Zoo Entertainment, Inc. (NASDAQ: ZOOG), a developer, publisher and
distributor of interactive entertainment for Internet-connected
consoles, handheld gaming devices, PCs, and mobile devices, today
announced its financial results for the second quarter ended June
30, 2011.
Second Quarter 2011 Operational
Highlights
- Released Kona's Crate (Android and iOS) via indiePub
Mobile
- indiePub slated Fractal (iPad) and Totem Destroyer (PC) for
release in Q3 2011, which were launched as scheduled
- Teamed with renowned independent game developer, Jason Rohrer,
to sell 'Diamond Trust of London' to Rohrer's devoted fan base
- Partnered with the rock band, Hawthorne Heights, to develop
exclusive content for the upcoming action-packed, arcade racing
title, Fireburst
- Established a new financing partner and terminated previous
financing facilities
Second Quarter 2011 Financial Results
Revenues for the second quarter 2011 decreased 63% to $3.7
million from $9.8 million in the second quarter 2010. The decrease
was due to the continued industry decline in the console market,
coupled with the company's transition away from the retail console
business to a new business model based on direct digital
distribution.
Gross margin was negative 67% of revenue in the second quarter
of 2011, compared to a positive 19% of revenue in the same period
in 2010. Sales in the second quarter of 2011 were primarily
catalogue product sold slightly above the current value of the
inventory, therefore generating minimal gross profit. The gross
margin was further adversely impacted by the acceleration of $1.2
million of product development amortization, $272,000 of additional
product development costs, $200,000 of additional royalty expense
as a result of changes in estimated unit sales for certain
products, as well as an additional $683,000 inventory reserve
recorded.
General and administrative expenses were $2.7 million in the
second quarter of 2011, as compared to $1.2 million in the same
period in 2010. General and administrative expenses in the second
quarter of 2011 included non-cash stock-based compensation charges
of $647,000, compared to $117,000 in the same period in 2010. The
increase in general and administrative expenses in the second
quarter 2011 was also due to $465,000 of expenses related to the
early retirement and commitment fees paid to terminate certain
financing facilities. The second quarter 2011 increase was also due
in part to certain employees whose function's classification
shifted from selling and marketing to general and administrative
expenses, as well as increased total headcount over the same period
in 2010. The indiePub and digital initiative costs included in
general and administrative expenses in the second quarter of 2011
were approximately $192,000.
Selling and marketing expenses were $715,000 in the second
quarter of 2011, as compared to $1.2 million in the second quarter
of 2010. The reduction was the result of certain lower variable
costs due to the lower sales volume in 2011 as compared to 2010, as
well as certain employees whose function's classification shifted
from selling and marketing expense to the general and
administrative expenses in the second quarter of 2011.
Loss from operations was $9.9 million in the second quarter of
2011, as compared to loss from operations of $1.0 million in the
same period in 2010. The loss in the second quarter of 2011
included approximately $7.0 million in significant charges related
to the retail boxed products, including:
- $0.7 million of inventory reserves and write-downs
- $1.5 million accelerated amortization of product development
(including $0.3 million of additional product development costs for
two products not yet released)
- $1.8 million for discontinued product development (charged to
research and development expenses)
- $1.7 million impairment of intangible assets
- $0.5 million charges for restructuring financing
facilities
- $0.5 million stock-based compensation for the modification of
certain stock option grants
No impairment of intangible assets or research and development
expenses occurred in the second quarter of 2010. The research and
development expenses in the second quarter of 2011 were related to
the write-off of the development of games that were abandoned
during the period, including two 3DS titles.
Net loss was $10.1 million or $(1.54) per basic and diluted
share, in the second quarter of 2011, as compared to net loss of
$965,000 or $(0.22) per basic and diluted share in the same period
in 2010.
Adjusted EBITDA was a loss of $7.1 million in the second quarter
of 2011, as compared to adjusted EBITDA loss of $402,000 in the
second quarter 2010 (see below definition and important discussion
of this non-GAAP financial measure and reconciliation to the
nearest GAAP measure).
At June 30, 2011, the company's net working capital position was
a negative $6.2 million, as compared to positive $763,000 at March
31, 2011. At June 30, 2011, the amount outstanding on the company's
working capital facilities was $1.6 million.
Events Subsequent to Q2 2011
- Raised $1.6 million in net proceeds from private placement
financing with insiders and an institutional investor
- Reached settlements with various vendors reducing current
liabilities by approximately $3.0 million
- Entered into a distribution agreement to distribute all legacy
console assets
- Continued to reduce headcount resulting in annual payroll
savings of more than $2.0 million from the beginning of 2011
Management Commentary
"The second quarter was largely in line with our expectations,
and continued to reflect a challenging console environment as well
as our transition to a digital products and distribution model,"
said Mark Seremet, CEO of Zoo Entertainment. "The majority of our
revenues in the quarter were still derived from boxed games on the
Nintendo Wii and DS console platforms, as we worked to wrap up this
line of business and roll out our digital offerings.
"In Q2, indiePub launched its first iOS and Android title,
Kona's Crate, which garnered tremendous reviews and strong game
plays. In fact, Kona's Crate has received more than 150,000
downloads and 30 million level plays since its launch in June. Post
quarter, we released as planned the Mac and PC versions of Kona's
Crate, as well as 'Fractal: Make Blooms Not War' for iPad and
'Totem Destroyer Deluxe' for PC. We believe the exceptional
consumer and professional game reviews, along with their addictive
game play, demonstrates the high quality of content we can pull
from indiePub.
"Also subsequent to the end of the quarter, we signed a
distribution agreement to monetize our legacy console assets and
free us almost entirely from the declining retail console business.
We expect that this transaction, along with the recent financing
and settlement of certain accounts payables and expenses, allows us
to apply new capital and our existing human resources toward taking
advantage of the faster growing digital segment of the marketplace
and optimize our cost structure.
"Certainly the road has been rough over the past few months as
we've worked through this transition, but we remain very optimistic
about our future and are ready to fully expand our new digital
business. This includes rolling out the remainder of the titles we
have planned for release before the end of the year and the launch
of our indiePub shop in November. The new indiePub shop will make
it possible for anyone to offer digital games for sale, and will
include social media tools for players to engage others and drive
sales.
"On indiePub, we plan to launch a host of titles across XBLA,
PSN, iOS, Android, PC and Mac. These titles include Capsized, our
first true 'freemium' game for iOS and Android, and we have another
planned for launch at the beginning of 2012. We believe a digital
model that includes these multiple revenue streams puts us on a
solid path towards revenue growth and profitability, and will help
us build long-term shareholder value as one of the leading players
in this evolving world of digital entertainment. Our transition
away from the retail boxed business has been challenging and taken
time, but with most of this behind us and many positive milestones
ahead, we have high expectations for the future."
Conference Call
The company will host a conference call to discuss its second
quarter 2011 financial results today, Monday, August 22, 2011, at
4:30 p.m. Eastern time.
Zoo Entertainment's CEO, Mark Seremet, and CFO, David Fremed,
will host the presentation, followed by a question and answer
period.
Date: Monday, August 22, 2011 Time: 4:30 p.m. Eastern time (1:30
p.m. Pacific time) Dial-In Number: 1-877-941-2068 International:
1-480-629-9712 Conference ID#: 4466683
The presentation will be webcast live and available for replay
here and on the company's website at www.zoogamesinc.com.
Please call the conference telephone number 5-10 minutes prior
to the start time. An operator will register your name and
organization and ask you to wait until the call begins. If you have
any difficulty connecting with the conference call, please contact
Liolios Group at 1-949-574-3860.
A replay of the call will be available after 7:30 p.m. Eastern
time today and until September 22, 2011:
Toll-free replay number: 1-877-870-5176 International replay
number: 1-858-384-5517 Replay pin number: 4466683
About Zoo Entertainment
Zoo Entertainment (NASDAQ: ZOOG) is a developer, publisher and
electronic distributor of interactive entertainment for
Internet-connected consoles, handheld gaming devices, PCs, and
mobile devices.
Zoo Entertainment's innovative content creation site, indiePub
(www.indiepub.com), was designed to capitalize on opportunities in
the emerging and high growth digital entertainment space. The site
fosters the independent gaming community by playing host to
independent game developers and players and providing developers
with the resources they need to collaborate and create great games.
A destination site for gaming enthusiasts and consumers, indiePub
takes an active role in helping independent developers create
innovative entertainment software. For more information, visit
www.zoogamesinc.com.
Non-GAAP Financial Measures
In this press release, our financial results are provided both
in accordance with accounting principles generally accepted in the
United States (GAAP) and using certain non-GAAP financial measures
which are not an alternative to GAAP and may be different from
non-GAAP financial measures used by other companies. As is common
in the industry, the company uses EBITDA and Adjusted EBITDA as
measures of performance to demonstrate earnings exclusive of
interest and non-cash events. The company defines Adjusted EBITDA
as net income (loss) before interest expense; income tax expense;
depreciation, amortization; non-cash stock-based compensation; and
impairment of intangible assets. The company in its management of
its business affairs and analysis of its monthly, quarterly and
annual performance makes decisions based on cash flows. The
company, in managing its current and future affairs, cannot affect
the amortization of intangible assets to any material degree, and
therefore uses EBITDA and Adjusted EBITDA as its primary management
guide. Investors are cautioned that EBITDA and Adjusted EBITDA are
not a measure of liquidity or of financial performance under
Generally Accepted Accounting Principles in the United States
(GAAP). The Adjusted EBITDA numbers presented may not be comparable
to similarly titled measures reported by other companies. EBITDA
and Adjusted EBITDA, while providing useful information, should not
be considered in isolation or as an alternative to net income, net
loss or cash flows as determined under GAAP. We believe the most
directly comparable GAAP financial measure to Adjusted EBITDA is
net income (loss) and, consistent with Regulation G under the U.S.
federal securities laws, the non-GAAP measures in this press
release have been reconciled to the nearest GAAP measure, and this
reconciliation is located under the heading "Unaudited
Reconciliations of GAAP to Non-GAAP Measures" following the
"Unaudited Condensed Consolidated Statements of Operations"
included in this press release.
Forward-Looking Statements
This press release contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995
about Zoo Entertainment, Inc. Forward-looking statements are
statements that are not historical facts. Such forward-looking
statements, based upon the current beliefs and expectations of Zoo
Entertainment, Inc.'s management, are subject to risks and
uncertainties, which could cause actual results to differ from the
forward-looking statements. The following factors, among others,
could cause actual results to differ from those set forth in the
forward-looking statements: general economic conditions;
geopolitical events and regulatory changes; the company's financial
performance and competitive position, the company's expectation
regarding its potential growth, requirements or changes adversely
affecting the businesses in which the company is engaged; demand
for the products and services that the company provides; the
company's ability to timely implement its business strategy; the
company's ability to take advantage of the digital segment and
expand its digital business; the company's expectation that the
digital segment will continue to grow; the company's expectations
with respect to the size of the market; the company's ability to
optimize its cost structure; the company's ability to increase its
revenues and become profitable; the company's expectation with
respect to the indiePub shop; the company's ability to launch new
products and the market acceptance of new and existing products, as
well as other relevant risks detailed in the company's filings with
the Securities and Exchange Commission. The information set forth
herein should be read in light of such risks. Zoo Entertainment,
Inc. assumes no obligation to update the information contained in
this press release.
ZOO ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
JUNE 30, 2011 DECEMBER 31, 2010
-------------- ------------------
(Unaudited)
ASSETS
Current assets:
Cash $ 35 $ 379
Accounts receivable and due from
factor, net of allowances of $1,045
and $8,131 at June 30, 2011 and
December 31, 2010, respectively 1,583 13,736
Inventory, net 2,644 7,368
Prepaid expenses and other current
assets 386 820
Product development costs, net 2,574 5,319
Deferred tax assets 48 153
-------------- ------------------
Total current assets 7,270 27,775
Fixed assets, net 262 264
Intangible assets, net 1,313 3,900
Other non-current assets 6 9
-------------- ------------------
Total assets $ 8,851 $ 31,948
============== ==================
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
EQUITY
Current liabilities:
Accounts payable $ 5,404 $ 4,806
Financing arrangements 1,615 9,606
Accrued expenses and other current
liabilities 5,987 7,457
Notes payable, current portion 493 160
-------------- ------------------
Total current liabilities 13,499 22,029
Notes payable, non-current portion 500 60
Deferred tax liabilities 48 153
-------------- ------------------
Total liabilities 14,047 22,242
Commitments and Contingencies
Stockholders' (Deficit) Equity:
Common stock, $.001 par value,
3,500,000,000 shares authorized:
6,812,279 shares issued and 6,799,276
shares outstanding at June 30, 2011
and 6,243,699 shares issued and
6,230,696 shares outstanding at
December 31, 2010 7 6
Additional paid-in capital 74,087 73,336
Accumulated deficit (74,821) (59,167)
Treasury stock, at cost, 13,003 shares
at June 30, 2011 and December 31,
2010 (4,469) (4,469)
-------------- ------------------
Total stockholders' (deficit) equity (5,196) 9,706
-------------- ------------------
Total liabilities and stockholders'
(deficit) equity $ 8,851 $ 31,948
============== ==================
ZOO ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts) (Unaudited)
Three Months Ended June Six Months Ended June
30, 30,
2011 2010 2011 2010
----------- ----------- ----------- -----------
Revenue $ 3,651 $ 9,798 $ 7,432 $ 26,460
Cost of goods sold 6,100 7,907 10,791 20,837
----------- ----------- ----------- -----------
Gross (loss) profit (2,449) 1,891 (3,359) 5,623
----------- ----------- ----------- -----------
Operating expense:
General and
administrative 2,739 1,190 4,938 2,795
Selling and marketing 715 1,220 1,760 2,336
Research and development 1,802 - 2,263 -
Impairment of intangible
assets 1,749 - 1,749 -
Depreciation and
amortization 453 495 906 999
----------- ----------- ----------- -----------
Total operating
expenses 7,458 2,905 11,616 6,130
----------- ----------- ----------- -----------
Loss from operations (9,907) (1,014) (14,975) (507)
Interest expense, net (181) (512) (679) (989)
----------- ----------- ----------- -----------
Loss before income taxes (10,088) (1,526) (15,654) (1,496)
Income tax benefit - 561 - 552
----------- ----------- ----------- -----------
Net loss $ (10,088) $ (965) $ (15,654) $ (944)
=========== =========== =========== ===========
Loss per common share -
basic and diluted:
Net loss per common
share - basic and
diluted $ (1.54) $ (0.22) $ (2.47) $ (0.34)
=========== =========== =========== ===========
Weighted average common
shares outstanding -
basic and diluted 6,571,783 4,431,346 6,334,523 2,765,146
=========== =========== =========== ===========
Zoo Entertainment, Inc. and Subsidiaries
Unaudited Reconciliations of GAAP to Non-GAAP Measures
For the Three and Six Months Ended June 30, 2011 and 2010
(In thousands)
Reconciliation of Net Loss (GAAP) to Adjusted EBITDA (Non-GAAP)
---------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2011 2010 2011 2010
--------- --------- --------- ---------
Net loss $ (10,088) $ (965) $ (15,654) $ (944)
Interest expense, net 181 512 679 989
Income tax benefit - (561) - (552)
Depreciation and amortization 453 495 906 999
--------- --------- --------- ---------
EBITDA (9,454) (519) (14,069) 492
Stock-based compensation 647 117 752 362
Impairment of intangible assets 1,749 - 1,749 -
--------- --------- --------- ---------
Adjusted EBITDA $ (7,058) $ (402) $ (11,568) $ 854
========= ========= ========= =========
Company Contact Kate Stump Controller Zoo Entertainment,
Inc. Tel 513-824-8297 Email Contact Investor Relations
Contact Scott Liolios or Matt Glover Liolios Group, Inc. Tel
949-574-3860 Email Contact
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