 and expire on July 30, 2013. Upon exercise, the warrants will be settled cashless.
In accordance with the contracts, the Company has issued an additional 2,290,908 cashless warrants at the same conditions as the Company has not repaid the principle amount to the loan provider on or before September 1, 2009. The Company has a verbal agreement with the loan providers to extend the term of the loan to April 1, 2010, and parties are currently working on renewal of the contract.
Loan agreement 5
On August 19, 2009, the Company entered into two bridge loan agreements with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of €1,000,000 (€ 500,000 each) or $ 1,465,500 ($ 732,750 each)). These loans bear an interest of 10% per annum and will be paid on a monthly basis. The principle amounts have to be repaid on September 1, 2009. Under this loan agreement, the Company pledged as collateral all Intellectual Property and accounts receivable owned by the Company. Concurrent with these loan agreements, the Company issued to these shareholders warrants to purchase 1,272,728 (636,364 each) shares of the Company’s common stock at an exercise price of $0.40 per share. The warrants may be exercised starting August 19, 2009 and expire on August 19, 2013. Upon exercise, the warrants will be settled cashless.
In accordance with the contracts, the Company has issued an additional 1,272,728 cashless warrants at the same conditions as the Company has not repaid the principle amount to the loan provider on or before September 1, 2009. The Company has a verbal agreement with the loan providers to extend the term of the loan to April 1, 2010, and parties are currently working on renewal of the contract.
Loan agreement 6
On September 22, 2009, the Company entered into two bridge loan agreements with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of €1,550,000 (€ 775,000 each) or $ 2,271,525 ($ 1,135,763 each)). These loans bear an interest of 10% per annum and will be paid on a monthly basis. The principle amounts have to be repaid on April 1, 2010. Under this loan agreement, the Company pledged as collateral all Intellectual Property and accounts receivable owned by the Company. Concurrent with these loan agreements, the Company issued to these shareholders warrants to purchase 1,972,726 (986,363 each) shares of the Company’s common stock at an exercise price of $0.40 per share. The warrants may be exercised starting September 22, 2009 and expire on September 22, 2013. Upon exercise, the warrants will be settled cashless.
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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 total discount of all the debts (loans 1 to 6) amounting to approximately $1,293,532 which will be amortized over the term of the loan. During the year ended December 31, 2009, $824,290 was amortized as interest expense in the accompanying consolidated financial statements.
On July 30, 2009, the Company renewed the terms of six bridge loans that were in default.
Two bridge loans with a total principle amount of €800,000 (€400,000 each), initially signed on November 7, 2008, had a repayment date of April 1, 2009. As the Company is in default the Company agreed to renew the contract and change the repayment date to September 1, 2009. Under this loan agreement, the Company pledged as collateral all Intellectual Property and accounts receivable owned by the Company. Concurrent with these loan agreements, the Company issued to these shareholders warrants to purchase 500,000 (250,000 each) shares of the Company’s common stock at an exercise price of $0.40 per share. The warrants have a cashless exercise and have a 4 year term.
Two bridge loans with a total principle amount of €1,200,000 (€600,000 each), initially signed on December 11, 2008, had a repayment date of May 1, 2009. As the Company is in default the Company agreed to renew the contract and change the repayment date to April 1, 2010. Under this loan agreement, the Company pledged as collateral all Intellectual Property and accounts receivable owned by the Company. Concurrent with these loan agreements, the Company issued to these shareholders warrants to purchase 700,000 (350,000 each) shares of the Company’s common stock at an exercise price of $0.40 per share. The warrants have a cashless exercise and have a 4 year term.
Two bridge loans (as per loan agreement 2) with a total principle amount of €250,000 (€125,000 each), initially signed on March 16, 2009, had a repayment date of June 30, 2009. As the Company is in default the Company agreed to renew the contract and change the repayment date to September 1, 2009. Under this loan agreement, the Company pledged as collateral all Intellectual Property and accounts receivable owned by the Company. Concurrent with these loan agreements, the Company issued to these shareholders warrants to purchase 318,182 (159,091 each) shares of the Company’s common stock at an exercise price of $0.40 per share. The warrants may be exercised starting July 31, 2009 and expire on July 31, 2013. Upon exercise, the warrants will be settled cashless.
In accordance with the contracts, the Company needs to issue an additional 318,182 (159,091 each) cashless warrants at the same conditions as the Company has not repaid the principle amount to the loan provider on or before September 1, 2009.
The total number of warrants issued in connection with these 2009 loans is 22,763,636. The warrants all have a four year term and have exercise prices of $0.40 and $0.50.
Loan agreement 7
On October 1, 2009, the Company entered into two bridge loan agreements with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of €1,600,000 (€800,000 each) or $2,344,800 ($1,172,400 each). An amount of €1,100,000 (or $1,612,000) of this loan has been received in September 2009 and is therefore included in the balance sheet. These loans bear an interest of 10% per annum and will be paid on a monthly basis. The principle amounts have to be repaid before April 1, 2010. Under this loan agreement, the Company pledged as a collateral all Intellectual Property and receivables owned by the Company. Concurrent with these loan agreements, the Company will adjust current outstanding warrants with an exercise price higher than $0.60 to an exercise price of $0.60 per share. This will be done for warrants to purchase 870,000 (435,000 each) shares of the Company’s common stock. The warrants may be exercised starting October 1, 2009 and expire on October 1, 2013. Upon exercise, the warrants will be settled cashless.
Loan agreement 8
On October 16, 2009, the Company entered into two bridge loan agreements with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of € 470,000 (€235,000 each) or $ 688,785 ($344,393 each). These loans bear an interest of 10% per annum and will be paid on a monthly basis. The principle amounts have to be repaid before April 1, 2010. Under this loan agreement, the Company pledged as a collateral all Intellectual Property and receivables owned by the Company. Concurrent with these loan agreements, the Company will adjust current outstanding warrants with an exercise price higher than $0.60 to an exercise price of $0.60 per share. This will be done for warrants to purchase 870,000 (435,000 each) shares of the Company’s common stock The warrants may be exercised starting October 16, 2009 and expire on October 16, 2013. Upon exercise, the warrants will be settled cashless.
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Extension of repayment date
On November 6, 2009, the Company has agreed with the two principal shareholders, to change the term of all loans to end on April 1, 2010. This applies for all loans outstanding, including the long term loan that has an original end date of September 27, 2010. Under this agreement the Company pledged as a collateral all Intellectual Property and receivables owned by the Company. As of the filing date, we are in default with repayment of these loans and therefore the shareholders can demand payment of the full outstanding amounts. We are currently discussing an extension of the repayment date.
Waiver of loans payable
On December 30, 2009, the loan providers have agreed with the Company to waive for the benefit of Playlogic all its rights with respect to the loans, including accrued and unpaid interest, for an amount of $21,038,003 as per December 31, 2009. The effect of the waiver results in a remaining amount payable of $6,000,000 as per December 31, 2009, which has been recorded in the balance sheet as per December 31, 2009. The waiver amount has been recorded directly in equity as Additional Paid in Capital, as the waiver is granted by two of our main shareholders. Under this loan agreement, the Company pledged as a collateral all current and future Intellectual Property, receivables and bankbalances owned by the Company. Furthermore, the loan providers have a first right of pledge on all the issued and outstanding shares of Playlogic GameFactory B.V. With effect as of December 31, 2009, the Company ows an interest on the remaining amount of $6,000,000 equal to 31.21% per year, which interest must be paid in weekly instalments in arrear on or before every Friday of the week, for the first time on or before April 2, 2010.
Issuer Purchase of Equity Securities
None.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable
ITEM 7.
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, Quality Assurance and testing, Public Relations 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.
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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.
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 2009 to Fiscal 2008
Revenues . Revenues for Fiscal 2009 were $11,094,565 as compared to $9,024,196 for Fiscal 2008. This increase of approximately 23% in revenues is primarily the result of the fact that the Company has released some high quality titles like Fairytale Fights that was released in Q4 of 2009. During 2008 the Company has changed its portfolio of games due to market developments (moving away from the PC market). This resulted in very few new releases in the second half of 2008.
Gross Profit . Gross profit totaled $1,040,162 for Fiscal 2009. For Fiscal 2008, gross profit totaled $3,456,090. This decrease in gross profit of 69% is primarily the result of the change in portfolio of games. During 2009 most titles sold were console games on which the cost of goods (including license fees paid to the console owners) is much higher than for a PC title. We have moved our focus to publishing games online as opposed to the traditional retail channels. Therefore, we have adjusted future forecasted revenues, which has resulted in an additional amortization charge for the year of $1,250,000. Furthermore, the titles we have released during 2009 were more expensive to develop than previous titles. This is mainly the case for the development of titles on Playstation 3 and on Xbox 360. We released 3 SKU’s on these platforms compared to zero in 2008
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Research and development expenses . Research and development expenses totaled $1,516,177 for Fiscal 2009. For Fiscal 2008, research and development expenses totaled $460,038. This represents a increase of $1,056,139 or 229%. Our internally developed game Fairytale Fights was released in October 2009. Starting in September 2009, a big part of the team allocated to the development of the game has worked on prototyping new titles for future development. We are currently working on sequels to Fairytale Fights. The costs related to this phase are expensed as R&D expenses. In 2008 the development of Fairytale Fights was in progress and the costs related to this development were capitalized on the balance sheet, resulting in lower R&D expenses for the year.
Selling, marketing, general and administrative expenses. Selling, marketing, general and administrative expenses totaled $11,882,011 for the Fiscal 2009. For fiscal 2008, selling, general and administrative expenses totaled $7,187,881. The increase of $4,694,130 or 65% of costs is due to the opening of a sales office in the USA and a high increase in advertising and marketing of our titles. Previously, the Company sublicensed its IP to US based companies, however due to the improved quality of games released and the fact that we wanted to have more control over our activities, the US office was set up. On the marketing side, we have visited all big consumer and trade shows during 2009 and also had a big marketing campaign to launch Fairytale Fights.
Depreciation. Depreciation expense totaled $426,195, for Fiscal 2009. For Fiscal 2008, depreciation expense totaled $384,960. The increase of $41,235 or 11% 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 which have been depreciated a full year in 2009 compared to half a year in 2008.
Asset impairment charges. We review our Capitalized Software whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Changes in estimates of the future revenues of titles have resulted in additional charges amounting to $6,000,000 for the year. $1,250,000 of this amount has been booked as additional amortization of the games, the remaining $4,750,000 has been recorded as a one time asset impairment charge in 2009 versus $4,500,000 in Fiscal 2008. 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. The total computer entertainment industry has suffered during the year 2009 and faced lower sales than expected.
Interest expense. Interest expense totaled $1,736,824 for Fiscal 2009. For Fiscal 2008, interest expense totaled $532,504. This represents an increase of $1,204,320 and is primarily the result of the a number of bridge loans the Company entered into to bring products like Fairytale Fights to the market. The total cash received on loans in 2009 amount to $18.6 million. Both the development of the game as well as the manufacturing of finished product before shipped to retail bears high cost.
Non cash interest expense. Non cash interest expense totaled $1,447,290 for Fiscal 2009. For Fiscal 2008, non cash interest expense totaled $147,000. This represents an increase of $1,300,290. The non cash interest expense derives from the accounting treatment on warrants issued in connection with loans received. We have closed a number of bridge loans totaling to an amount of $17.3 million in 2009. Approximately 20 million warrants have been issued during 2009.
Net loss. Our net loss for Fiscal 2009 was $(20,335,389) . For Fiscal 2008 we had a net loss that totaled $9,478,797. The decrease of the net result is primarily due to higher costs, such as marketing and advertising. Furthermore, we have expensed a $4.75 million one time impairment charge. The straight line amortization on some of our games as well as higher operating expenses increased due to an increased number of employees and opening an office in the USA. We have invested a lot in high quality games, however the actual sales we have recognized were below expectations, resulting in a low gross margin.
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 $(1,095,107) for the Fiscal 2009 and $(897,792) for Fiscal 2008.
Equity. The total stockholders’ equity as of December 31, 2009 amounted to $183,141 as opposed to a stockholders’equity of $(2,319,679) as of December 31, 2008. Although we have reported a loss, the increase in equity relates to the waiver of the loans payable at the end of 2009, amounting to $21,038,000. As this amount was waived by current shareholders, we have recorded the gain directly in equity, as a contribution to Additional Paid-In Capital.
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Liquidity and Capital Resources
As of December 31, 2009, our cash balance was $918,943 as compared to $81,978 at December 31, 2008.
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, 2009 was $2,266,499, as compared to $380,993 at December 31, 2008.
The Company’s management states that in order to satisfy its working capital requirements through the second quarter of 2010, it will need to obtain additional financing from third parties. If the Company does not obtain any necessary financing in the next month, 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.
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, 2009:
Summary of Significant Accounting Policies
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 $454,647 and $428,017 at December, 31, 2009 and 2008, 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 2009 and 2008 of approximately $120,536 and $109,004, respectively.
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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, 2009 and 2008
Software Development Costs
Capitalized software development costs include direct costs incurred for internally developed titles and payments made to third party software developers under development agreements.
We capitalize internal software development costs (including stock-based compensation, specifically identifiable employee payroll expense and incentive compensation costs related to the completion and release of titles), third party production and other content costs, subsequent to establishing technological feasibility of a software title. Technological feasibility of a product includes the completion of both technical design and game design documentation.
We enter into agreements with third party developers that require us to make payments for game development and production services. In exchange for our payments, we receive the exclusive publishing and distribution rights to the finished game title as well as, in some cases, the underlying Intellectual Property rights. Such agreements allow us to fully recover these payments to the developers at an agreed upon royalty rate earned on the subsequent retail sales of such software, net of any agreed upon costs. We capitalize all development and production service payments to third party developers as software development costs and licenses. On a product-by-product basis, we reduce software development costs and record a corresponding amount of research and development expense for any costs incurred by third party developers prior to establishing technological feasibility of a product. We typically enter into agreements with third party developers after completing the technical design documentation for our products and therefore record the design costs leading up to a signed development contract as research and development expense. When we contract with third party developers, we generally select those that have proven technology and experience in the genre of the software being developed, which often allows for the establishment of technological feasibility early in the development cycle. In instances where the documentation of the design and technology are not in place prior to an executed contract, we monitor the software development process and require our third party developers to adhere to the same technological feasibility standards that apply to our internally developed products.
Amortization of capitalized software development costs and licenses commences when a product is released and is recorded on a title-by-title basis in cost of goods sold. For capitalized software development costs, amortization is calculated using (1) the proportion of current year revenues to the total revenues expected to be recorded over the life of the title or (2) the straight-line method over the remaining estimated useful life of the title, whichever is greater.
Impairment
At each balance sheet date, or earlier if an indicator of impairment exists, we evaluate the recoverability of capitalized software costs, licenses and any other unrecognized minimum commitments that have not been paid, using an undiscounted future cash flow analysis. We use various measures to evaluate expected product performance and estimate future revenues for our software titles including historical performance of comparable titles; orders for titles prior to release; and the estimated performance of a sequel title based on the performance of the title on which the sequel is based. When management determines that the value of a title is unlikely to be recovered by product sales, capitalized costs are charged to the Statement of Operations in the period in which such determination is made.
For the years ended December 31, 2009 and 2008, the Company recognized impairment charges of $4,750,000 and $4,500,000, respectively, and amortization charges of approximately $4,994,000 and $ 2,237,000 respectively.
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The impairment charge recorded in 2009 is due to the worldwide recession as well as an overall market decrease in the sale of video games. Furthermore, as the Company will focus more on online sales as opposed to using retail channels, we have recorded this impairment charge for the year. Only titles that have been released to market have been impaired in 2009.
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 in 2008.
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. We provide for excess or obsolete inventory based on the future expected demand for our products. Significant changes in demand for our products would impact management's estimates in establishing our inventory provision.
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 $1,516,000 and $460,000 for the years ended December 31, 2009 and 2008, respectively. The increase in 2009 is due to the start of new projects in our subsidiary Playlogic Gamefactory BV after the release of our internally developed Fairytale Fights.
Advertising and marketing expenses
We expense advertising and marketing expenses as incurred. Advertising expense for the years ended December 31, 2009 and 2008 amounted to approximately $2,306,000, and $736,000, respectively.
Income Taxes
We utilize the asset and liability method of accounting for income taxes. At December 31, 2009 and 2008, 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.
We use estimates and assumptions to compute the provision for income taxes including allocations of certain transactions to different tax jurisdictions, amounts of permanent and temporary differences, the likelihood of deferred tax assets being recovered and the outcome of contingent tax risks. These estimates and assumptions are revised as new events occur, more experience is acquired and additional information is obtained. The impact of these revisions is recorded in income tax expense or benefit in the period in which they become known.
In June 2006 the FASB clarified the accounting for uncertainty in income taxes by prescribing application of a more likely than not threshold to the recognition and derecognition of uncertain tax positions. It also prescribed guidance on measurement, classification, interest and penalties, accounting for interim periods, and disclosures. The Company adopted the new guidance in January 2009.
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Share-Based Payment Arrangements
We have issued stock-based compensation to employees and directors.
We calculate the fair value of our employee and non-employee stock option awards using the Black-Scholes pricing model. Employee stock option awards are amortized as stock-based compensation expense on a straight-line basis over the expected vesting period, which is generally three years, and reduced for estimated forfeitures. We apply variable accounting to our non-employee based stock option awards, whereby we re-measure the fair value of the unvested portion of the awards at each vest date, and record stock-based compensation expense for the difference between total earned compensation at the end of the period and total earned compensation at the beginning of the period.
We value time-based restricted stock awards to employees using our closing stock price on the date of grant. Time-based restricted stock awards are amortized and recorded as expense on a straight-line basis over their expected vesting period, which is typically three years, and reduced for estimated forfeitures. We apply variable accounting to our non-employee time-based restricted stock awards, whereby we re-measure the value of such awards at each balance sheet date and adjust the value of the awards based on the closing price of our common stock at the end of the reporting period. Changes in the value of the awards from period to period are recorded as stock-based compensation expense over the vesting period, which is typically four years.
Estimated forfeitures are adjusted, if necessary, in subsequent periods if actual forfeitures differ from our estimates.
For the years ended December 31, 2009 and 2008, the Company recorded approximately $973,000 and $206,000 respectively, of stock-based compensation expense. See Note J for a full discussion of the Company’s stock-based compensation arrangements.
Earnings (loss) per share
Basic EPS is computed by dividing the net income (loss) applicable to common stockholders for the period by the weighted average number of shares of common stock outstanding during the same period. Diluted EPS is computed by dividing the net income (loss) applicable to common stockholders for the period by the weighted average number of shares of common stock and common stock equivalents outstanding.
The Company incurred a net loss for the years ended December 31, 2009 and 2008; therefore, the basic and diluted weighted average shares outstanding exclude the impact of all common stock equivalents because their impact would be antidilutive.
The Company defines common stock equivalents as unexercised stock options, unvested time-based and market-based restricted stock and warrants outstanding during the period.
Unexercised warrants to purchase 18,601,022 shares and 8,797,233 shares of our common stock as of December 31, 2009 and 2008, respectively, were excluded from the computation of diluted earnings per share because the exercise of warrants would be anti-dilutive to earnings per share.
Unexercised warrants to purchase 18,601,022 shares and 8,797,233 shares of our common stock as of December 31, 2009 and 2008, 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 our 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.
We recognize revenue upon the transfer of title and risk of loss to our customers. We recognize revenue for software titles when there is (1) persuasive evidence that an arrangement with the customer exists, which is generally based on a customer purchase order, (2) the product is delivered, (3) the selling price is fixed or determinable and (4) collection of the customer receivable is deemed probable. Our payment arrangements with customers typically provide net 30 and 60 day terms.
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Some of our software products provide limited online functionality at no additional cost to the consumer. Generally, we consider such features to be incidental to the overall product offering and an inconsequential deliverable. Accordingly, we do not defer revenue related to products containing such online features. We determine whether our products contain substantial online functionality by evaluating the significance of the development effort and the nature of the online features, the extent of anticipated marketing focus on the online features, the significance of the online features to the customers' anticipated overall gameplay experience, and the significance of our post sale obligations to customers. Overall, online play functionality is still an emerging area for us, and we continue to monitor this developing functionality and its significance to our products.
In addition, some of our software products are sold exclusively as downloads of digital content for which the consumer takes possession of the digital content for a fee. Revenue from product downloads is generally recognized when the download is made available (assuming all other recognition criteria are met).
Revenue is recognized after deducting estimated reserves for returns, price concessions and other allowances. In circumstances when we do not have a reliable basis to estimate returns and price concessions or are unable to determine that collection of a receivable is probable, we defer the revenue until such time as we can reliably estimate any related returns and allowances and determine that collection of the receivable is probable.
Allowances for Returns, Price Concessions and Other Allowances
We accept returns and grant price concessions in connection with our publishing arrangements. Following reductions in the price of our products, we grant price concessions to permit customers to take credits against amounts they owe us with respect to products unsold by them. Our customers must satisfy certain conditions to entitle them to return products or receive price concessions, including compliance with applicable payment terms and confirmation of field inventory levels.
Our distribution arrangements with customers do not give them the right to return titles or to cancel firm orders. However, we sometimes accept returns from our distribution customers for stock balancing and make accommodations to customers, which include credits and returns, when demand for specific titles falls below expectations.
We make estimates of future product returns and price concessions related to current period product revenue. We estimate the amount of future returns and price concessions for published titles based upon, among other factors, historical experience and performance of the titles in similar genres, historical performance of the 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 our products by consumers.
Significant management judgments and estimates must be made and used 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 April 2009, the FASB issued ASC 805, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that arise from Contingencies , which requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value, if fair value can be determined during the measurement period. ASC 805 specifies that an asset or liability should be recognized at time of acquisition if the amount of the asset or liability can be reasonably estimated and that it is probable that an asset existed or that a liability had been incurred at the acquisition date. ASC 805 is effective for all fiscal years beginning after December 15, 2008 (31 December 2009 for the Company). 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 2009, the FASB issued ASC 855, Subsequent Events which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. ASC 855 is effective for interim or annual financial periods ending after June 15, 2009 (the Company's second quarter ended June 30, 2009). The implementation of this standard did not have a material impact on the Company's financial statements. Subsequent events were evaluated through the date of issuance of these consolidated financial statements on November 18, 2009 at the time this Quarterly Report on Form 10-Q was filed with the Securities and Exchange Commission.
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In June 2009, the FASB issued ASC 105 which replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States. ASC 105 is effective for interim and annual periods ending after September 15, 2009 (the Company's third quarter ended September 30, 2009). We do not expect the adoption of this standard to have an impact on our financial position or results of operations.
In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements. This guidance modifies the fair value requirements of FASB ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements, by allowing the use of the “best estimate of selling price” in addition to vendor specific objective evidence and third party evidence for determining the selling price of a deliverable. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence, (b) third-party evidence, or (c) estimates. In addition, the residual method of allocating arrangement consideration is no longer permitted. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. We do not expect the adoption of ASU 2009-13 to have a material impact on our Condensed Consolidated Financial Statements.
In October 2009, the FASB issued ASU 2009-14, Software (Topic 985) - Certain Revenue Arrangements that Include Software Elements. This guidance modifies the scope of FASB ASC subtopic 965-605, Software-Revenue Recognition , to exclude from its requirements non-software components of tangible products and software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality. ASU 2009-14 is effective for fiscal years beginning on or after June 15, 2010. We do not expect the adoption of ASU 2009-14 to have a material impact on our Condensed Consolidated Financial Statements.
The FASB’s Accounting Standards Codification (ASC) is effective for all interim and annual financial statements issued after September 15, 2009. The ASC is now the single official source of authoritative, nongovernmental generally accepted accounting principles (GAAP) in the United States. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. Our accounting policies were not affected by the conversion to ASC. However, we have conformed references to specific accounting standards in these notes to our consolidated financial statements to the appropriate section of ASC.
In January 2010, the FASB issued guidance that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. The guidance is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures that are effective for annual periods beginning after December 15, 2010. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
There were various other accounting standards and interpretations issued during 2010 and 2009, none of which are expected to have a material impact on the Company’s consolidated financial position, operations, or cash flows.
Related Party Transactions
See below Part III.
ITEM 7A
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.
Interest Rate risk
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. After signing the waiver agreement we have agreed to pay an amount of Euro 25,000 (or $36,000) interest per week to the loan providers. This means an effective interest percentage of 31% per year. This interest is only calculated on the remaining loan of $6 million.
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Foreign Currency Exchange Rate Risk
We transact business in foreign currencies and are exposed to risks resulting from fluctuations in foreign currency exchange rates. Accounts relating to foreign operations are translated into United States dollars using prevailing exchange rates at the relevant quarter end. Translation adjustments are included as a separate component of stockholders' equity. For the year ended December 31, 2009, our foreign currency translation adjustment loss was approximately $5.1 million.
We recognized a foreign exchange transaction gain in interest and other expense, net in our consolidated statement of operations for the year ended December 31, 2009 of $183,000 (gain) and a foreign exchange transaction loss for the year ended December 31, 2008 of $412,000 (loss).
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data appear in a separate section of this report starting on Page. 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A.
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.
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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, 2009.
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 2009, 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.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE;
Our directors and executive officers are as follows:
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. Based on his knowledge of financial institutions, such as investment banks, the Board of Directors believes that Mr Simon is qualified to be Chairman of the Board of Directors.
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. Based on his knowledge of US technology companies the Board of Directors believes Mr Calhoun is qualified to be member of the Board of Directors.
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. Based on his legal background, the Board of Directors believes Mr Van Emden is qualified to be member of the Board of Directors.
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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. Mr Spoor has resigned as Board Member as of December 31, 2009.
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.
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.
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 factthat 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.
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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 ten 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 2009, 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 2009, the Company's Board of Directors had five Directors. During 2009 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.
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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 2009 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 2009 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 2009 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's Code of Business Conduct and Ethics applicable to its directors and all employees, including senior financial officers, is available on the Company's website at www.playlogicgames.com . If the Company makes any amendment to its Code of Business Conduct and Ethics that is required to be disclosed pursuant to the Exchange Act, the Company will make such disclosures on its website.
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.
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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.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation for the fiscal years ended December 31, 2007, 2008 and 2009 received by the individual who served as Playlogic International's Chief Executive Officer during 2009 and Playlogic International’s other most highly compensated executive officers whose total annual salary and bonus for fiscal year 2009 exceeded $100,000 (the “Named Officers”).
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Annual Compensation
Compensation Awards
Payouts
All Other Compen-
sation
TOTAL
Name and Principal Position as
of December 31, 2008
Year
Salary €/($)
Bonus ($)
Other Annual Compensation ($)
Restricted Stock Awards (5)
Securities Underlying Options/SARs (#)
NonEquity Incentive Plan Compensation
Nonqualified Deferred Compensation Earnings
LTIP Payouts ($)
Willem M. Smit (1)
--
390,000
--
Chief Executive Officer
240,000
200,000 (2)
Sloterhof Investments N.V.
(of which Mr. Willem M. Smit
is the beneficial owner)
--
--
Rogier W. Smit
€143,000/
350,000
€143,000/
$198,772
$198,772
Executive Vice President
€143,000/
--
400,000
--
€143,000/
$210,000
$210,000
€143,000/
200,000 (3)
€143,000/
$196,098
$196,098
Marcel Noordeloos
€143,000/
100,000
€143,000/
$198,772
$198,772
Chief Financial Officer a.i.
€0/$0
€0/$0
€0/$0
€0/$0
Dominique Morel Chief
€143,000/$
--
75,000
--
€143,000/$
Technology Officer
198,772
198,772
€143,000/$
100,000 (4)
--
€143,000/$
210,000
210,000
€143,000/
100,000 (4)
€143,000/
$196,098
$196,098
Pierre-Yves Thiercelin
€131,560/
--
75,000
--
€131,560/
$183,435
$183,435
International Sales Director (10)
€143,000/
100,000
€143,000/
$210,000
$210,000
€ 48,500/
75,000 (6)
€ 48,500/
$66,500
$66,500
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___________________
(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)
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.
(3)
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.
(4)
We granted to Mr. Morel, 100,000 options to purchase shares of our common stock at an exercise price of $3.50 per share. A total of 25,000 shares of these options vested on October 1, 2007, and the remaining options will vest in three equal installments on October 1, 2008, October 1, 2009 and October 1, 2010
(5)
Calculated by multiplying the amount of restricted stock by the restated value for Dutch income tax purposes of the restricted stock grant ($.70 per share).
(6)
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 2009.
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The following table contains the outstanding equity awards as of December 31, 2009:
As of December 31, 2009, all options and warrants in the table above have a 4 year term. The Stock options granted before January 23, 2009 have been extended and now expire on January 1, 2013. The Stock Options granted in January 23, 2009 will expire on January 23, 2013. The warrants have a 4 year term and expires on December 31, 2014. All stock options and warrants in the table above have an exercise price of $0.60 per share.
Option Exercises and Holdings
During the fiscal year ended December 31, 2009, 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 2009 as disclosed in the tables above. The options have a four year term and expire on January 1, 2013.
The following table contains the Directors’ compensation for the year ending December 31, 2009:
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.
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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. 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.
Risk Oversight
Companies face a variety of risks, including credit risk, liquidity risk, and operational risk. The Board believes an effective risk management system will (1) timely identify the material risks that the Company faces, (2) communicate necessary information with respect to material risks to senior executives and, as appropriate, to the Board or relevant Board Committee, (3) implement appropriate and responsive risk management strategies consistent with Company’s risk profile, and (4) integrate risk management into Company decision-making.
The Board has designated the Audit Committee to take the lead in overseeing risk management and the Audit Committee makes periodic reports to the Board regarding briefings provided by management and advisors as well as the Committee’s own analysis and conclusions regarding the adequacy of the Company’s risk management processes.
In addition to the formal compliance program, the Board encourages management to promote a corporate culture that incorporates risk management into the Company’s corporate strategy and day-to-day business operations. The Board also continually works, with the input of the Company’s executive officers, to assess and analyze the most likely areas of future risk for the Company.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of December 31, 2009, 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, 2009.
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`
*Less than 1%
Directors and officers hold options to purchase 3,752,500 shares of the Company’s common stock at an exercise price of $0.60 per share. The options expire on January 1, 2013.
Furthermore, Directors and Officers hold warrants to purchase 11.8 million of the Company’s common stock at exercise prices between $0.40 and $0.60. The warrants have a cashless exercise.
___________
(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.
- 54 -
Equity Compensation Plan Information
The following table presents information concerning our equity compensation plans as of December 31, 2009.
ITEM 13.
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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit committee
The audit committee of our board of directors is directly responsible for the appointment, oversight, and evaluation of our independent registered public accounting firm. In accordance with the audit committee’s charter, it must approve, in advance of the service, all audit and permissible non-audit services to be provided by our independent registered public accounting firm and establish policies and procedures for the engagement of the outside auditor to provide audit and permissible non-audit services. Our independent registered public accounting firm may not be retained to perform non-audit services specified in Section 10A(g) of the Exchange Act.
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-Q for the quarters ended March 31, 2009, June 30, 2009 and September 30, 2009 as included in the Company’s Forms 10-Q as well as for the audit of the financial statements ended December 31, 2009 as included in the Company’s 10-K were $76,000
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, 2009, June 30, 2009 and September 30, 2009 as well as for the audit of the financial statements ended December 31, 2009 as included in the Company’s 10-K were $60,000.
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, 2009.
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Tax Fees.
The aggregate fees billed for tax compliance, tax advice or tax planning services by DRV for the fiscal year ended December 31, 2009 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, 2009.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a)
Documents filed as part of Form 10-K
1. Financial Statements:
The financial statements required by item 15 are submitted in a separate section of this report, beginning on Page, incorporated herein and made a part hereof.
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.
- 56 -
3. Exhibits:
Exhibit Index
- 57 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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
May 17, 2010
Willy J. Simon
/s/ Willem M. Smit
Director and Chief Executive Officer
May 17, 2010
Willem M. Smit
/s/ Marcel Noordeloos
Interim Chief Financial Officer
(Principal Financial and Accounting Officer)
May 17, 2010
Marcel Noordeloos
/s/ Erik L.A. van Emden
Director
May 17, 2010
Erik L.A. van Emden
/s/ George M. Calhoun
Director
May 17 2010
George M. Calhoun
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
CONTENTS
F - 1
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, 2009 and 2008, and the related consolidated statements of operations and comprehensive loss, changes in shareholders’ equity (deficit), and cash flows for the years ended December 31, 2009 and 2008. 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, 2009 and 2008, and the consolidated results of their operations and their cash flows for the years ended December 31, 2009 and 2008 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 net losses, working capital deficits, and recurring negative operating cash flows during the years ended December 31, 2009 and 2008, 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
April 26, 2010
F - 2
The accompanying notes are an integral part of these consolidated financial statements
F - 3
The accompanying notes are an integral part of these consolidated financial statements
F - 4
The accompanying notes are an integral part of these consolidated financial statements
F - 5
The accompanying notes are an integral part of these consolidated financial statements
F - 6
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 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.
During 2009 we have incorporated a 100% subsidiary in Switzerland which is currently dormant, but might be used for future financing activities.
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
Use of 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 subsidiaries Playlogic Game Factory B.V. (a corporation domiciled in The Netherlands) and Playlogic Suisse SA (a corporation domiciled in Switzerland). 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.
F - 7
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, 2009 and 2008, we had a working capital deficit of approximately $4,363,136 and $7,288,336, respectively, resulting from recurring negative operating cash flow which raised substantial doubts about our ability to continue as a going concern. For the years ending December 31, 2009 and December 31, 2008, we have recorded net losses of $20,335,389 and $9,478,797 respectively. Furthermore, we showed negative cash flow from operations for these periods amounting to $16,336,931 and $13,065,035 respectively. 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.
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 months, the Company will be forced to rely on existing cash in the bank and upon additional funds loaned by third parties 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 third parties 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.
F - 8
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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:
*$1.440 and $1.400 at December 31, 2009 and 2008, respectively
** Average for the year ended December 31, 2009 was $1.3942
Average for the year ended December 31, 2008 was $1.4711
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 78%, and 77% of consolidated net revenues in each of the two years ended December 31, 2009, and 2008 respectively. As of December 31, 2009 and 2008, the three largest customers accounted for 75% and 35%, 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. We are currently facing a payment issue from our main customer for our distribution in the Europe, Koch Media. Amounts due for payment in December 2009 have not yet been paid by Koch to us. As Koch is a significant customer, we are facing cash flow issues over the last months. We have started legal proceedings against Koch Media Group. As the contract is written in accordance with Austrian Laws, we have hired an Austrian law firm to assist us in this matter. We are claiming a total of Euro 1.7 million (or approximately $2.4 million), which is build up on unpaid sales of our products plus damages from our side. We have not recorded the claim of damages in the financial statements.
On other large customers, management believes that the receivable balances from these customers do not represent a significant credit risk based on past collection experience.
The Company has concentrated its credit risk for cash by maintaining deposits in financial institutions, which may at times, exceed the amounts covered by insurance provided by the United States Federal Deposit Insurance Corporation (FDIC) for banks in the USA and by the Nederlansche Bank (DNB, which is the Dutch governmental bank) for our banks in the Netherlands. The loss that would have resulted from that risk totaled $722,196 at December 31, 2009, for the excess of the deposit liabilities reported by the financial institutions over the amount that would have been covered by federal and governmental insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk to cash.
F - 9
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of January 1, 2009, we adopted the guidance for Fair Value Measurements which establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of "observable inputs" and minimize the use of "unobservable inputs." The three levels of inputs used to measure fair value are as follows:
·
Level 1-Quoted prices in active markets for identical assets or liabilities.
·
Level 2-Observable inputs other than quoted prices included in Level 1, such as quoted prices for markets that are not active or other inputs that are observable or can be corroborated by observable market data.
·
Level 3-Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
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 60 days old to be past due.
Because of the credit risk involved, management has provided an allowance for doubtful accounts receivable, totaling $454,647 and $428,017 at December, 31, 2009 and 2008, respectively, which we believe will eventually become uncollectible. The main part of this amount has already been expensed in previous years. We recorded expenses for doubtful debt during the years ended 2009 and 2008 of approximately $120,536 and $109,004, 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, 2009 and 2008
Software Development Costs & Intellectual Property licenses
Capitalized software development costs include direct costs incurred for internally developed titles and payments made to third party software developers under development agreements.
We capitalize internal software development costs (including stock-based compensation, specifically identifiable employee payroll expense and incentive compensation costs related to the completion and release of titles), third party production and other content costs, subsequent to establishing technological feasibility of a software title. Technological feasibility of a product includes the completion of both technical design and game design documentation.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We enter into agreements with third party developers that require us to make payments for game development and production services. In exchange for our payments, we receive the exclusive publishing and distribution rights to the finished game title as well as, in some cases, the underlying Intellectual Property rights. Such agreements allow us to fully recover these payments to the developers at an agreed upon royalty rate earned on the subsequent retail sales of such software, net of any agreed upon costs. We capitalize all development and production service payments to third party developers as software development costs and licenses. On a product-by-product basis, we reduce software development costs and record a corresponding amount of research and development expense for any costs incurred by third party developers prior to establishing technological feasibility of a product. We typically enter into agreements with third party developers after completing the technical design documentation for our products and therefore record the design costs leading up to a signed development contract as research and development expense. When we contract with third party developers, we generally select those that have proven technology and experience in the genre of the software being developed, which often allows for the establishment of technological feasibility early in the development cycle. In instances where the documentation of the design and technology are not in place prior to an executed contract, we monitor the software development process and require our third party developers to adhere to the same technological feasibility standards that apply to our internally developed products.
Amortization of capitalized software development costs and licenses commences when a product is released and is recorded on a title-by-title basis in cost of goods sold. For capitalized software development costs, amortization is calculated using (1) the proportion of current year revenues to the total revenues expected to be recorded over the life of the title or (2) the straight-line method over the remaining estimated useful life of the title, whichever is greater.
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.
Impairment
At each balance sheet date, or earlier if an indicator of impairment exists, we evaluate the recoverability of capitalized software costs, (Intellectual Property) Licenses and any other unrecognized minimum commitments that have not been paid, using an undiscounted future cash flow analysis. We use various measures to evaluate expected product performance and estimate future revenues for our software titles including historical performance of comparable titles; orders for titles prior to release; and the estimated performance of a sequel title based on the performance of the title on which the sequel is based. When management determines that the value of a title is unlikely to be recovered by product sales, capitalized costs are charged to the Statement of Operations in the period in which such determination is made.
We also assess the recoverability of capitalized intellectual property license costs based on certain qualitative factors, such as the success of other products and/or entertainment vehicles utilizing the intellectual property, whether there are any future planned theatrical releases or television series based on the intellectual property, and the rights holder's continued promotion and exploitation of the intellectual property.
Significant management judgments and estimates are utilized in the assessment of the recoverability of capitalized costs. In evaluating the recoverability of capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts and estimates of additional costs to be incurred. If revised forecasted or actual product sales are less than the original forecasted amounts utilized in the initial recoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which could result in an impairment charge. Material differences may result in the amount and timing of charges for any period if management makes different judgments or utilizes different estimates in evaluating these qualitative factors
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2009 and 2008, the Company recognized impairment charges of $4,750,000 and $4,500,000, respectively, and amortization charges of approximately $4,994,000 and $ 2,237,000 respectively.
The impairment charge recorded in 2009 is due to the worldwide recession as well as an overall market decrease in the sale of video games. Furthermore, as the Company will focus more on online sales as opposed to using retail channels, we have recorded this impairment charge for the year. Only titles that have been released to market have been impaired in 2009.
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 in 2008.
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. We provide for excess or obsolete inventory based on the future expected demand for our products. Significant changes in demand for our products would impact management's estimates in establishing our inventory provision.
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 $1,516,000 and $460,000 for the years ended December 31, 2009 and 2008, respectively. The increase in 2009 is due to the start of new projects in our subsidiary Playlogic Gamefactory BV after the release of our internally developed Fairytale Fights.
Advertising and marketing expenses
We expense advertising and marketing costs as incurred. Advertising expense for the years ended December 31, 2009 and 2008 amounted to approximately $2,306,000, and $736,000, respectively.
Income Taxes
We utilize the asset and liability method of accounting for income taxes. At December 31, 2009 and 2008, 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.
We use estimates and assumptions to compute the provision for income taxes including allocations of certain transactions to different tax jurisdictions, amounts of permanent and temporary differences, the likelihood of deferred tax assets being recovered and the outcome of contingent tax risks. These estimates and assumptions are revised as new events occur, more experience is acquired and additional information is obtained. The impact of these revisions is recorded in income tax expense or benefit in the period in which they become known.
In June 2006 the FASB clarified the accounting for uncertainty in income taxes by prescribing application of a more likely than not threshold to the recognition and derecognition of uncertain tax positions. It also prescribed guidance on measurement, classification, interest and penalties, accounting for interim periods, and disclosures. The Company adopted the new guidance in January 2009.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We calculate the fair value of our employee and non-employee stock option awards using the Black-Scholes pricing model. Employee stock option awards are amortized as stock-based compensation expense on a straight-line basis over the expected vesting period, which is generally three years, and reduced for estimated forfeitures. We apply variable accounting to our non-employee based stock option awards, whereby we re-measure the fair value of the unvested portion of the awards at each vest date, and record stock-based compensation expense for the difference between total earned compensation at the end of the period and total earned compensation at the beginning of the period.
We value time-based restricted stock awards to employees using our closing stock price on the date of grant. Time-based restricted stock awards are amortized and recorded as expense on a straight-line basis over their expected vesting period, which is typically three years, and reduced for estimated forfeitures. We apply variable accounting to our non-employee time-based restricted stock awards, whereby we re-measure the value of such awards at each balance sheet date and adjust the value of the awards based on the closing price of our common stock at the end of the reporting period. Changes in the value of the awards from period to period are recorded as stock-based compensation expense over the vesting period, which is typically four years.
Estimated forfeitures are adjusted, if necessary, in subsequent periods if actual forfeitures differ from our estimates.
For the years ended December 31, 2009 and 2008, the Company recorded approximately $973,000 and $206,000 respectively, of stock-based compensation expense. See Note J for a full discussion of the Company’s stock-based compensation arrangements.
Earnings (loss) per share
Basic EPS is computed by dividing the net income (loss) applicable to common stockholders for the period by the weighted average number of shares of common stock outstanding during the same period. Diluted EPS is computed by dividing the net income (loss) applicable to common stockholders for the period by the weighted average number of shares of common stock and common stock equivalents outstanding.
The Company incurred a net loss for the years ended December 31, 2009 and 2008; therefore, the basic and diluted weighted average shares outstanding exclude the impact of all common stock equivalents because their impact would be antidilutive.
The Company defines common stock equivalents as unexercised stock options, unvested time-based and market-based restricted stock and warrants outstanding during the period.
Unexercised stock options to purchase 4,525,000 and 3,202,500 shares of the Company’s common stock as of December 31, 2009 and 2008, 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 18,601,022 shares and 8,797,233 shares of our common stock as of December 31, 2009 and 2008, 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 our 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.
We recognize revenue upon the transfer of title and risk of loss to our customers. We recognize revenue for software titles when there is (1) persuasive evidence that an arrangement with the customer exists, which is generally based on a customer purchase order, (2) the product is delivered, (3) the selling price is fixed or determinable and (4) collection of the customer receivable is deemed probable. Our payment arrangements with customers typically provide net 60 and 90 day terms.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Some of our software products provide limited online functionality at no additional cost to the consumer. Generally, we consider such features to be incidental to the overall product offering and an inconsequential deliverable. Accordingly, we do not defer revenue related to products containing such online features. We determine whether our products contain substantial online functionality by evaluating the significance of the development effort and the nature of the online features, the extent of anticipated marketing focus on the online features, the significance of the online features to the customers' anticipated overall gameplay experience, and the significance of our post sale obligations to customers. Overall, online play functionality is still an emerging area for us, and we continue to monitor this developing functionality and its significance to our products.
In addition, some of our software products are sold exclusively as downloads of digital content for which the consumer takes possession of the digital content for a fee. Revenue from product downloads is generally recognized when the download is made available (assuming all other recognition criteria are met).
Revenue is recognized after deducting estimated reserves for returns, price concessions and other allowances. In circumstances when we do not have a reliable basis to estimate returns and price concessions or are unable to determine that collection of a receivable is probable, we defer the revenue until such time as we can reliably estimate any related returns and allowances and determine that collection of the receivable is probable.
Allowances for Returns, Price Concessions and Other Allowances
We accept returns and grant price concessions in connection with our publishing arrangements. Following reductions in the price of our products, we grant price concessions to permit customers to take credits against amounts they owe us with respect to products unsold by them. Our customers must satisfy certain conditions to entitle them to return products or receive price concessions, including compliance with applicable payment terms and confirmation of field inventory levels.
Our distribution arrangements with customers do not give them the right to return titles or to cancel firm orders. However, we sometimes accept returns from our distribution customers for stock balancing and make accommodations to customers, which include credits and returns, when demand for specific titles falls below expectations.
We make estimates of future product returns and price concessions related to current period product revenue. We estimate the amount of future returns and price concessions for published titles based upon, among other factors, historical experience and performance of the titles in similar genres, historical performance of the 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 our products by consumers.
Significant management judgments and estimates must be made and used 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 April 2009, the FASB issued ASC 805, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that arise from Contingencies , which requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value, if fair value can be determined during the measurement period. ASC 805 specifies that an asset or liability should be recognized at time of acquisition if the amount of the asset or liability can be reasonably estimated and that it is probable that an asset existed or that a liability had been incurred at the acquisition date. ASC 805 is effective for all fiscal years beginning after December 15, 2008 (31 December 2009 for the Company). The adoption of this statement is not expected to have a material effect on the Company's future financial position or results of operations.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In May 2009, the FASB issued ASC 855, Subsequent Events which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. ASC 855 is effective for interim or annual financial periods ending after June 15, 2009 (the Company's second quarter ended June 30, 2009). The implementation of this standard did not have a material impact on the Company's financial statements. Subsequent events were evaluated through the date of issuance of these consolidated financial statements on November 18, 2009 at the time this Quarterly Report on Form 10-Q was filed with the Securities and Exchange Commission.
In June 2009, the FASB issued ASC 105 which replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States. ASC 105 is effective for interim and annual periods ending after September 15, 2009 (the Company's third quarter ended September 30, 2009). We do not expect the adoption of this standard to have an impact on our financial position or results of operations.
In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605) - Multiple-Deliverable Revenue Arrangements. This guidance modifies the fair value requirements of FASB ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements, by allowing the use of the “best estimate of selling price” in addition to vendor specific objective evidence and third party evidence for determining the selling price of a deliverable. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence, (b) third-party evidence, or (c) estimates. In addition, the residual method of allocating arrangement consideration is no longer permitted. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. We do not expect the adoption of ASU 2009-13 to have a material impact on our Condensed Consolidated Financial Statements.
In October 2009, the FASB issued ASU 2009-14, Software (Topic 985) - Certain Revenue Arrangements that Include Software Elements. This guidance modifies the scope of FASB ASC subtopic 965-605, Software-Revenue Recognition , to exclude from its requirements non-software components of tangible products and software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality. ASU 2009-14 is effective for fiscal years beginning on or after June 15, 2010. We do not expect the adoption of ASU 2009-14 to have a material impact on our Condensed Consolidated Financial Statements.
The FASB’s Accounting Standards Codification (ASC) is effective for all interim and annual financial statements issued after September 15, 2009. The ASC is now the single official source of authoritative, nongovernmental generally accepted accounting principles (GAAP) in the United States. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. Our accounting policies were not affected by the conversion to ASC. However, we have conformed references to specific accounting standards in these notes to our consolidated financial statements to the appropriate section of ASC.
In January 2010, the FASB issued guidance that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. The guidance is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures that are effective for annual periods beginning after December 15, 2010. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
There were various other accounting standards and interpretations issued during 2010 and 2009, none of which are expected to have a material impact on the Company’s consolidated financial position, operations, or cash flows.
Reclassifications
Certain 2008 amounts have been reclassified to conform to the 2009 presentation.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - COMPREHENSIVE INCOME (LOSS)
Components of comprehensive income (loss) are as follows:
NOTE C- PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2009 and 2008:
Depreciation expense for the years ended December 31, 2009, and 2008, was $426,195 and $384,960, respectively.
NOTE D - SOFTWARE DEVELOPMENT COSTS & INTELLECTUAL PROPERTY LICENSES
The following table provides the details of software development costs for the year ended December 31, 2009 and 2008
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The amount of software development costs resulting from advance payments and guarantees to third-party developers were $1,410,000 and $4,906,000, respectively, at December 31, 2009 and 2008. In addition, software development costs totaling $3,642,000 and $8,717,000 at December 31, 2009 and 2008, 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 2011.
Capitalized intellectual property licenses were $1.8 million and $1.9 million at December 31, 2009 and December 31, 2008, respectively. Amortization of Intellectual Property Licenses for the years ended December 31, 2009 and 2008 were $95,000 and $0, respectively.
NOTE E - INVENTORY
As of December 31, 2009 and 2008, inventory consisted of:
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 431,000 has been written off and charged to expenses during the year.
NOTE F - RELATED PARTY TRANSACTIONS
Transactions in 2008:
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.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Transactions in 2009:
On February 10, 2009, the Company sold 200,185 shares of its common stock to an accredited investor based in the Netherlands at nominal value of $0.001 per share or gross proceeds of $200, pursuant to the terms of a subscription agreement dated February 10, 2009. . The investor has provided services to assist the Company in finding new funding. The market price of the stock was $0.40 on the day of grant
On February 10, 2009, the Company sold 61,000 shares of its common stock to an accredited investor based in the Netherlands at nominal value of $0.001 per share or gross proceeds of $61, pursuant to the terms of a subscription agreement dated February 10, 2009. . The investor has provided services to assist the Company in finding new funding. The market price of the stock was $0.40 on the day of grant.
On February 13, 2009, the Company sold 30,000 shares of its common stock to an accredited investor based in the Netherlands at nominal value of $0.001 per share or gross proceeds of $30, pursuant to the terms of a subscription agreement dated February 13, 2009. The investor has provided services to assist the Company in finding new funding. The market price of the stock was $0.40 on the day of grant.
On December 30, 2009, warrant holders exercised a total of 17,467,253 warrants with exercise prices between $0.40 and $0.60. The exercise was cashless and was calculated at an agreed upon price which was set on stock price of $1.25 per share. Consequently, the Company issued a total of 10,757,878 shares of common stock to two accredited investors based in the Netherlands at a nominal value of $0.001 per share.
Loans from shareholders 2008
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:
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, 2009, an amount of $196,000 (2008: $147,000) was amortized as interest expense in the accompanying consolidated financial statements.
Loans from shareholders 2009
Loan agreement 1
On January 23, 2009, the Company entered into two bridge loan agreements with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of €1,500,000 (€750,000 each) or $ 2,200,000 ($1,100,000 each)). These loans bear an interest of 10% per annum and will be paid on a monthly basis. The principle amounts have to be repaid on December 31, 2009. Under this loan agreement, the Company pledged as a collateral all Intellectual Property owned by the Company. Concurrent with these loan agreements, the Company issued to these shareholders warrants to purchase 1,500,000 (750,000 each) shares of the Company’s common stock at an exercise price of $0.50 per share. The warrants may be exercised starting January 23, 2009 and expire on January 22, 2013.
Loan agreement 2
On March 16, 2009, the Company entered into two bridge loan agreements with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of €250,000 (€125,000 each) or $ 365,000 ($182,500 each). These loans bear an interest of 10% per annum and will be paid on a monthly basis. The principle amount was initially to be repaid before the end of June 2009. As of July 31, 2009 this loan agreement has been renewed and the repayment date has been extended to September 1, 2009. Under this loan agreement, the Company pledged as a collateral all Intellectual Property and receivables owned by the Company. Concurrent with these loan agreements, the Company issued to these shareholders warrants to purchase 318,182 (159,091 each) shares of the Company’s common stock at an exercise price of $0.40 per share. The warrants may be exercised starting July 31, 2009 and expire on July 31, 2013. Upon exercise, the warrants will be settled cashless.
In accordance with the contracts, the Company has issued additional 318,182 (159,091 each) cashless warrants at the same conditions as the Company has not repaid the principle amount to the loan provider on or before September 1, 2009. The Company has a verbal agreement with the loan providers to extend the term of the loan to April 1, 2010, and parties are currently working on renewal of the contract.
Loan agreement 3
On June 12, 2009, the Company entered into two bridge loan agreements with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of €3,900,000 (€1,950,000 each) or $ 5,700,000 ($2,850,000 each)). These loans bear an interest of 10% per annum and will be paid on a monthly basis. The principle amounts have to be repaid on September 1, 2009. Under this loan agreement, the Company pledged as collateral all Intellectual Property and accounts receivable owned by the Company. Concurrent with these loan agreements, the Company issued to these shareholders warrants to purchase 4,963,636 (2,481,818 each) shares of the Company’s common stock at an exercise price of $0.40 per share. The warrants may be exercised starting April 7, 2009 and expire on April 7, 2013. Upon exercise, the warrants will be settled cashless.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the contracts, the Company has issued an additional 4,963,636 cashless warrants at the same conditions as the Company has not repaid the principle amount to the loan provider on or before September 1, 2009. The Company has a verbal agreement with the loan providers to extend the term of the loan to April 1, 2010, and parties are currently working on renewal of the contract.
Loan agreement 4
On July 30, 2009, the Company entered into two bridge loan agreements with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of €1,800,000 (€ 900,000 each) or $ 2,638,000 ($1,319,000 each)). These loans bear an interest of 10% per annum and will be paid on a monthly basis. The principle amounts have to be repaid on September 1, 2009. Under this loan agreement, the Company pledged as collateral all Intellectual Property and accounts receivable owned by the Company. Concurrent with these loan agreements, the Company issued to these shareholders warrants to purchase 2,290,908 (1,145,454 each) shares of the Company’s common stock at an exercise price of $0.40 per share. The warrants may be exercised starting July 30, 2009 and expire on July 30, 2013. Upon exercise, the warrants will be settled cashless.
In accordance with the contracts, the Company has issued an additional 2,290,908 cashless warrants at the same conditions as the Company has not repaid the principle amount to the loan provider on or before September 1, 2009. The Company has a verbal agreement with the loan providers to extend the term of the loan to April 1, 2010, and parties are currently working on renewal of the contract.
Loan agreement 5
On August 19, 2009, the Company entered into two bridge loan agreements with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of €1,000,000 (€ 500,000 each) or $ 1,465,500 ($ 732,750 each)). These loans bear an interest of 10% per annum and will be paid on a monthly basis. The principle amounts have to be repaid on September 1, 2009. Under this loan agreement, the Company pledged as collateral all Intellectual Property and accounts receivable owned by the Company. Concurrent with these loan agreements, the Company issued to these shareholders warrants to purchase 1,272,728 (636,364 each) shares of the Company’s common stock at an exercise price of $0.40 per share. The warrants may be exercised starting August 19, 2009 and expire on August 19, 2013. Upon exercise, the warrants will be settled cashless.
In accordance with the contracts, the Company has issued an additional 1,272,728 cashless warrants at the same conditions as the Company has not repaid the principle amount to the loan provider on or before September 1, 2009. The Company has a verbal agreement with the loan providers to extend the term of the loan to April 1, 2010, and parties are currently working on renewal of the contract.
Loan agreement 6
On September 22, 2009, the Company entered into two bridge loan agreements with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of €1,550,000 (€ 775,000 each) or $ 2,271,525 ($ 1,135,763 each)). These loans bear an interest of 10% per annum and will be paid on a monthly basis. The principle amounts have to be repaid on April 1, 2010. Under this loan agreement, the Company pledged as collateral all Intellectual Property and accounts receivable owned by the Company. Concurrent with these loan agreements, the Company issued to these shareholders warrants to purchase 1,972,726 (986,363 each) shares of the Company’s common stock at an exercise price of $0.40 per share. The warrants may be exercised starting September 22, 2009 and expire on September 22, 2013. Upon exercise, the warrants will be settled cashless.
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 total discount of all the debts (loans 1 to 6) amounting to approximately $1,293,532 which will be amortized over the term of the loan. During the 9 months ended September 30, 2009, $482,671 was amortized as interest expense in the accompanying consolidated financial statements.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On July 30, 2009, the Company renewed the terms of six bridge loans that were in default.
Two bridge loans with a total principle amount of €800,000 (€400,000 each), initially signed on November 7, 2008, had a repayment date of April 1, 2009. As the Company is in default the Company agreed to renew the contract and change the repayment date to September 1, 2009. Under this loan agreement, the Company pledged as collateral all Intellectual Property and accounts receivable owned by the Company. Concurrent with these loan agreements, the Company issued to these shareholders warrants to purchase 500,000 (250,000 each) shares of the Company’s common stock at an exercise price of $0.40 per share. The warrants have a cashless exercise and have a 4 year term.
Two bridge loans with a total principle amount of €1,200,000 (€600,000 each), initially signed on December 11, 2008, had a repayment date of May 1, 2009. As the Company is in default the Company agreed to renew the contract and change the repayment date to April 1, 2010. Under this loan agreement, the Company pledged as collateral all Intellectual Property and accounts receivable owned by the Company. Concurrent with these loan agreements, the Company issued to these shareholders warrants to purchase 700,000 (350,000 each) shares of the Company’s common stock at an exercise price of $0.40 per share. The warrants have a cashless exercise and have a 4 year term.
Two bridge loans (as per Loan agreement 2) with a total principle amount of €250,000 (€125,000 each), initially signed on March 16, 2009, had a repayment date of June 30, 2009. As the Company is in default the Company agreed to renew the contract and change the repayment date to September 1, 2009. Under this loan agreement, the Company pledged as collateral all Intellectual Property and accounts receivable owned by the Company. Concurrent with these loan agreements, the Company issued to these shareholders warrants to purchase 318,182 (159,091 each) shares of the Company’s common stock at an exercise price of $0.40 per share. The warrants may be exercised starting July 31, 2009 and expire on July 31, 2013. Upon exercise, the warrants will be settled cashless.
In accordance with the contracts, the Company needs to issue an additional 318,182 (159,091 each) cashless warrants at the same conditions as the Company has not repaid the principle amount to the loan provider on or before September 1, 2009.
The total number of warrants issued in connection with these 2009 loans is 22,763,636. The warrants all have a four year term and have exercise prices of $0.40 and $0.50.
Loan agreement 7
On October 1, 2009, the Company entered into two bridge loan agreements with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of €1,600,000 (€800,000 each) or $2,344,800 ($1,172,400 each). These loans bear an interest of 10% per annum and will be paid on a monthly basis. The principle amounts have to be repaid before April 1, 2010. Under this loan agreement, the Company pledged as a collateral all Intellectual Property and receivables owned by the Company. Concurrent with these loan agreements, the Company will adjust current outstanding warrants with an exercise price higher than $0.60 to an exercise price of $0.60 per share. This will be done for warrants to purchase 870,000 (435,000 each) shares of the Company’s common stock. The warrants may be exercised starting October 1, 2009 and expire on October 1, 2013. Upon exercise, the warrants will be settled cashless.
Loan agreement 8
On October 16, 2009, the Company entered into two bridge loan agreements with two principal shareholders based in the Netherlands, pursuant to which the Company borrowed a principal amount of € 470,000 (€235,000 each) or $ 688,785 ($344,393 each). These loans bear an interest of 10% per annum and will be paid on a monthly basis. The principle amounts have to be repaid before April 1, 2010. Under this loan agreement, the Company pledged as a collateral all Intellectual Property and receivables owned by the Company. Concurrent with these loan agreements, the Company will adjust current outstanding warrants with an exercise price higher than $0.60 to an exercise price of $0.60 per share. This will be done for warrants to purchase 870,000 (435,000 each) shares of the Company’s common stock. The warrants may be exercised starting October 16, 2009 and expire on October 16, 2013. Upon exercise, the warrants will be settled cashless.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Extension of loans repayment date
On November 6, 2009, the Company has agreed with the two principal shareholders, to change the term of all loans to end on April 1, 2010. This applies for all loans outstanding, including the long term loan that has an original end date of September 27, 2010. Under this agreement the Company pledged as a collateral all Intellectual Property and receivables owned by the Company. Warrants with an exercise price higher than $0.60 held by the two principal shareholders have been re-priced to warrants with an exercise price of $0.60. The costs related to this re-pricing amount to $426,894 and have been fully expensed in 2009. As of the filing date, we are in default with repayment of these loans and therefore the shareholders can demand payment of the full outstanding amounts. We are currently discussing an extension of the repayment date.
Waiver of loans
On December 30, 2009, the loan providers have agreed with the Company to waive for the benefit of Playlogic all its rights with respect to the loans, including accrued and unpaid interest, for an amount of $21,038,003 as per December 31, 2009. The effect of the waiver results in a remaining amount payable of $6,000,000 as per December 31, 2009, which has been recorded in the balance sheet as per December 31, 2009. The waiver amount has been recorded directly in equity as Additional Paid in Capital, as the waiver is granted by two of our main shareholders. Under this loan agreement, the Company pledged as a collateral all current and future Intellectual Property, receivables and bankbalances owned by the Company. Furthermore, the loan providers have a first right of pledge on all the issued and outstanding shares of Playlogic GameFactory B.V. With effect as of December 31, 2009, the Company ows an interest on the remaining amount of $6,000,000 equal to 31.21% per year, which interest must be paid in weekly instalments in arrear on or before every Friday of the week, for the first time on or before April 2, 2010. 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 allocated a remaining discount of all the debts (for all loans) amounting to $635,302 to the loan payable which will be amortized over the remaining term of the loan. On the balance sheet the net amount is showed, amounting to $5,364,698.
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 $80,483 and $109,876 outstanding receivables due to our officers as of December 31, 2009 and 2008, respectively. On March 31, 2010, the officers fully settled the outstanding amount through a cash payment (by bank transfer), so no receivable balance from officers remains as of March 31, 2010.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - ACCRUED LIABILITIES
Accrued liabilities can be specified as follows:
(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 receive quarterly invoices for this license. Unpaid invoices are recorded in accounts 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 . We do not pay interest on this obligation.
Long-term debt consists of the following note payable:
Future maturities of long-term debt are as follows:
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - INCOME TAXES
The components of income tax (benefit) expense for each of the years ended December 31, 2009 and 2008, respectively, are as follows:
As of December 31, 2009, the Company has a net operating loss carry forward of approximately $400,000 to offset future United States taxable income and approximately $68,000,000 to offset future Netherlands taxable income. We have filed our tax returns up to 2007 and are working on the tax returns for the years ending December 31, 2008 and 2009. Not all tax returns have been approved officially by the tax authorities. In the Netherlands, we can carry forward losses for nine years, so this years loss can effect against profits up to 2018.Subject to current United States regulations, the approximate $300,000 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, 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.
The Company's income tax expense (benefit) for the years ended December 31, 2009 and 2008, respectively, differed from the statutory rate of 26% as noted below:
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
Common stock
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, 2009 the Company sold a total of 618,360 shares as disclosed under Note F related party transactions. No warrants were sold in combination with these share subscriptions.
During the year ended December 31, 2009, the Company issued 25,000 shares of its common stock for services provided by an investment bank based in the United States. The shares have a par value of $0.001 per share. The market price of the stock was $0.55 on the day of the grant.
On June 1, 2009, the Company issued 105,000 shares of its common stock for services provided by the PR and Marketing company the Company hired. This PR and Marketing company is based in the United States. The shares have a par value of $0.001 per share. The market price of the stock was $0.32 on the day of grant
On September 1, 2009, the Company issued 115,000 shares of its common stock for services provided by the PR and Marketing company the Company hired. This PR and Marketing company is based in the United States. The shares have a par value of $0.001 per share. The market price of the stock was $0.55 on the day of grant.
Stock options 2008
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 $2.00 per share. A total of 26,667 shares of these options will vest on June 4, 2010 and the remaining 53,333 options will vest in 2 equal yearly installments on June 4, 2011 and June 4, 2012. 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 and the remaining 26,667 options will vest in 2 equal yearly installments on June 4, 2011 and June 4, 2012. The options will expire after 4 years.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 2010 and the remaining 26,667 options will vest in 2 equal yearly installments on June 4, 2011 and June 4, 2012. 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.
Stock options 2009
On January 23, 2009, 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 $0.60 per share. A total of 26,667 shares of these options will vest on January 23, 2010 and the remaining 53,333 options will vest in 2 equal yearly installments on January 23, 2011 and January 23, 2012. The options will expire after 4 years.
On January 23, 2009, 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 $0.60 per share. A total of 13,333 shares of these options will vest on January 23, 2010 and the remaining 26,667 options will vest in 2 equal yearly installments on January 23, 2011 and January 23, 2012.. The options will expire after 4 years.
On January 23, 2009, 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 $0.60 per share. A total of 13,333 shares of these options will vest on January 23, 2010 and the remaining 26,667 options will vest in 2 equal yearly installments on January 23, 2011 and January 23, 2012. The options will expire after 4 years.
On January 23, 2009, we granted to Ruud Spoor, 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 $0.60 per share. A total of 13,333 shares of these options will vest on January 23, 2010 and the remaining 26,667 options will vest in 2 equal yearly installments on January 23, 2011 and January 23, 2012. The options will expire after 4 years.
On January 23, 2009, we granted to Willem M. Smit, the Company’s Executive Director, 40,000 options to purchase shares of the Company’s common stock at an exercise price of $0.60 per share. A total of 13,333 shares of these options will vest on January 23, 2010 and the remaining 26,667 options will vest in 2 equal yearly installments on January 23, 2011 and January 23, 2012. The options will expire after 4 years.
On January 23, 2009, we granted to certain employees and officers a total of 1,082,500 options (in accordance with the table below) to purchase shares of the Company’s common stock at an exercise price of $0.60 per share. These options vest ratably over the first three years and will expire in 4 years.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The fair value of options granted during 2009 and 2008 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:
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
A summary of our stock options for the two years ended December 31, 2009 and 2008 is as follows:
Options outstanding that are expected to vest are net of estimated future forfeitures. No options have been exercised during the year ended December 31, 2009. Total compensation cost recognized under share-based payment arrangements during the years ended December 31, 2009 and 2008 were $170,000 and $208,000, respectively.
Total compensation cost not yet recognized as of December 31, 2009 and 2008 is presented in the table below:
Total compensation cost not yet recognized as of December 31, 2009 and 2008 are related to non-vested awards. The actual compensation cost recognized might differ due to forfeitures or cancellations. Vesting period for restricted stock awards is based on performance criteria so may differ from this estimate.
On December 30, 2009, the Board of Directors approved a proposal from the Compensation Committee to lower the exercise price of all outstanding warrants to $0.60. The price of the underlying share on that day was $0.35. This applies only to options held by employees on the payroll as of December 30, 2009. The total number of 2,787,500 options with original exercise prices of $1.30, $2.00, $2.90 and $3.50 have been repriced to $0.60. The Company has recorded an expense of $228,493 in relation to this change.
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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, 2009 and 2008:
On December 30, 2009, the Board of Directors approved a proposal from the Compensation Committee to grant our Chief Executive Officer Mr. Smit 5,000,000 warrants to purchase shares of the Company’s common stock at an exercise price of $0.60 per share. Mr. Smit is one of the founders of the Company and the percentage of ownership in the Company has decreased substantially due to new issuance of stock and warrants. The warrants will expire on December 30, 2013. Upon exercise, the warrants will be settled cashless. The market price of the underlying share on the date of grant was $0.35. The Company has recorded an expense of $575,000 in relation to this grant.
In connection with the bridge loans provided during 2009, the exercise price of the warrants issued to the loan providers has been lowered to $0.60 for the warrants that had an exercise price higher than $0.60. The Company has recorded an expense of $426,895 in 2009 in connection to this re-pricing.
The fair value of warrants granted during 2009 and 2008 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 warrants 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 warrants. The following table summarizes the assumptions and variables used to compute the weighted average fair value of warrant grants:
Exercise of warrants
On December 30, 2009, two principal shareholders excercized a total of 17,467,253 warrants with exercize prices of $0.40, $0.50 and $0.60. These were cashless warrants, and were exercized at a stock price of $1.25 resulting in 10,757,878 new shares of common stock.
NOTE K - COMMITMENTS AND CONTINGENCIES
Litigation
Due to the Company’s cash flow situation, we are behind on payments to some of our vendors. Some of these vendors have gone legal to collect their outstanding receivables. We are in continuous discussions with both vendors and collection agencies to settle the issues in a professional way. A significant part of our accounts payable balance is overdue. All amounts claimed have been recorded in the financial statements as accounts payable. We could incur costs for legal advice in some cases (if we hire external lawyers) which we will recongnize upon the date of the action. If a vendor with a significant outstanding amount demands immediate payment in full, our ability to continue as a going concern could be at risk. The Company is actively searching for new funding and/or financing, to resolve these matters and we are in continuous open dialogue with the vendors involved.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In 2009, we have lost a lawsuit started by Visionvale, the developers of the title Ancient Wars: Sparta (released in 2007), in which Visionvale had claimed the final payment for the development of the title. Visionvale aldo claimed that the software development agreement was, because of non-payment, legally terminated and that the licensing rights reverted back to Visionvale. Playlogic has disputed that the agreement had been terminated and claimed that parties did not agree on a license but a transfer of IP rights. The court decided that the IP rights had been transferred to Playlogic, but Playlogic had to pay the remaining outstanding amounts, including interest and costs. The costs amounting to approximately $100,000 have been included in the Statement of Operations for the year 2009.
Visionvale has published the game as well and additionally they have published a sequel of the game, which both portray an infringement on the IP rights owned by Playlogic. We have not been granted any penalty payments by Visionvale for this infringement, on which we have appealed. We have recorded all costs related to this lawsuit in 2009, but have not recorded the potential benefit.
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 results of operations.
We have started legal cases against a number of customers for non payment. Some relate to sales of our games in 2007. We have recorded these items as receivables in our books, but have provided the most part of this. The main lawsuits in which we claim money from our customers relate to:
Evolved: we entered into a license deal in 2006 for a number of our titles, to be sold in the USA. Although Evolved, even today, is selling our product, we have not received any payment from them. Evolved claims they had to incur costs on the titles that should have been paid by Playlogic and are offsetting the revenues against that.
Koch Media: We are facing a payment issue from our main customer for our distribution in the Europe, Koch Media. Amounts due for payment in December 2009 have not yet been paid by Koch to us. As Koch is a significant customer, we are facing cash flow issues over the last months. We have started legal proceedings against Koch Media Group. As the contract is written in accordance with Austrian Laws, we have hired an Austrian law firm to assist us in this matter. We are claiming a total of Euro 1.7 million (or approximately $2.4 million), which is build up on unpaid sales of our products plus damages from our side. We have not recorded the claim of damages in the financial statements.
Office leases
In 2008, the Company 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 $420,000 (€ 291,500) for the offices and $30,000 (€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 have started in January 2009. The Company recognized $155,000 in accrued rent expense from this lease agreement during the year 2008, which is amortized over the remaining term of the contract.
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 $360,000 (€250,000) per year, payable in quarterly installments.
We have recorded a rent expense amounting to $839,000 in 2009 and $687,000 in 2008.
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PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Future minimum non-cancelable lease payments on the above leases for office space are as follows:
Transportation leases
The Company leases 5 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 $ 7,000.
Future minimum non-cancelable lease payments on the above transportation leases are as follows:
Software development contracts
The Company has entered into three (3) separate software development contracts with unrelated entities on which we will receive invoices in the future. All other contracts have fully been invoiced and the amounts not yet paid are included in the accounts payable balance. 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 $1.2 million through completion.
F - 31
PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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:
NOTE M - OTHER INCOME & EXPENSES
Other income and expenses include non cash interest expenses, such as the costs of warrants granted in connection with loans, as well as costs related to the grant of stock options.
NOTE N - SUBSEQUENT EVENTS
Due to the Company’s current cash flow situation, we are behind on payments to some of our vendors. Some of these vendors have gone legal to collect their outstanding receivables. We are in continuous discussions with both vendors and collection agencies to settle the issues in a professional way. All amounts claimed have been recorded in the financial statements as accounts payable. We could incur costs for legal advice in some cases (if we hire external lawyers) which we will recongnize upon the date of the action. The Company is actively searching for new funding and/or financing, to resolve these matters.
On March 24, 2010, 17,225,000 warrants with exercise prices of $0.40 to $0.60 were exercised cashless at an agreed upon price which was set on stock price of $1.25 resulting in 11,705,200 new shares of common stock.
F - 32