UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington,
D.C. 20549
FORM
10-KSB/A
(Amendment No. 2)
|X| ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF
THE SECURITIES
EXCHANGE ACT OF 1934
FOR
THE FISCAL YEAR ENDED: December 31, 2007
|_| TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF
1934
FROM THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION
FILE NUMBER: 000-49649
PLAYLOGIC ENTERTAINMENT,
INC.
(Name of
Small Business Issuer in Its Charter)
|
Delaware
|
23-3083371
|
|
(State
or other Jurisdiction of
|
(I.R.S.
Employer
|
|
Incorporation
or Organization)
|
Identification
No.)
|
|
Concertgebouwplein
13, 1071 LL Amsterdam, The Netherlands
|
1071
LL
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant’s
telephone number:
(011)
31-20-676-0304
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act: Common Stock, par value
$0.001 per share
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. [ ]
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. [ ]
Yes [X] No
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). [ ]
The
Issuer's revenues for its most recent fiscal year were $10,099,746
As of
March 27, 2008, 41,532,580 shares of the Issuer's $0.001 par value common stock
were outstanding and the aggregate market value of the shares held by
non-affiliates was $53,992,354 based upon a closing bid price on March 27, 2008
of $1.30 per share of common stock on the Over-The-Counter Bulletin
Board.
As
of March 27, 2008, no shares of preferred stock were
outstanding.
EXPLANATORY NOTE
This
Amendment No. 2 on Form 10-KSB/A amends the items identified below with respect
to the annual report on Form 10-KSB filed by Playlogic Entertainment, Inc. (“We”
or the “Company”) with the Securities and Exchange Commission (the “SEC”) on
March 28, 2008 (the “Original Filing”) for the fiscal year ended December 31,
2007, as amended by Amendment No. 1 on Form 10-KSB/A filed on August 21, 2008
(“Amendment No. 1”).
In
connection with the review of the Original Filing
,
and Amendment
No. 1, the SEC asked the Company to:
(i)
clarify the definition of internal control over financial reporting in the
Management’s Report on Internal Control Over Financial Reporting;
(ii)
provide disclosure required by Item 308(T)(a)(4) of Regulation S-B regarding the
attestation by its registered public accounting firm on the internal control
over financial reporting; and
(iii)
revise the management’s conclusion on the effectiveness of the Company’s
disclosure controls and procedures.
The
amendment has no impact on the Company’s consolidated balance sheet,
consolidated statements of operations, consolidate statements of changes in
shareholders’ equity and consolidated statements of cash flows for the year
ended December 31, 2007.
Changes
Reflected in this Form 10-KSB/A
This Form
10-KSB/A only amends certain information in the following items related to the
fiscal year ended December 31, 2007:
Cover
Page
Explanatory
Note
Part
I
Risk
Factors
Part
II
Item 7 –
Financial Statements
Note A –
Nature of Operations and Summary of Significant Accounting Policies
Item 8A –
Controls and Procedures
Exhibits
Signature
Page
Certifications
The
application of the foregoing has resulted in certain amendments to the Original
Filing
.
, as
amended by Amendment No. 1. Primarily these amendments are to address
the SEC’s comments as discussed above. Except for the amended
information, this Form 10-KSB/A continues to describe conditions as of the date
of the Original Filing, and the disclosures contained herein have not been
updated to reflect events, results or developments that have occurred after the
Original Filing, or to modify or update these disclosures affected by subsequent
events, results or developments that have occurred or facts that have become
known to us after the date of the Original Filing (other than this amendment and
Amendment No. 1), and such forward looking statements should be read in their
historical context. This Form 10-KSB/A should be read in conjunction
with the Company’s filings made with the SEC subsequent to the Original Filing,
as amended by Amendment No. 1, including any amendments to those
filings.
PLAYLOGIC
ENTERTAINMENT ANNUAL REPORT ON FORM 10-KSB/A
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2007
TABLE
OF CONTENTS
|
PART
I
|
|
Page
|
|
Item
1.
|
Business
|
2
|
|
Item
1A.
|
Risk
Factors
|
11
|
|
Item
2.
|
Property
|
18
|
|
Item
3.
|
Legal
Proceedings
|
18
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
18
|
|
|
|
|
|
PART
II
|
|
|
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Shareholder Matters and Small
Business Issuer Purchases of Equity Securities
|
19
|
|
Item
6.
|
Management’s
Discussion and Analysis
|
21
|
|
Item
7.
|
Financial
Statements
|
26
|
|
Item
8.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
26
|
|
Item
8A.
|
Controls
and Procedures
|
26
|
|
Item
8B.
|
Other
Information
|
26
|
|
|
|
|
|
PART
III
|
|
|
|
Item
9.
|
Directors
and Executive Officers of the Registrant; Compliance with Section 16(a) of
the Exchange Act
|
27
|
|
Item
10.
|
Executive
Compensation
|
31
|
|
Item
11.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
|
34
|
|
Item
12.
|
Certain
Relationships and Related Transactions
|
34
|
|
Item
13.
|
Exhibits
and Financial Statement Schedules
|
34
|
|
Item
14.
|
Principal
Accounting Fees and Services
|
35
|
ITEM 1. BUSINESS
Caution
Regarding Forward-Looking Information
Certain
statements contained in this Annual Report including, without limitation,
statements containing the words "believes", "anticipates", "expects" and words
of similar import, constitute forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company, or
industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements.
Such
factors include, among others, the following: international, national and local
general economic and market conditions: demographic changes; the ability of the
Company to sustain, manage or forecast its growth; the ability of the Company to
successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions;
the ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous
filings.
Given
these uncertainties, readers of this Annual Report and investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
Background
Playlogic
Entertainment, Inc. was incorporated in the State of Delaware in May 2001, when
its name was Donar Enterprises, Inc. Initially, our plan was to engage in the
business of converting and filing registration statements, periodic reports and
other forms of small to mid-sized companies with the U.S. Securities and
Exchange Commission electronically through EDGAR. We had limited operations
until June 30, 2005, when we entered into a share exchange agreement with
Playlogic International N.V., a corporation formed under the laws of The
Netherlands that commenced business in 2002, and its shareholders. Pursuant to
this agreement, the former shareholders of Playlogic International became the
owners of over approximately 91% of our common stock, as described below.
Playlogic International has become our wholly-owned subsidiary and represents
all of our commercial operations.
On June
30, 2005, we entered into a share exchange agreement with Playlogic
International N.V. and Playlogic International's shareholders whereby all of the
Playlogic International shareholders exchanged all of their ordinary shares
(which are substantially similar to shares of common stock of a U.S. company)
and priority shares (which are substantially similar to shares of preferred
stock of a U.S. company) of Playlogic International for 21,836,924 shares of our
common stock. Pursuant to the share exchange agreement, the former shareholders
of Playlogic International received approximately 91.0% of our outstanding
common stock. Of the 21,836,924 shares of Playlogic Entertainment issued in the
share exchange, 1,399,252 were placed in escrow with the Company’s stock
transfer agent, Securities Transfer Corporation, as escrow agent. Following
review by our auditors and our filing of the financial statements of the first
quarter of 2006 these 1,399,252 shares in escrow were released to Halter
Financial Group, Inc. and its affiliates or their assigns.
On August
2, 2005, Donar Enterprises Inc. merged with and into a wholly owned subsidiary
named Playlogic Entertainment, Inc. In connection with the merger, Donar's name
was changed to Playlogic Entertainment, Inc. Playlogic Entertainment, Inc. was
formed specifically for the purpose of effecting the name change.
In this
annual report, "Playlogic Entertainment," the "Company," "we," "us" and "our"
refer to Playlogic Entertainment, Inc. and, unless the context otherwise
indicates, our subsidiary Playlogic International N.V. and/or its subsidiary
Playlogic Game Factory B.V.
General
Our
principal business office is located at Concertgebouwplein 13, 1071 LL
Amsterdam, The Netherlands, and our telephone number at that address is
31-20-676-0304.
Our
corporate web site is www.playlogicgames.com. The information found on our web
site is not intended to be part of this annual report and should not be relied
upon by you when making a decision to invest in our common stock.
General
Overview
Playlogic
is a publisher of interactive entertainment products, such as video game
software and other digital entertainment products. We publish on all major
interactive entertainment hardware platforms, like Sony’s PlayStation 3,and
Playstation2, Microsoft’s Xbox 360 and Nintendo’s Wii, PCs and handheld devices
(such as Nintendo DS, and PSP) and mobile devices.
Our
principal sources of revenue are derived from publishing operations. Publishing
revenues are derived from the sale of our digital entertainment products. We own
most of the intellectual properties of our products, which we believe positions
us to maximize profitability. Owning our Intellectual Properties increases the
value of our company as our portfolio increases every quarter with new titles
published.
As a
publisher, we are responsible for publishing, sales and marketing of our
products. We sell our products to distributors, who sell to retail. Furthermore,
we sell directly to consumers through online distribution channels, at least two
months after the product was made available at retail or at a time agreed with
our distributors. Moreover, starting in 2008 we will be selling our products
online through our own website in a specifically designed store. Both digital
downloads as well as finished products will be available to consumers on the
Playlogic website.
Various
studios throughout the world develop games which we publish. One of these
studios is our subsidiary, Playlogic Game Factory B.V., located in The
Netherlands. Other independent studios in various countries develop our games
under development contracts. These development contracts generally provide that
we pay the studio an upfront payment, which is an advance on future royalties,
earned, and a payment upon achievement of various milestones. In addition, we
license the rights to our existing titles to other studios who then develop
those titles for other platforms.
Different
studios and developers frequently contact us requesting financing and publishing
of their games. We evaluate each of these offers based on several factors,
including sales potential, market conditions, technology used, track record and
human resources of the studio, production pipeline and project management
skills.
We select
which games we develop, based on our analysis of consumer trends and behavior
and our experience with similar or competitive products. Full due diligence and
a financial risk analysis / assessment are part of this process. Once we select
a game to develop, we then assign a development studio, based upon its
qualifications, previous experience and prior performance. Once developed, we
distribute our games worldwide through existing distribution channels with
experienced distributors.
We
generally aim to release our titles simultaneously across a range of hardware
formats in order to spread development risks and increase total unit sales per
SKU with just a marginal augmentation in development time, resources
and associated costs.
We
believe that greater online functionality and the vast processing capabilities,
as well as the new casual games with simplified controls (i.e. Nintendo Wii,
Nintendo DS, Playstation 3 Sixaxis and Playstation Eye) of the new platforms
will further increase the total world wide installed base, diversifying the
consumer base and help our industry grow. In addition, according to DFC
Intelligence, new sales potential, revenue opportunities from wireless gaming,
online console gaming, and in-game advertising are expected to grow from $1
billion in 2005 to $5 billion in 2009.
The games
industry has gone through a transition period. The current and Next Gen consoles
(Xbox360, PlayStation 3, Wii) and DS platforms have broadened the market,
appealing to an even larger mass consumer audience than ever before, providing
increased publishing opportunities. The investments in next generation platforms
are however marginally larger than for the previous generation
platforms.
Playlogic
has created a healthy balance between games available for the current and the
next generation platforms. To spread risk and broaden Playlogic’s portfolio,
both Next Gen titles for the Playstation 3, Xbox 360 and Nintendo Wii as well as
PC games and handheld titles are a all part of the line-up for the coming
year.
As
the console transition from ‘past’ to ‘next’ has been in progress over the past
two years Playlogic will focus more of it’s publishing portfolio on console
titles for the current platforms. With the Increased console installed base
Playlogic will shift its focus from publishing PC and console titles to
simultaneous multi platform console releases as primary and PC
as secondary.
Industry
Overview
The
‘next’ generation began in 2004, when Nintendo developed the DS platform as a
successor to the Game Boy Advance, with a touch screen allowing the user to
interact with video game content in a different way. Few observers appreciated
that that the Nintendo DS signaled a change in gameplay that would have a
lasting impact on the industry. Sony followed with the PLaystaion Portable (PSP)
in early 2005, with Microsoft launching the Xbox360 later that year. In late
2006 Sony and Nintendo launched the PS3 and Wii, respectively and the next
generation was in full gear. Although the last of these launches completed the
beginning of the next generation cycle, they by no means marked the end of the
current cycle. Both Sony and the software publishers managed software growth in
2006 both by extending the value of the deep catalog of ‘legacy’ software and by
continuing to develop for the Playstation 2.
Since the
introduction of the Playstation 2 in October 200, the installed base of current
generation hardware (PS2, Gamecube, Xbox) reached over 112 million units in the
US and Europe alone. Total console and handheld software sales have grown from
$6 billion in the US and Europe in 2000 to $12.2 billion 2006, representing a
compound annual growth rate of 11%.
It is expected this growth rate will
accelerate to almost 20% over the next three years, even though partially offset
by declining PC sales, unprecedented levels of software sales are
anticipated.
Nintendo
is off to a strong early start with its Wii console. The company has chosen to
forego competition based solely on microprocessor speed and graphics capability,
and instead has chosen to emphasize game play and an innovative control
mechanism.
The
differentiating features of the Xbox360 and the PS3 is the ability to display
game content in high definition (1080p). In contrast to past cycles, it is
believed that that the high definition features of the next generation consoles
will result in slower adoption by the masses, at least until the penetration of
HD monitors accelerates. In prior console cycles, new consoles were compatible
with standard format televisions, so the only hardware required was the console
itself. While the next generation of consoles will operate satisfactorily on
normal 4:3 format televisions, most games for the PS3 and Xbox360 are designed
for 16:9 formats in high definition. It is expected that ultimately
most console purchasers will desire the full benefits of the next generation
experience, and that most consumers will defer buying a PS3 or Xbox360 until
they have purchased an HD monitor. Nintendo is well positioned to exploit the
slower adoption of next generation technology, as its Wii console does not
require an HD monitor. Accordingly, it is expected that overall console adoption
will be slower in the next cycle than in the past, with slower sales of the
PS3 and Xbox360 compared to their predecessors, partially offset by more robust
sales of the Wii compared to the Gamecube
(Source:
WedBush Morgan Securities: Industry report May 2007)
Market Trends -
Worldwide
The
Xbox360 and the PS3 are far more similar than their predecessors were and the
economics of game development will serve as a discentive to third party
publishers to offer exclusive content for either console. The similarity between
the two platforms will likely serve to lower the cost of porting from one
platform to another. It is to be expected that virtually all games developed for
one of these platforms will also be ported to the other. The lack of
differentiation between the PS3 and the Xbox 360 may allow the Wii to gain a
competitive advantage, due to its different controls and relatively simple
components, publishers are required to develop a special SKU for the Wii,
further differentiating the console. Due to its superior library of first party
titles and low price, it is expected that Nintendo’s Wii will gain the greatest
share of the hardware market.
Although
it is expected that digital content offers the potential for tremendous growth,
it is not expected that there will be a significant earnings contribution from
sales of digital content for a few years.
(Source:
WedBush Morgan Securities: Industry report May 2007)
Since the
introduction of PlayStation 2 in 2000, the console has sold over 140 million
units worldwide according to games industry. biz. The PlayStation 3 has
been introduced to the market in the second half of 2006. Microsoft
introduced its next generation console, the Xbox 360, in November 2005.
Microsoft’s
Xbox360 has sold more than 17.7 million units so far. Sony sold almost 10.5
million units of its Playstation 3.Nintendo’s next generation console, called
‘Wii’ has been sold more than 20.13 million units so far. WedBush Morgan
Securities expects next generation hardware shipments through the end of 2007
will reach 46 million units in the U.S. and Europe.
Nintendo
Dual Screens (‘Nintendo DS’) and PlayStation Portable (‘PSP’) were both
successfully introduced to the market. The sales volume of the Nintendo DS
reached 40.3 million units by the end of March 2007, and PSP reached the sales
volume of 25.4 million units by the end of the same period.
Playlogic will also continue to
publish PC games because in comparison to next generation consoles, PC games are
less expensive to develop and still address a very wide target audience.
Furthermore Playlogic will focus on handheld games, because of the large
installed base, in particular for the Nintendo DS. Low developments costs and
fast time to market make developing for these platforms less riskful. Playlogic
will continue development of PlayStation 2 titles, because of their large
installed base of over 140 million units.
We expect a further price reduction
of the Playstation 2 console which will rejuvenate consumer and retail interest
in the console and open up new emerging markets for the console and software to
be sold.
.
Consumer
Facts
Several
Demographic trends and fundamental market drivers will determine the the size of
the interactive entertainment software market.
The most compelling of these include
the widening age demographic of the interactive game consumer, rapid growth of
teen and twenty-something population, Growth of the female gamer market,
penetration of Nintendo Wii among people over 40, and the increasing disposable
incomes of teens and pre-teens.
The trends will continue to drive sales
growth in both the hardware and software sectors.
The
primary driver behind the industry’s growth is the dramatic expansion in age
profile of the interactive game consumer.
The first
mass-market generation of interactive consumers (and now the oldest) started
playing video games with the release of the Atari home console during the late
1970s. It is estimated that the age range of consumers in this period was
approximately between 8-20. Since the 1970s succeeding generations of video game
consumers have embraced more advanced systems and complex technology. Some older
consumers drop out of the market each year, replaced by a large number of
children receiving their first DS or Playstation consoles. The mean number of
the original generation of ‘Atari Kids’ is now approaching 40, with an emerging
group of ‘Nintendads’ right behind them and many still play games on PC or home
consoles. The age demographic of 90% of the gamers is believed to be in the
range of 6- 40 years of age, dramatically older than the 1970s
generation.
As the high end of the gamer age
range increases, the number of overall video game consumers continues to
increase
. More important, people over 22 typically are employed, and
have a significant amount of disposable income. People in their 20s are also
generally quite self-indulgent, and we believe that they are willing to spend a
large portion of their disposable income on entertainment. As the average age of
video game consumers expands beyond 22, it is expected to see an acceleration in
the spending per user.
This
phenomenon differentiates the next generation console cycle from past
cycles.
There
will be a continuing expansion of the age demographic for at least another 20
years, as the oldest gamers stay interested in games well into their 60s and
children continue to embrace games.
Female
Market
The
largest area of future growth is likely to be the female market. Over the next
two years the ‘mass market’ phase of the current console cycle should segue into
the ‘casual’ phase of the next generation cycle. Accordingly, it is expected to
see an overall industry wide trend towards games with non-violent focus. As more
games target mass-market, it is expected that the trend toward more female
gamers to continue. It is estimated that currently only 31% of all primary
gamers in households are female. The Entertainment Software Association (ESA)
estimates that female users (either primary or secondary) make up only 35% of
the console market and 43% of the PC market.
An increase of 5% penetration in
these platform compositions by female gamers could translate into as much as $1
billion of incremental annual revenues to the industry each year. (Source:
WedBush Morgan Securities: Industry report May 2007)
Release Overview
|
|
|
|
|
|
Expected release
|
|
Game
|
|
Studio
|
|
Platform
|
date to
retail
|
|
Completed
Games
|
|
|
|
|
|
|
|
Alpha
Black Zero
|
|
Khaeon
(NL)
|
|
PC
|
|
Released
|
|
Airborne
Troops
|
|
Widescreen
Games (F)
|
|
PS2,
PC
|
|
Released
|
|
Cyclone
Circus
|
|
Playlogic
Game Factory (NL)
|
|
PS2
|
|
Released
|
|
Xyanide
|
|
Overloaded
(NL)
|
|
Mobile
Phones
|
|
Released
|
|
World
Racing 2
|
|
Synetic
(G)
|
|
PS2,
Xbox, PC
|
|
Released
|
|
Knights
of the Temple 2
|
|
Cauldron
(SK)
|
|
PS2,
Xbox, PC
|
|
Released
|
|
Gene
Troopers
|
|
Cauldron
(SK)
|
|
PS2,
Xbox, PC
|
|
Released
|
|
Xyanide
|
|
Playlogic
Game Factory (NL)
|
|
Xbox
|
|
Released
(2)
|
|
Age
of Pirates: Caribbean Tales
|
|
Akella
(Russia)
|
|
PC
|
|
Released
|
|
Infernal
|
|
Metropolis
(Poland)
|
|
PC
|
|
Released
|
|
Ancient
Wars: Sparta
|
|
World
Forge (Russia)
|
|
PC
|
|
Released
|
|
Xyanide
Resurrection
|
|
Playlogic
Game Factory (NL)
|
|
PSP
|
|
Released
|
|
Evil
Days Of Luckless John
|
|
3A
Entertainment (Great Britain)
|
|
PC
|
|
Released
|
|
Xyanide:
Resurrection
|
|
Playlogic
Game Factory (NL)
|
|
PS2
|
|
Released
|
|
Obscure
2
|
|
Hydravision
(F)
|
|
PC
|
|
Released
(1)
|
|
Obscure
2
|
|
Hydravision
(F)
|
|
PS2
|
|
Released
(1)
|
|
Xyanide:
Resurrection
|
|
Playlogic
Game Factory (NL)
|
|
PC
|
|
Released
|
|
|
|
|
|
|
|
|
|
Under
development
|
|
|
|
|
|
|
|
Obscure
2
|
|
Hydravision
(F)
|
|
Wii
|
|
Q1
2008
(4)
|
|
Officers
|
|
GFI
(Russia)
|
|
PC
|
|
Q1
2008
(1)
|
|
Dimensity
|
|
Dagger
Studio (Bulgaria)
|
|
PC
|
|
Q2
2008
(4)
|
|
Age
of Pirates: Captain Blood*
|
|
Akella
(Russia)
|
|
PC,
Xbox 360
|
|
Q2
2008
(4)
|
|
Aggression
1914
|
|
Buka
(Russia)
|
|
PC
|
|
Q1
2008
(4)
|
|
Red
Bull Break Dancing
|
|
SmackDown
(FR)
|
|
DS,
Web
|
|
Q2
2008
(4)
|
|
Infernal
2
|
|
Metropolis
(Poland)
|
|
X360
|
|
Q4
2008
(5)
|
|
Dragon
Hunters
|
|
Engine
software (NL)
|
|
DS
|
|
Q1
2008
(4)
|
|
Simon
the Sorcerer 4
|
|
RTL
/Silverstyle Studio (GER)
|
|
PC
|
|
Q1
2008
(4)
|
|
Qoobs
|
|
Abstraction
games (NL)
|
|
PC,
X360 LA
|
|
Q2
2008
(4)
|
|
The
Strategist
|
|
Humagade
(Canada)
|
|
DS,
Wii, PC
|
|
Q2
2008
(4)
|
|
Undisclosed
Title
|
|
Playlogic
Game Factory (NL)
|
|
PS3,
Xbox360, PC
|
|
Q1
2009
(4)
|
|
Dragon
Hunters 2
|
|
Engine
software (NL)
|
|
DS,
Wii
|
|
Q4
2008
(4)
|
|
Dungeon
Twister
|
|
Hydravision
(FR)
|
|
DS,
PC, X360 LA
|
|
Q4
2008
(4)
|
|
Sudoku
Ball
|
|
White
Bear (NL)
|
|
DS,
Wii, PC
|
|
Q4
2008
(4)
|
|
Infernal
|
|
Tate
Interactive (Poland)
|
|
Wii
|
|
Q3
2008
(4)
|
|
Battle
of the Sexes
|
|
TBD
|
|
Wii,
DS, PC, PS2
|
|
Q1
2009
(4)
|
______________
(1)
Released in Europe
only.
(2)
Released in the US
only
(3)
Released in Asia
only
(4)
Released in all
territories/Global
(5)
Final decision on
Next Generation options to be made.
The games
industry is currently in a transition period. The current and Next Gen consoles
(Xbox360, PlayStation 3, Wii) and DS platforms have broadened the market,
appealing to an even larger mass consumer audience than ever before, providing
increased publishing opportunities. The investments in next generation platforms
are however larger than for the previous generation platforms. Playlogic has
created a healthy balance between games available for the current and the next
generation platforms. To spread risk and broaden Playlogic’s portfolio, PC games
and handheld titles are a substantial part of the line-up for the coming
year.
Material
agreements
We
entered into the following material agreements in the fiscal year ended December
31, 2007:
Acquisition of Obscure II
:
On April 16, 2007, we announced the acquisition of the survival horror game
“Obscure II” form French development studio Hydravision. The Sequeal of the
innovative Obscure will be released in Q3 of this year on PC and PS2. The
release for Wii is set for Q4.
Distribution Agreement
Gameworld
: On May 29, 2007, we announced that Game World BV, also based
in the Netherlands, will distribute our titles Xyanide Resurrection (PSP, PS2),
Evil days of Luckless John (PC) and Obscure II (PC, PS2) in Benelux
territory.
Distribution Agreement Koch Media
France
: On June 27, 2007, we signed a new agreement with Koch Media
France for French-territory distribution of our next three titles published in
Q3: Xyanide Resurrection (PS2 and PSP), Obscure II (PC and PS2) and Evil days of
Luckless John (PC)
Dragon Hunters
agreement.
On June 28, 2007, we signed a worldwide 3 year
license with a 2 year extension, on all platforms, based on the popular
franchise Dragon Hunters with Futurikon (France). The animated television series
is on air and there is also a full feature-length animated movie based on the
series scheduled for release early next year. Playlogic plans to publish the
game version of Dragon Hunters on Nintendo DS in line with the movie release,
scheduled for Q1 of 2008.
Atari Italy Renew Distribution
Agreement
: On July 12, 2007, we signed a renewed distribution agreement
with Atari Italy for the arrival of three new PC and PS2 games between July and
September, including the long-awaited Obscure II for PS2 and PC.
Spencer Clarke LLC as Investment
Banker
: On August 8, 2007, we signed a strategic partnership
with Spencer Clarke LLC, a New York-based, full service investment banking and
retail brokerage firm, Spencer Clarke will provide investment banking
and financial advisory services including assisting Playlogic with capital
market opportunities.
Publisher status by Sony Computer
Entertainment America (SCEA)
: On September 18, 2007, we signed an
agreement with Sony Computer Entertainment America (SCEA) granting Playlogic
full publishing rights in the United States for the PS2 and PSP system
platforms.
Publishing and Distribution
Agreement with Ignition
: On September 25, 2007, we signed a publishing
and distribution agreement with Ignition Entertainment Ltd for the North America
market. The titles covered by this agreement are Xyanide: Resurrection for PS2
and Obscure: The Aftermath for PC, PS2 and Wii.
Global Publisher Status for
PS3
: On September 27, 2007, we signed a Global Publishers
License for the PS3 computer entertainment system. This official publisher
agreement allows Playlogic to publish games for the PS3 system in all
territories worldwide.
The PS3
system is the latest addition to the Playstation family and represents the
pinnade in console gaming.
$12,3 Million in equity through a
Private Placement
: On October 12, 2007, we successfully closed in total
$12.3 million in equity through a Private Placement. This raise and conversion
reverses the negative equity situation Playlogic has faced over the past years
to a positive equity.
The total
amount of $12,3 million is placed at existing and new shareholders, all
accredited investors. In total 13,942,147 new common shares has been issued.
After closing this Private Placement, the company has 38,4 million common shares
outstanding.
Sony development agreement.
On October 31, 2007, we signed our third development agreement with Sony
Computer Entertainment Europe Ltd. The project will be developed at Playlogic’s
in-house studio Playlogic Game Factory B.V. over a period of seven months with
an option of extension of another six months. The scope and content of the
project will remain undisclosed until further notice by SCEE Ltd.
Acquisition of “Aggression – Reign
over Europe”
: On November 21, 2007, we have acquired the Real Time
Strategy game “Aggression – Reign over Europe” from Buka Entertainment. The
planned release for the RTS with tactical elements is Q1 2008.
Playlogic wins legal proceedings in
copyrights to game Ancient Wars: Sparta
: on November 27, 2007, we have
won the legal proceedings in copyrights to the game Ancient Wars: Sparta. So has
decided the District Court of Amsterdam in the case of Playlogic Entertainment
against WorldForge / Visionvale Ltd. From Cyprus and Burut Co. from
Russia.
The
provisional judge of the District Court of Amsterdam concludes that all the
copyrights to the game Ancient Wars: Sparta always belonged to Playlogic
pursuant to the agreement with WorldForge / Visionvale and Burut. The judge
ruled in Playlogic’s favor on all counts and WorldForge / Visionvale and Burut
have to pay a penalty of € 10,000 each time they state the contrary or refrain
from publishing rectifications of former wrong statements.
Acquisition of Dimensity
: On
December 18, 2007, we have acquired the hack and slash adventure game
‘Dimensity” from Bulgarian developer Dagger Games. The latest addition to
Playlogic’s line up is set for release in PC in the second quarter of 2008. In
total Playlogic expects to publish 6 to 8 new titles in Q1 of 2008.
Sales
and Distribution
Our sales
expectations for each game are based mostly upon similar or competitive products
and the success that those products have achieved. We also work with our
distributors to generate realistic unit sales figures and revenues based upon
their experience, and after giving presentations to and consulting with the
retail stores in each of our global territories.
Generally,
we aim to release our titles simultaneously across a range of hardware formats,
rather than exclusively for one platform. We believe this allows us to spread
the development risk and increase the sales potential, with only a minimal
increase in development time and resources spent.
We seek
to increase sales and maximize profit potential of all our games by reducing the
wholesale and recommended retail prices of our products at various times during
the life of a product. Price reductions may occur at anytime in a product's life
cycle, but we expect they will typically occur six to nine months after a
product's initial launch. We also employ various other marketing methods
designed to promote consumer awareness and sales, such as attendance at trade
and consumer shows, and we intend to organize in-store promotions, point of
purchase displays and co-operative advertising.
Playlogic
games are distributed worldwide by local distribution partners. Distribution
costs per game are low since Playlogic does not have the costs of a physical
distribution network of its own.
In each
territory Playlogic decides on strategic partners for physical distribution of a
game. This distribution partner must have all necessary listings at local
retail.
Playlogic
delivers finished manufactured products to distribution partners. Delivery of
finished products instead of licensing a game enables Playlogic to a much higher
margin and quality control. In emerging markets Playlogic’s games are
manufactured under licenses held by local distribution partners. In countries in
which we currently do not have a console publishing license, we enter into
co-publishing arrangements with our business partners, who manufacture, finalize
and distribute the finished games to the retail stores.
Local
distribution partners of Playlogic sell and deliver the games to retail stores
and take care of reorders. Playlogic’s local distribution partners only get
rights of offline distribution on the manufactured products.
We retain
all rights of further exploitation of a digital entertainment product such as
digital distribution, OEM-/Premium sales, and merchandising.
Worldwide
major games portals and platforms will offer Playlogic’s products for
Games-on-Demand and Purchase-by-Download. To play games on demand end-users pay
for a time limited access to a package of games a monthly subscription, similar
to video rental stores in the past. Playlogic games are offered as well for
purchase by download. The end user has the choice between trying the game for a
limited time (for instance one hour) before buying or direct download. The time
limitation is defined by us for each game individually dependent on the genre.
Hosting and payment fulfillment are completed by external technology
partners.
Playlogic
will pursue a variety of digital distribution strategies for delivering
entertainment products to the end-user, including mobile games, in-flight
entertainment, and set-top boxes.
Furthermore,
in 2008 Playlogic will be selling their products online through our own website
in a specifically designed store. Both digital downloads as well as finished
products will be available to consumers on the Playlogic
website.
Competition
Competition
in the entertainment software industry is based on product quality and features,
brand name recognition, access to distribution channels, effectiveness of
marketing and price. We compete for both
licenses
and game sales with the other international games publishing houses,
including Electronic Arts, Take Two Interactive, Activision, THQ and Ubisoft.
Many of our competitors have greater financial, technical and personnel
resources than we do and are able to carry larger inventories and make higher
offers to licensors and developers for commercially desirable properties than we
can. Further, many of our competitors, including the ones mentioned above, have
the financial resources to withstand significant price competition and to
implement extensive advertising and marketing campaigns.
Retailers
have limited shelf space and promotional resources, and an increasing number of
games titles compete for adequate levels of shelf space and promotional support:
the competition is intense. We expect competition for retail shelf space to
continue to increase, which may require us to increase marketing expenditures to
maintain our current levels of sales.
Competitors
with more extensive ranges and popular titles may have greater bargaining power
with retailers. Accordingly, we may not be able to achieve the levels of support
or shelf space that such competitors receive. Similarly, as competition for
popular properties increase, our cost of acquiring licenses for such properties
is also likely to increase, possibly resulting in reduced margins. Prolonged
price competition, increased licensing costs or reduced margins would cause our
profits to decrease.
We have
an advantage over our competitors concerning digital distribution; we do not
have our own physical distribution network. Therefore we can easily switch to
digital distribution, whereas our peers need to use its existing physical
distribution network as well. For instance, the agreement we signed in February
2006 with Macrovision illustrates Playlogic’s strategic focus on digital
distribution in the future. We signed the agreement with Macrovision’s Trymedia
Games division for the digital distribution of Playlogic’s entertainment
products. As a leading secure digital distribution services provider and
operator of the world's largest distribution network for downloadable games,
Macrovision will distribute selected Playlogic products on its network. We will
also incorporate the Trymedia technology into our recently re-launched website
www.playlogicgames.com
, offering customers easy and secure access to some of its latest game releases,
as well as the option to try-before-you-buy selected titles.
Intellectual
Property
Like
other entertainment companies, our business is based on the creation,
acquisition, exploitation and protection of intellectual property. Each of our
products embodies a number of separately protected intellectual properties. Our
products are copyrighted as software, our product names are trademarks of ours
and our products may contain voices and likenesses of third parties or the
musical compositions and performances of third parties. Our products may also
contain other content licensed from third parties, such as trademarks, fictional
characters, storylines and software code.
Our
products are susceptible to unauthorized copying. Our primary protection against
unauthorized use, duplication and distribution of our products is copyright and
trademark. We typically own the copyright to the software code as well as the
brand or title name trademark under which our products are
marketed.
Our
business is dependent on licensing and publishing arrangements with third
parties, and if we cannot continue to license popular properties on commercially
reasonable terms, our business could be harmed. Our software may be subject to
legal claims that could be costly and time consuming and cause a material
adverse effect on our business. Acquiring licenses to create games based on
movies could be very expensive. If we spend a significant amount of resources to
acquire such licenses and the resulting games are not successful, our business
may be materially harmed.
We own or
have licensed trademarks and copyrights of the following games:
|
|
|
Games
|
Platform
|
Area
|
|
1.
|
|
Alpha
Black Zero
|
PC
|
Worldwide
|
|
2.
|
|
Airborne
Troops
|
PS2
|
Worldwide
|
|
|
|
|
PC
|
Worldwide
|
|
3.
|
a.
|
Xyanide
Resurection
|
PSP
|
Worldwide
|
|
|
b.
|
Xyanide
Mobile
|
Mobile
Phones
|
Worldwide
|
|
4.
|
|
Cyclone
Circus
|
PS2
|
Worldwide
|
|
5.
|
|
World
Racing 2
|
PS2
|
Worldwide
|
|
|
|
|
Xbox
|
Worldwide
|
|
|
|
|
PC
|
Worldwide
|
|
6.
|
|
Knights
of the Temple 2
|
PS2
|
Worldwide
|
|
|
|
|
Xbox
|
Worldwide
|
|
|
|
|
PC
|
Worldwide
|
|
7.
|
|
Gene
Troopers
|
PS2
|
Worldwide
|
|
|
|
|
Xbox
|
Worldwide
|
|
|
|
|
PC
|
Worldwide
|
|
8.
|
|
Age
of Pirates: Caribbean Tales
|
PC
|
Worldwide
(1)
|
|
9
|
|
Ancient
Wars: Sparta
|
PC
|
Worldwide
(2)
|
|
10.
|
|
Age
of Pirates Captain Blood
|
PC
|
Worldwide
(3)
|
|
11.
|
|
Infernal
|
PC
|
Worldwide
(4)
|
|
12.
|
|
Evil
days of Luckless John
|
PC
|
Worldwide
|
|
13.
|
|
Obscure2
|
PC,PS2,Wii
|
Worldwide
|
|
14.
|
|
Undisclosed
title
|
PS3
|
Worldwide
|
_____________
(1)
Excluding former USSR,
Poland, Check, Slovak and South Africa
(2)
Excluding former
USSR
(3)
Excluding former USSR,
Poland, Czech, Slovak and South Africa
(4)
Excluding Japan,
former USSR
Employees
As of
December 31, 2007, we employed 62 full-time employees and 6 part-time employees.
All of our employees are based in the Netherlands and have executed employment
agreements with us, which are governed by the law of the Netherlands.
Substantially all of the employment contracts are running for an indefinite
period of time. As to the senior executives mentioned under Item 10, the Company
may terminate the employment upon a six-month notice, and a senior executive may
terminate the employment upon a three-month notice. As to non-executive
employees, the Company may terminate the employment upon a two-month notice, and
the employee may terminate the employment upon a one-month notice. We are
obliged to continue to pay base salary and fringe benefits to our employees
during the notice period. We typically pay an annual base salary and allow our
staff certain benefits. Our employees are entitled to 26 vacation days a year.
13 of our employees are entitled to a company car. Two of our senior non-Dutch
executives are entitled to receive allowances for housing, and home leave travel
cost. With the exception of the disclosures made under Item 10, we did not grant
any bonuses during 2007. Under Dutch law, we are obliged to pay the employees in
the event of illness 100% of base salary from the first day of illness reporting
for a maximum period of 52 weeks, calculated from this first day of illness.
After the lapse of the period of 52 weeks, we pay 70% of the base pay during a
period with a maximum of 52 weeks counted from the first day of the 53rd week
following the date of illness reporting. We currently do not have any pension
plan or other retirement schedule. The costs associated with employer’s
contribution to the Dutch social security system are per employee in the range
of 15% of annual base pay.
I
TEM 1A. RISK FACTORS
An
investment in our common stock involves substantial risks and uncertainties and
our actual results and future trends may differ materially from our past
performance due to a variety of factors, including, without limitation, the risk
factors identified below. The risks and uncertainties described below are
not the only risks and uncertainties we face. Additional risks and uncertainties
not presently known to us or that we currently deem immaterial also may impair
our business operations. If any of the following risks actually occur, our
business, results of operations and financial condition would suffer. In that
event, the trading price of our common stock could decline, and our shareholders
may lose part or all of their investment in our common stock. The discussion
below and elsewhere in this report also includes forward-looking statements, and
our actual results may differ substantially from those discussed in these
forward-looking statements as a result of the risks discussed
below.
WE
HAVE A LIMITED OPERATING HISTORY, WE HAVE EXPERIENCED LOSSES IN PRIOR YEARS AND
WE MAY NOT BE ABLE TO MAINTAIN PROFITABILITY ON A CONSISTENT BASIS.
We
commenced operations in April 2002. Accordingly, we have a limited operating
history and our business strategy may not be successful. Our failure to
implement our business strategy or an unsuccessful business strategy could
materially adversely affect our business, financial condition and
operations.
For the
year 2007 we recorded net revenue of $10.1 million and showed a net profit of
$0.7 million. We had 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.
Although
2007 was our first profitable year, we may not be able to maintain profitability
on a consistent basis. Also, through the equity raise finalized during 2007,
amounting to $12.3 million, we have a positive shareholders’ equity. The report
of Playlogic's independent auditors on the December 31, 2007 financial
statements include an explanatory paragraph indicating there could be
uncertainties
about Playlogic's ability to continue as a going concern.
WE
ARE DEPENDENT ON FINANCING BY THIRD PARTIES, AND IF WE ARE NOT ABLE TO OBTAIN
THE NECESSARY FINANCING FOR OUR OPERATIONS, OUR BUSINESS WILL BE SIGNIFICANTLY
HARMED, AND WE MAY NEED TO CEASE OPERATIONS.
We expect
that our current cash balance and cash generated from operations will be
sufficient to cover our working capital costs through the second quarter of
2008. We will need to obtain additional financing from third parties. We expect
our capital requirements to increase over the next several years as we continue
to develop new products, increase marketing and administration infrastructure,
and embark on in-house business capabilities and facilities. Our future
liquidity and capital funding requirements will depend on numerous factors,
including, but not limited to, the cost of hiring and training production
personnel who will produce our titles, the cost of hiring and training
additional sales and marketing personnel to promote our products, and the cost
of hiring and training administrative staff to support current management. The
Company is currently in the process of increasing the liquidity of the Company.
If we do not obtain the necessary financing in the future, this could impact our
results.
MANY OF OUR TITLES HAVE SHORT
LIFECYCLES AND MAY FAIL TO GENERATE SIGNIFICANT REVENUES
.
The
market for interactive entertainment software is characterized by short product
lifecycles and frequent introduction of new products. Many software titles do
not achieve sustained market acceptance or do not generate a sufficient level of
sales to offset the costs associated with product development. A significant
percentage of the sales of new titles generally occur within the first three
months following their release. Therefore, our profitability depends upon our
ability to develop and sell new, commercially successful titles and to replace
revenues from titles in the later stages of their lifecycles. Any competitive,
financial, technological or other factor which delays or impairs our ability to
introduce and sell our software could adversely affect our future operating
results.
A
SIGNIFICANT PORTION OF OUR REVENUES ARE DERIVED FROM A LIMITED NUMBER OF TITLES.
IF WE FAIL TO DEVELOP NEW, COMMERCIALLY SUCCESSFUL TITLES, OUR BUSINESS MAY BE
HARMED.
For the
year ended December 31, 2007, three titles, Ancient Wars: Sparta, Infernal and
Obscure II, accounted for approximately 60% of our revenues. For the year ended
December 31, 2006, two titles, Age of Pirates: Caribbean Tales and World Racing
2, accounted for approximately 60% of our revenues for the year ended December
31, 2005, three titles, World Racing 2, Gene Troopers, Knights of the Temple 2
accounted for approximately 60% of our revenues. For the year ended December 31,
2004, one title, Alpha Black Zero accounted for 100% of our revenues. We did not
have any revenue in 2003 or 2002. Our future titles may not be commercially
viable. We also may not be able to release new titles within scheduled release
times or at all. If we fail to continue to develop and sell new, commercially
successful titles, our revenues and profits may decrease substantially and we
may incur losses.
OUR
BUSINESS IS DEPENDENT ON LICENSING AND PUBLISHING ARRANGEMENTS WITH THIRD
PARTIES, AND IF WE CANNOT CONTINUE TO LICENSE POPULAR PROPERTIES ON COMMERCIALLY
REASONABLE TERMS, OUR BUSINESS WILL BE HARMED.
Our
success depends on our ability to identify and exploit new titles on a timely
basis. We have entered into agreements with third parties to acquire the rights
to publish and distribute interactive entertainment software. These agreements
typically require us to make advance payments, pay royalties and satisfy other
conditions. Our advance payments may not be sufficient to permit developers to
develop new software successfully. In addition, software development costs,
promotion and marketing expenses and royalties payable to software developers
have increased significantly in recent years and reduce the potential profits
derived from sales of our software. Future sales of our titles may not be
sufficient to recover advances to software developers and we may not have
adequate financial and other resources to satisfy our contractual commitments.
If we fail to satisfy our obligations under these license agreements, the
agreements may be terminated or modified in ways that may be burdensome to
us. Our profitability depends upon our ability to continue to license
popular properties on commercially feasible terms. Numerous companies compete
intensely for properties and we may not be able to license popular properties on
favorable terms or at all in the future.
ACQUIRING
LICENSES TO CREATE GAMES BASED ON MOVIES MAY BE VERY EXPENSIVE. IF WE SPEND A
SIGNIFICANT AMOUNT OF RESOURCES TO ACQUIRE SUCH LICENSES AND THE RESULTING GAMES
ARE NOT SUCCESSFUL, OUR BUSINESS MAY BE MATERIALLY HARMED.
Many
current video game titles are based on popular motion pictures. Some of these
games have been successful, but many have not. We do not have any such games in
the development stage as of yet.
WE
ARE EXPOSED TO SEASONALITY IN THE PURCHASES OF OUR PRODUCTS AND IF WE FAIL TO
RELEASE PRODUCTS IN TIME DURING PERIODS OF HIGH CONSUMER DEMAND, SUCH AS THE
HOLIDAYS, OUR REVENUES MAY BE NEGATIVELY AFFECTED.
The
interactive entertainment software industry is highly seasonal, with the highest
levels of consumer demand occurring during the year-end holiday buying season.
Additionally, in a platform transition period, sales of game console software
products can be significantly affected by the timeliness of the introduction of
game console platforms by the manufacturers of those platforms, such as Sony,
Microsoft and Nintendo. The timing of hardware platform introduction is also
often tied to holidays and is not within our control. If a hardware platform is
released unexpectedly close to the holidays, this would result in a shortened
holiday buying season and could negatively impact the sales of our products.
Delays in development, licensor approvals or manufacturing can also affect the
timing of the release of our products, causing us to miss key selling periods
such as the year-end holiday buying season.
WE
CONTINUALLY NEED TO DEVELOP NEW INTERACTIVE ENTERTAINMENT SOFTWARE FOR VARIOUS
OPERATING SYSTEMS AND IF DEVELOPERS OF OPERATING SYSTEMS FACE FINANCIAL OR
OPERATIONAL DIFFICULTIES, WE MAY NOT BE ABLE TO RELEASE OUR TITLES AND MAY INCUR
LOSSES.
We depend
on third-party software developers and our internal development studios to
develop new interactive entertainment software within anticipated release
schedules and cost projections. Many of our titles are externally developed. If
developers experience financial difficulties, additional costs or unanticipated
development delays, we will not be able to release titles according to our
schedule and may incur losses.
The
development of new interactive entertainment software is a lengthy, expensive
and uncertain process. Considerable time, effort and resources are required to
complete development of our proposed titles. We have in the past and may in the
future experience delays in introducing new titles. Delays, expenses, technical
problems or difficulties could force the abandonment of or material changes in
the development and commercialization of our proposed titles. In addition, the
costs associated with developing titles for use on new or future platforms may
increase our development expenses.
DEVELOPING
GAMES FOR THE NEXT GENERATION GAME CONSOLES BY SONY, MICROSOFT AND NINTENDO WILL
LIKELY BE MORE EXPENSIVE AND TIME CONSUMING FOR US AND OUR STUDIOS. IF WE ARE
NOT ABLE TO PRODUCE GAMES FOR THESE CONSOLES IN A COST-EFFECTIVE MANNER, OUR
BUSINESS MAY BE SIGNIFICANTLY HARMED.
Each of
Sony, Nintendo and Microsoft are expected to release next generation game
consoles in the next few years. These new consoles will likely be more powerful,
and games for these consoles will have greater graphics and features. With this
increased power and capabilities, there are likely to be increased costs to
develop games and it is likely that each game will need larger development
teams. Budgets for next generation games are likely to be twice those of games
for current consoles and development teams may need to increase three-fold. The
rising costs may make it prohibitively expensive for small game publishers like
us to take the risk of creating new, unproven games. If we cannot create games
for the next generation consoles in a cost effective manner, our business is
likely to be significantly harmed.
WE
DEPEND ON SONY, NINTENDO AND MICROSOFT FOR THE MANUFACTURING OF PRODUCTS THAT WE
DEVELOP FOR THEIR HARDWARE PLATFORMS. ACCORDINGLY, ANY OF THEM COULD CAUSE
UNANTICIPATED DELAYS IN THE RELEASE OF OUR PRODUCTS AS WELL INCREASES TO OUR
DEVELOPMENT, MANUFACTURING, MARKETING OR DISTRIBUTION COSTS, WHICH COULD
MATERIALLY HARM OUR BUSINESS AND FINANCIAL RESULTS.
Generally,
when we develop interactive entertainment software products for hardware
platforms offered by Sony, Nintendo or Microsoft, the products are manufactured
exclusively by that hardware manufacturer or their approved replicator. We pay a
licensing fee to the hardware manufacturer for each copy of a product
manufactured for that manufacturer's game platform.
The
agreements with these manufacturers include certain provisions such as approval
rights over all products and related promotional materials and the ability to
change the fee they charge for the manufacturing of products, that allow them
substantial influence over our costs and the release schedule of our products.
In addition, since each of the manufacturers is also a publisher of games for
its own hardware platforms and manufactures products for all of its other
licensees, a manufacturer may give priority to its own products or those of our
competitors in the event of insufficient manufacturing capacity. Accordingly,
Sony, Nintendo or Microsoft could cause unanticipated delays in the release of
our products as well increase our development, manufacturing, marketing or
distribution costs, which could materially harm our business and financial
results.
WE
PARTLY DEPEND ON INDEPENDENT DEVELOPERS, AND WE MAKE ADVANCE PAYMENTS TO THEM
PRIOR TO THE COMPLETION OF THE PRODUCT. THERE IS NO ASSURANCE THAT WE CAN RECOUP
THESE PAYMENTS IF WE DO NOT ACCEPT THE PRODUCT FROM A THIRD PARTY
DEVELOPER.
We make
advance payments to independent software developers prior to completion of the
games, which are for the development of intellectual property related to our
games. The advance payments become due when the developer meets agreed
milestones.
Upon
termination of the contract for any reason prior to the completion of a game,
the advance payments are repayable by the independent software developers, who
then remain the sole owner of the source material and intellectual property.
These advance payments that are due prior and after completion of the product
are partly capitalized and expensed as cost of goods sold at the higher of the
contractual or effective royalty rate based on net product sales. However, there
is no assurance that the independent developer will return the advance payments
to us, and if they do not, our business may suffer.
WE
MAY FAIL TO ANTICIPATE CHANGING CONSUMER PREFERENCES, AND IF WE DO, OUR RESULTS
OF OPERATIONS MAY BE MATERIALLY HARMED.
Our
business is speculative and is subject to all of the risks generally associated
with the interactive entertainment software industry, which has been cyclical in
nature and has been characterized by periods of significant growth followed by
rapid declines. Our future operating results will depend on numerous factors
beyond our control, including:
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the
popularity, price and timing of new software and hardware platforms being
released and distributed by us and our competitors;
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international,
national and regional economic conditions, particularly economic
conditions adversely affecting discretionary consumer
spending;
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changes
in consumer demographics;
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the
availability of other forms of entertainment; and
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critical
reviews and public tastes and preferences, all of which change rapidly and
cannot be predicted.
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In order
to plan for acquisition and promotional activities we must anticipate and
respond to rapid changes in consumer tastes and preferences. A decline in the
popularity of interactive entertainment software or particular platforms could
cause sales of our titles to decline dramatically. The period of time necessary
to develop new game titles, obtain approvals of manufacturers and produce
CD-ROMs or game cartridges is unpredictable. During this period consumer appeal
of a particular title may decrease, causing projected sales to decline.
RAPIDLY
CHANGING TECHNOLOGY AND PLATFORM SHIFTS COULD HURT OUR OPERATING
RESULTS.
The
interactive software market and the PC and video game industries in general are
associated with rapidly changing technology, which often leads to software and
platform obsolescence and significant price erosion over the life of a product.
The introduction of new platforms and technologies can render existing software
obsolete or unmarketable. We expect that consumer demand of software for
platforms of older generation will decrease as more advanced platforms are
introduced. As a result, our titles developed for such platforms may not
generate sufficient sales to make such titles profitable. Obsolescence of
software or platforms could leave us with increased inventories of unsold titles
and limited amounts of new titles to sell to consumers which would have a
material adverse effect on our operating results.
We have
devoted and will continue to devote significant development and marketing
resources on products designed for new-generation video game systems, such as
Xbox 360 and PlayStation 3. If PlayStation 3 and/or Xbox 360 do not achieve wide
acceptance by consumers or Sony/Microsoft is unable to ship a significant number
of PlayStation 3/Xbox 360 units in an timely fashion, or if our titles fail to
sell through, we will have spent a substantial amount of our resources for this
platform without corresponding revenues, which would have a material adverse
effect on our business, operating results and financial condition.
We need
to anticipate technological changes and continually adapt our new titles to
emerging platforms to remain competitive in terms of price and performance. Our
success depends upon our ability and the ability of third-party developers to
adapt software to operate on and to be compatible with the products of original
equipment manufacturers and to function on various hardware platforms and
operating systems. If we design titles to operate on new platforms, we may be
required to make substantial development investments well in advance of platform
introductions and we will be subject to the risks that any new platform may not
achieve initial or continued market acceptance.
A number
of software publishers who compete with us have developed or are currently
developing software for use by consumers over the Internet. Future increases in
the availability of such software or technological advances in such software or
the Internet could result in a decline in platform-based software and impact our
sales. Direct sales of software by major manufacturers over the Internet would
adversely affect our distribution business.
IF
OUR PRODUCTS CONTAIN DEFECTS, OUR BUSINESS COULD BE HARMED
SIGNIFICANTLY.
Software
products as complex as the ones we publish may contain undetected errors when
first introduced or when new versions are released. Despite extensive testing
prior to release, we cannot be certain that errors will not be found in new
products or releases after shipment which could result in loss of or delay in
market acceptance. This loss or delay could significantly harm our business and
financial results.
RETURNS
OF OUR TITLES MAY ADVERSELY AFFECT OUR OPERATING RESULTS.
Our
arrangements with retailers for published titles require us to accept returns
for stock balancing, markdowns or defects. We establish a reserve for future
returns of published titles at the time of sales, based primarily on these
return policies and historical return rates and we recognize revenues net of
returns.
Our
distribution arrangements with retailers only give them the right to return
titles to us or to cancel firm orders in case of reorders, although we do accept
returns for stock balancing, markdowns and defects. We sometimes negotiate
accommodations to retailers, including price discounts, credits and returns,
when demand for specific titles falls below expectations.
Our sales
returns and allowances for the year ended December 31, 2007 were $150,000. If
return rates for our published titles significantly exceed our estimates, our
operating results will be materially adversely affected.
OUR
BUSINESS IS COMPETITIVE.
Competition
in our industry is intense and new products are regularly introduced. We compete
for both licenses to properties and the sale of interactive entertainment
software with Sony, Nintendo and Microsoft, each of which is the largest
developer and marketer of software for its platforms. Sony, Microsoft and
Nintendo currently dominate the industry and have the financial resources to
withstand significant price competition and to implement extensive advertising
campaigns, particularly for prime-time television. These companies may also
increase their own software development efforts or focus on developing software
products for third-party platforms.
In
addition, we compete with domestic public and private companies, international
companies, large software companies and media companies. Many of our competitors
have far greater financial, technical, personnel and other resources than we do
and many are able to carry larger inventories, adopt more aggressive pricing
policies and make higher offers to licensors and developers for commercially
desirable properties than we can. Our titles also compete with other forms of
entertainment such as motion pictures, television and audio and DVDs featuring
similar themes, on-line computer programs and forms of entertainment which may
be less expensive or provide other advantages to consumers.
Retailers
typically have limited shelf space and promotional resources and competition is
intense among an increasing number of newly introduced interactive entertainment
software titles for adequate levels of shelf space and promotional support.
Competition for retail shelf space is expected to increase, which may require us
to increase our marketing expenditures just to maintain current levels of sales
of our titles. Competitors with more extensive lines and popular titles
frequently have greater bargaining power with retailers. Accordingly, we may not
be able to achieve the levels of support and shelf space that such competitors
receive. Similarly, as competition for popular properties increases, our cost of
acquiring licenses for such properties is likely to increase, possibly resulting
in reduced margins. Prolonged price competition, increased licensing costs or
reduced operating margins would cause our profits to decrease
significantly.
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.
WE MAY BE BURDENED WITH PAYMENT
DEFAULTS AND UNCOLLECTIBLE ACCOUNTS IF OUR DISTRIBUTORS OR RETAILERS CANNOT
HONOR THEIR CREDIT ARRANGEMENT
S
WITH US.
Distributors
and retailers in the interactive entertainment software industry have from time
to time experienced significant fluctuations in their businesses and a number of
them have failed. The insolvency or business failure of any significant retailer
or distributor of our products could materially harm our business and financial
results. We typically make sales to most of our retailers and some distributors
on unsecured credit, with terms that vary depending upon the customer's credit
history, solvency, credit limits and sales history, as well as whether we can
obtain sufficient credit insurance. Although, as in the case with most of our
customers, we have insolvency risk insurance to protect us against our
customers' bankruptcy, insolvency or liquidation, this insurance contains a
significant deductible and a co-payment obligation and the policy does not cover
all instances of non-payment. In addition, although we maintain a reserve for
uncollectible receivables, the reserve may not be sufficient in every
circumstance. As a result, a payment default by a significant customer could
significantly harm our business and financial results. We are currently
investigating to insure our debtors in order to limit the risks.
WE
MAY NOT BE ABLE TO MAINTAIN OUR DISTRIBUTION RELATIONSHIPS WITH KEY VENDORS, AND
IF WE DO NOT, OUR RESULTS OF OPERATIONS MAY BE MATERIALLY HARMED
We
distribute interactive entertainment software products and provide related
services in the Benelux countries, France, Germany, the United Kingdom, and
other European countries and the United States, for a variety of entertainment
software publishers, many of which are our competitors, and/or hardware
manufacturers. These services are generally performed under limited term
contracts. Although we expect to use reasonable efforts to retain these vendors,
we may not be successful in this regard.
OUR
SOFTWARE MAY BE SUBJECT TO LEGAL CLAIMS WHICH COULD BE COSTLY AND TIME CONSUMING
AND CAUSE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
In prior
years lawsuits were filed against numerous video game companies by the families
of victims who were shot and killed by teenage gunmen in attacks perpetrated at
schools. In these lawsuits plaintiffs alleged that the video game companies
manufactured and/or supplied these teenagers with violent video games, teaching
them how to use a gun and causing them to act out in a violent manner. Both
lawsuits have been dismissed. It is possible, however, that similar, additional
lawsuits may be filed in the future. If such future lawsuits are filed and
ultimately decided against us and our insurance carrier does not cover the
amounts we are liable for, it could have a material adverse effect on our
business and financial results. Payment of significant claims by insurance
carriers may make such insurance coverage materially more expensive or
unavailable in the future, thereby exposing our business to additional
risk.
IN
MANY OF OUR KEY TERRITORIES, OUR BUSINESS, OUR PRODUCTS AND OUR DISTRIBUTION
CHANNELS ARE SUBJECT TO INCREASING REGULATION IN AREAS RELATING TO CONTENT,
CONSUMER PRIVACY AND ONLINE DELIVERY. IF WE DO NOT SUCCESSFULLY COMPLY WITH
THESE REGULATIONS, OUR BUSINESS MAY SUFFER.
Legislation
is continually being introduced that may affect both the content of our products
and their distribution. For example, privacy laws in the United States and
Europe impose various restrictions on our web sites. Those rules vary by
territory although the Internet recognizes no geographical boundaries. Other
countries, such as Germany, have adopted laws regulating content both in
packaged goods and those transmitted over the Internet that are stricter than
current United States laws. In the United States, the federal and several state
governments are considering content restrictions on products such as ours, as
well as restrictions on distribution of such products. Any one or more of these
factors could harm our business by limiting the products we are able to offer to
our customers and by requiring additional differentiation between products for
different territories to address varying regulations. This additional product
differentiation would be costly.
IF
WE DO NOT CONSISTENTLY MEET OUR PRODUCT DEVELOPMENT SCHEDULES, WE WILL
EXPERIENCE FLUCTUATIONS IN OUR OPERATING RESULTS.
Product
development schedules, particularly for new hardware platforms, high-end
multimedia PCs and the Internet, are difficult to predict because they involve
creative processes, use of new development tools for new platforms and the
learning process, research and experimentation associated with development for
new technologies. We have in the past experienced development delays for several
of our products. Failure to meet anticipated production or “go live” schedules
may cause a shortfall in our revenues and profitability and cause our operating
results to be materially different from expectations. Delays that prevent
release of our products during peak selling seasons may reduce lifetime sales of
those products.
OUR
EXPANSION MAY STRAIN OUR OPERATIONS.
We have
expanded through internal growth and acquisitions of titles, which has placed
and may continue to place a significant strain on our management,
administrative, operational, and financial and other resources. We intend to
release a number of titles on current and new platforms. Furthermore, we have
expanded our publishing and distribution operations, increased our advances to
developers and manufacturing expenditures, enlarged our work force and expanded
our presence on international markets. To successfully manage this growth, we
must continue to implement and improve our operating systems as well as hire,
train and manage a substantial and increasing number of management, technical,
marketing, administrative and other personnel. We may be unable to effectively
manage rapidly expanded operations which are geographically
dispersed.
We have
acquired rights to various properties and businesses, and we may pursue
opportunities by making selective acquisitions consistent with our business
strategy. We may be unable to successfully integrate any new personnel, property
or business into our operations. If we are unable to successfully integrate
future personnel, properties or businesses into our operations, we may incur
significant charges.
Our
publishing and distribution activities require significant amounts of capital.
We may seek to obtain additional debt or equity financing to fund the cost of
expansion. The issuance of equity securities would result in dilution to the
interests of our shareholders.
A LIMITED NUMBER OF CUSTOMERS MAY
ACCOUNT FOR A SIGNIFICANT PORTION OF OUR SALES, AND
THE LOSS OF OUR RELATIONSHIPS WITH
PRINCIPAL CUSTOMERS OR A DECLINE IN SALES TO PRINCIPAL CUSTOMERS COULD HARM OUR
OPERATING RESULTS.
Sales to
our four largest customers accounted for approximately 76% of our revenues for
the year ended December 31, 2007. Sales to our four largest customers accounted
for approximately 88% of our revenues for the year ended December 31, 2006.
Sales to our three largest customers accounted for approximately 65% of our
revenues for the year ended December 31, 2005. The loss of our relationships
with principal customers or a decline in sales to principal customers could harm
our operating results.
RATING
SYSTEMS FOR INTERACTIVE ENTERTAINMENT SOFTWARE, POTENTIAL LEGISLATION AND
CONSUMER OPPOSITION COULD INHIBIT SALES OF OUR PRODUCTS.
The home
video game industry requires interactive entertainment software publishers to
provide consumers with information relating to graphic violence or sexually
explicit material contained in software titles. Certain countries have also
established similar rating systems as prerequisites for sales of interactive
entertainment software in such countries. We believe that we comply with such
rating systems and display the ratings received for our titles. Our software
titles generally receive a rating of "G" (all ages), "E10-Plus" (age 10 and
over) or "T" (age 13 and over), although certain of our titles receive a rating
of "M" (age 17 and over), which may limit the potential markets for these
titles.
In the
United States, there have been several legislative proposals that if adopted
would result in the regulation of interactive entertainment software, motion
picture and recording industries, including a proposal to adopt a common rating
system for interactive entertainment software, television and music containing
violence and sexually explicit material and an inquiry by the U.S. Federal Trade
Commission with respect to the marketing of such material to minors. Consumer
advocacy groups have also opposed sales of interactive entertainment software
containing graphic violence and sexually explicit material by pressing for
legislation in these areas and by engaging in public demonstrations and media
campaigns. If any groups were to target our titles, we might be required to
significantly change or discontinue a particular title. In addition, certain
retailers, such as U.S.-based retailers Wal-Mart Stores Inc., Sears Inc.,
including its Kmart and Sears’s division, and Target, a division of Dayton
Hudson Corporation, have declined to sell interactive entertainment software
containing graphic violence or sexually explicit material, which also limits the
potential markets for certain of our games. Such restrictions or impairments may
also occur in other geographic markets and as a result limit the potential for
certain of our games in those markets. Furthermore, because of the content in
some of our titles, religious or other advocacy groups could pressure retailers
not to sell or carry our titles which could impair marketing or sales efforts
with certain retailers and as a consequence limit sales or potential sales for
certain of our games in affected areas.
WE
ARE SUBJECT TO RISKS AND UNCERTAINTIES OF INTERNATIONAL TRADE, AND IF ANY OF
THESE RISKS MATERIALIZE, OUR RESULTS OF OPERATIONS MAY BE HARMED.
Sales in
European markets, primarily Germany, France and the Benelux, have accounted for
an increasing portion of our revenues. In 2007, sales in Europe accounted for
approximately 75% of our revenues and sales in the United States accounted for
the remaining 25% of our revenues. We are subject to risks inherent in
international trade, including:
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increased
credit risks;
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tariffs
and duties;
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fluctuations
in foreign currency exchange rates;
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shipping
delays; and
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international
political, regulatory and economic developments, all of which can have a
significant impact on our operating
results.
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WE ARE DEPENDENT UPON OUR KEY
EXECUTIVES AND PERSONNEL, AND IF WE FAIL TO HIRE AND RETAIN NECESSARY PERSONNEL
AS NEEDED, OUR BUSINESS WILL BE SIGNIFICANTLY IMPAIRED
.
Our
success is largely dependent on the personal efforts of certain key personnel.
The loss of the services of one or more of these key employees could adversely
affect our business and prospects. Our success is also dependent upon our
ability to hire and retain additional qualified operating, marketing, technical
and financial personnel. Competition for qualified personnel in the computer
software industry is intense, and we may have difficulty hiring or retaining
necessary personnel in the future. If we fail to hire and retain necessary
personnel as needed, our business will be significantly impaired.
FLUCTUATIONS
IN FOREIGN EXCHANGE RATES AND INTEREST RATES COULD HARM OUR RESULTS OF
OPERATIONS
We are
exposed to currency risks and interest rate risks. We are particularly exposed
to fluctuations in the exchange rate between the U.S. dollar and the Euro, as we
incur manufacturing costs and price our systems predominantly in Euro while a
portion of our revenues and cost of sales is denominated in U.S.
dollars.
In
addition, a substantial portion of our assets, liabilities and operating results
are denominated in Euros, and a minor portion of our assets, liabilities and
operating results are denominated in currencies other than the Euro and the U.S.
dollar. Our consolidated financial statements are expressed in U.S. dollars.
Accordingly, our results of operations are exposed to fluctuations in various
exchange rates.
Furthermore,
a strengthening of the Euro, particularly against the U.S. dollar could lead to
intensified price-based competition in those markets that account for the
majority of our sales, resulting in lower prices and margins and an adverse
impact on our business, financial condition and results of
operations.
THE
MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE.
The
market price of the common stock may be highly volatile. Disclosures of our
operating results, announcements of various events by us or our competitors and
the development and marketing of new titles affecting the interactive
entertainment software industry may cause the market price of the common stock
to change significantly over short periods of time.
SOME
OF OUR EXISTING SHAREHOLDERS CAN EXERT CONTROL OVER US AND MAY NOT MAKE
DECISIONS THAT ARE IN THE BEST INTERESTS OF ALL SHAREHOLDERS.
As of
December 31, 2007, officers, directors, and shareholders holding more than 5% of
our outstanding shares collectively controlled approximately 29% of our
outstanding common stock. As a result, these shareholders, if they act together,
would be able to exert a significant degree of influence over our management and
affairs and over matters requiring shareholder approval, including the election
of directors and approval of significant corporate transactions. Accordingly,
this concentration of ownership may harm the market price of our ordinary shares
by delaying or preventing a change in control of us, even if a change is in the
best interests of our other shareholders.
In
addition, the interests of management shareholders and shareholders holding more
than 5% of our outstanding shares may not always coincide with the interests of
our other shareholders, and accordingly, they could cause us to enter into
transactions or agreements that we would not otherwise consider.
THE COMPANY IS INVOLVED IN A NUMBER
OF LEGAL PROCEEDINGS RELATED TO ITS ORDINARY COURSE OF BUSINESS. THE OUTCOME OF
THESE PROCEEDINGS IS UNCERTAIN AND MAY ADVERSELY AFFECT THE COMPANIES FINANCIAL
POSITION.
Although
we believe that we has adequate legal claims or defenses in place and/or
provided adequate accruals for related costs such that the ultimate outcome will
not have a material adverse impact on our future financial position or results
from operation the outcome of these legal proceedings is not sure.
IT
MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US, OR OUR OFFICERS AND
DIRECTORS.
Service
of process upon our directors and officers, most of whom reside outside the
United States, may be difficult to obtain within the United States. In addition,
because substantially all of our assets and all of our directors and officers
are located outside the United States, any judgment obtained in the United
States against us or any of our directors and officers may not be collectible
within the United States.
THERE IS SUBSTANTIAL DOUBT ABOUT OUR
ABILITY TO CONTINUE AS A GOING CONCERN. IF THE COMPANY DOES NOT OBTAIN ANY
NECESSARY FINANCING, WE MAY NEED TO CEASE OPERATIONS.
The
Company’s management believes that in order to satisfy its working capital
requirements through the second quarter of 2007, it will need to obtain
additional financing from third parties. If the Company does not obtain any
necessary financing in the future, we may need to cease operations. There is no
legal obligation for either management or significant shareholders to provide
additional future funding. Consequently, there is substantial doubt about our
ability to continue as a going concern. We have no current plans, proposals,
arrangements or understandings with respect to the sale or issuance of
additional securities prior to the location of a merger or acquisition
candidate. Accordingly, there can be no assurance that sufficient funds will be
available to us to allow us to cover the expenses related to such
activities.
WE
MAY BE SUBJECT TO REGULATORY SCRUTINY AND SUSTAIN A LOSS OF PUBLIC CONFIDENCE IF
WE ARE UNABLE TO SATISFY REGULATORY REQUIREMENTS RELATING TO OUR INTERNAL
CONTROLS OVER FINANCIAL REPORTING AND/OR IF WE HAVE MATERIAL INTERNAL CONTROL
WEAKNESSES WHICH MAY RESULT IN MATERIAL FINANCIAL REPORTING ERRORS
Section
404 of the Sarbanes-Oxley Act of 2002 requires us to perform an evaluation of
our internal controls over financial reporting beginning with our annual report
filed for a fiscal year ending on or after December 15, 2007 and have our
independent registered public accounting firm attest to such evaluation for
fiscal years ending on or after December 15, 2009. Compliance with
these requirements can be expensive and time-consuming.
While we
believe that we met and will continue to be able to meet the applicable
deadlines, no assurance can be given that we will meet the required deadlines in
future years. If we fail to timely complete this evaluation, or if our auditors
cannot timely attest to our evaluation when we are required to have such
attestation, or if we have material internal control weaknesses which may result
in material financial reporting errors, we may be subject to regulatory scrutiny
and a loss of public confidence in our internal controls. In
addition, failure to provide the required management report would render our
annual report materially deficient. As a result, we would not be timely or
current in our Exchange Act reporting. This would result in us not
being eligible to file new Form S-3 or Form S-8 registration statements and the
loss of the availability of Rule 144. Because the filing of the
annual report constitutes the Section 10(a)(3) update for any effective Forms
S-3 or S-8, we also would be required to suspend any sales under already
effective registration statements. However, now that have amended our
annual report to provide the required management's report on whether or not
internal control is effective, we would be able file new Forms S-8 and resume
making sales under already effective Forms S-8, and shareholders can avail
themselves of Rule 144 (assuming all other conditions to use of the form or rule
are satisfied). Although amending the annual report to provide
management's report may result in us becoming current in our Exchange Act
reports, it would remain untimely and we would not be eligible to file new Forms
S-3.
FAILURE
TO PROVIDE A MANAGEMENT REPORT IN OUR 2007 ANNUAL REPORT RENDERED OUR ANNUAL
REPORT MATERIALLY DEFICIENT AND CAUSED US NOT TIMELY OR CURRENT IN OUR EXCHANGE
ACT REPORTING. IT ALSO RENDERED OUR DISCLOSURE CONTROLS AND
PROCEDURES INEFFECTIVE AS OF THE END OF 2007.
Our
failure to provide the required management report in our annual report on Form
10-KSB for the fiscal year ended December 31, 2007, filed on March 28, 2008
rendered our annual report materially deficient. As a result, we were not timely
or current in our Exchange Act reporting. This resulted 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 resulted in us becoming current in our Exchange Act reports,
our annual report remains untimely and we are not be eligible to file new Forms
S-3. In addition, in light of our failure to provide the required
management report in our original annual report, our management concluded that
our disclosure controls and procedures were not effective as of the end of
2007. Ineffective disclosure controls and procedures may result in
material errors in our public disclosures, and we may be subject to regulatory
scrutiny and a loss of public confidence in our disclosure
controls.
ITEM 2. PROPERTY
We do not
own any real estate. Currently, we lease properties in Breda and Amsterdam, The
Netherlands.
Our
offices located at Hambroeklaan 1 in Breda are leased by our subsidiary,
Playlogic Game Factory, from Neglinge BV pursuant to a lease agreement, which
expires on October 1, 2013. Playlogic Game Factory has an option to extend the
lease agreement. If this option is exercised, the lease agreement will expire on
October 1, 2018. The lease property spans 1,600 square meters and may only be
used as office space. At signing of the lease agreement, the lessor committed
itself to invest $440,000 (€300,000) in the lease property which amount shall be
repaid by Playlogic Game Factory B.V. in ten years. Payment is due on a
quarterly basis and amounts to $44,000 (€30,000) per year.
We lease
our offices located at Concertgebouwplein 13 in Amsterdam from Mr. Prof. Dr. D.
Valerio pursuant to a lease agreement, which expires on June 30, 2008. The lease
property spans 260 square meters and may only be used as office space. Payment
is due on a quarterly basis and amounts to $22,000 (€15,000) per
quarter.
On
February 4, 2008, we entered into a lease for new offices at the World Trade
Center in Amsterdam. The move of our offices is scheduled to happen in May
2008.
The
leased premises have approximately 900 square meters. The lease amounts to
$425,000 (€291,000)) per year. We have agreed a rent free period and will only
start payment as of January 2009. Payment is due on a quarterly
basis.
I
TEM 3. LEGAL
PROCEEDINGS
On
November 27, 2007, we have won the legal proceedings in copyrights to the game
Ancient Wars: Sparta. So has decided the District Court of Amsterdam in the case
of Playlogic Entertainment against WorldForge/Visionvale Ltd. from
Cyprus and Burut Co. from Russia.
The
provisional judge of the District Court of Amsterdam concludes that all the
copyrights to the game Ancient Wars: Sparta always belonged to Playlogic
pursuant to the agreement with WorldForge / Visionvale and Burut. The judge
ruled in Playlogic’s favor on all counts and WorldForge / Visionvale and Burut
have to pay a penalty of € 10,000 each time they state the contrary or refrain
from publishing rectifications of former wrong statements.
Furthermore,
the Company is involved in a number of minor legal actions incidental to its
ordinary course of business.
With
respect to the above matters, the Company believes that it has adequate legal
claims or defenses and/or provided adequate accruals for related costs such that
the ultimate outcome will not have a material adverse effect on the Company’s
future financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of the holders of our common stock during the
year. During the fiscal year ending December 31, 2007, no other matters
were submitted to a vote of holders of our common stock through the solicitation
of proxies or otherwise.
I
TEM 5. MARKET FOR THE REGISTRANT'S
COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY
SECURITIES
Since
August 2, 2005, our common stock has been quoted on the Over-the-Counter (“OTC”)
Bulletin Board, an electronic stock listing service provided by The NASDAQ Stock
Market, Inc., under the symbol PLGC.OB (our symbol had been DNRE.OB from January
2003 until May 2005, and it was DNRR.OB from May 2005 until August 2,
2005).
As of
December 31, 2007, there were approximately 400 holders of record of our common
stock.
The price
range of our common stock during the past two fiscal years is shown below. High
and low prices given here refer to the high and low bid quoted on the OTC
Bulletin Board. These prices reflect our 1-for-10 reverse stock split effective
April 15, 2005. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual
transactions.
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Fiscal
2006
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High
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Low
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First
Quarter
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$5.50
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$1.25
|
|
Second
Quarter
|
$5.15
|
$2.40
|
|
Third
Quarter
|
$3.00
|
$1.45
|
|
Fourth
Quarter
|
$3.00
|
$0.36
|
|
|
|
|
|
|
|
|
|
Fiscal
2007
|
High
|
Low
|
|
|
|
|
|
First
Quarter
|
$1.01
|
$0.36
|
|
Second
Quarter
|
$1.01
|
$0.45
|
|
Third
Quarter
|
$1.01
|
$0.64
|
|
Fourth
Quarter
|
$1.10
|
$0.65
|
The
source for the high and low closing bids quotations is www.finance.yahoo.com and
does not reflect inter-dealer prices. Such quotations are without retail
mark-ups, mark-downs or commissions, and may not represent actual transactions
and have not been adjusted for stock dividends or splits.
The
Company has never declared or paid dividends on its common stock and anticipates
that for the foreseeable future it will not pay dividends on its common
stock.
Unregistered
Sales of Equity Securities
Each
issuance set forth below was made in reliance upon the exemptions from
registration requirements under Section 4(2) of the Securities Act of 1933, as
amended. When appropriate, we determined that the purchasers of securities
described below were sophisticated investors who had the financial ability to
assume the risk of their investment in our securities and acquired such
securities for their own account and not with a view to any distribution thereof
to the public. Where required by applicable law, the certificates evidencing the
securities bear legends stating that the securities are not to be offered, sold
or transferred other than pursuant to an effective registration statement under
the Securities Act or an exemption from such registration
requirements.
Common stock
During
the year ended December 31, 2007, the Company sold 3,182,609 units at $1.15
per share to unrelated third parties for proceeds of $3,660,000 pursuant to an
exemption from registration claimed under Rule 4(2) of the Securities Act of
1933, as amended. Each unit consisted of two shares (totaling $ 2.30)
of the Company’s par value common stock and one Common Stock Warrant to purchase
the Company’s common stock at $2.75 per share at any time within the next 5
years. In total 1,591,308 warrants have been issued in relation to this sale.
Furthermore, the Company sold 270,000 shares to an unrelated third party at par
value for facilitating the share issuances.
During
the year ended December 31, 2007, the Company issued 9,147,861 units at $0.80
per share to unrelated third parties for proceeds of approximately $7,313,000
pursuant to an exemption from registration claimed under Rule 4(2) of the
Securities Act of 1933, as amended. In relation to this sale
2,500,000 warrants have been issued to purchase the Company’s common stock at
$1.35 per share at any time within the next 5 years.
Of this
subscription, 6,287,273 shares were used to convert outstanding debt amounting
to $5,024,899. The remaining 2,288,471 shares have been sold for cash,
however the cash was paid directly by subscriber to vendors of the
Company and didn’t therefore go through the Company’s records.
During
the year, the Company sold 600,000 shares of its common stock to an
accredited investor based in the Netherlands at $0.90 per share for a total cash
consideration of $538,604 pursuant to an exemption from registration claimed
under Rule 4(2) of the Securities Act of 1933, as amended.
The above
transactions can be summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
Cash
to Vendors
|
|
|
Conversion
of Debt
|
|
|
Total
|
|
|
Units
|
|
|
Shares
issued @ 1.15
|
|
$
|
2,735,019
|
|
|
$
|
635,961
|
|
|
$
|
289,020
|
|
|
$
|
3,660,000
|
|
|
$
|
3,182,609
|
|
|
Shares
issued @ 0.80
|
|
|
|
|
|
|
2,288,471
|
|
|
|
5,024,899
|
|
|
|
7,313,370
|
|
|
|
9,147,861
|
|
|
Shares
issued @ 0.90
|
|
|
|
|
|
|
|
|
|
|
538,604
|
|
|
|
538,604
|
|
|
|
600,000
|
|
|
Shares
issued @ par
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
270
|
|
|
|
270,000
|
|
|
|
|
$
|
2,735,289
|
|
|
$
|
2,924,432
|
|
|
$
|
5,852,523
|
|
|
$
|
11,512,244
|
|
|
$
|
13,200,470
|
|
Option
grants
On August
28, 2007, the Company granted to Willy J. Simon, the Company’s Chairman and Non
Executive Director, 112,500 options to purchase shares of the Company’s common
stock at an exercise price of $1.35 per share. A total of 112,500 shares of
these options will vest on April 1, 2008. The options will expire after 3
years.
On August
28, 2007, the Company granted to George M. Calhoun, one of the Company’s
Non Executive Directors, 62,500 options to purchase shares of the Company’s
common stock at an exercise price of $1.35 per share. A total of 62,500 shares
of these options will vest on April 1, 2008.
The options will
expire after 3 years.
On August
28, 2007, the Company granted to Erik L.A. van Emden, one of the
Company’s Non Executive Directors, 62,500 options to purchase shares of the
Company’s common stock at an exercise price of $1.35 per share. A total of
62,500 shares of these options will vest on April 1, 2008. The options will
expire after 3 years.
On August
28, 2007, the Company granted a number of employees and officers a total
of 725,000 options (in accordance with the table below) to purchase
shares of the Company’s common stock at an exercise price of $1.35 per share.
These options will vest for 33,33% on August 28, 2009, and the remaining options
will vest in two equal installments on August 28, 2010 and August 28, 2011. The
options will expire after 4 years.
|
W.M
Smit, Chief Executive Officer
|
|
|
200,000
|
|
|
R.W.
Smit, Executive Vice President
|
|
|
200.000
|
|
|
D.
Morel, Chief Technology Officer
|
|
|
100.000
|
|
|
P.Y.
Thiercelin, Director of Sales
|
|
|
75.000
|
|
|
B.
Mulderij, Marketing Manager
|
|
|
75.000
|
|
|
M.
Janse, Executive Producer
|
|
|
25.000
|
|
|
O.
Klooster, Assistant Controller
|
|
|
25.000
|
|
|
I.
Frid, Managing Director
|
|
|
15.000
|
|
|
L.
Leatomu, PA to the CEO
|
|
|
10.000
|
|
|
|
|
|
|
725.000
|
Issuer
Purchase of Equity Securities
None.
I
TEM 6. 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
Playstation 2, Microsoft’s Xbox 360 and Nintendo’s Wii, PCs and handheld devices
(such as Nintendo DS, and PSP) and mobile devices.
Our
principal sources of revenue are derived from publishing operations. Publishing
revenues are derived from the sale of our digital entertainment products. We own
most of the intellectual properties of our products, which we believe positions
us to maximize profitability.
As a
publisher, we are responsible for publishing, sales and marketing of our
products. We sell our products to distributors, who sell to retail. Furthermore,
we sell directly to consumers through online distribution channels, at least two
months after the product was made available at retail.
Various
studios throughout the world develop games which we publish. One of these
studios is our subsidiary, Playlogic Game Factory B.V., located in The
Netherlands. Other independent studios in various countries develop our games
under development contracts. These development contracts generally provide that
we pay the studio an upfront payment, which is an advance on future royalties,
earned and a payment upon achievement of various milestones. In addition, we
license the rights to our existing titles to other studios who then develop
those titles for other platforms.
Different
studios and developers frequently contact us requesting financing and publishing
their games. We evaluate each of these offers based on several factors,
including sales potential (primarily based on past performance by the studio or
developer), technology used, track record and human resources of the studio,
game play, graphics and sounds.
We select
which games we develop, based on our analysis of consumer trends and behavior
and our experience with similar or competitive products. Once we select a game
to develop, we then assign a development studio, based upon its qualifications,
previous experience and prior performance. Once developed, we distribute our
games worldwide through existing distribution channels with experienced
distributors. We generally aim to release our titles simultaneously across a
range of hardware formats in order to spread development risks and increase with
a minimum increase in development time and resources.
We
believe that greater online functionality and the expanded artificial
intelligence capabilities of the new platforms will improve game play and help
our industry grow. In addition, according to DFC Intelligence, new sales
potential, revenue opportunities from wireless gaming, online console gaming,
and in-game advertising are expected to grow from $1 billion in 2005 to $5
billion in 2009.
We
believe that greater online functionality and the vast processing capabilities,
as well as the new casual games with simplified controls (IE: Nintendo Wii,
Nintendo DS, Playstation 3 Sixaxis and Playstation Eye) of the new platforms
will further increase the total world wide installed base, diversifying the
consumer base and help our industry grow. In addition, according to DFC
Intelligence, new sales potential, revenue opportunities from wireless gaming,
online console gaming, and in-game advertising are expected to grow from $1
billion in 2005 to $5 billion in 2009.
The games
industry has gone through a transition period. The current and Next Gen consoles
(Xbox360, PlayStation 3, Wii) and DS platforms have broadened the market,
appealing to an even larger mass consumer audience than ever before, providing
increased publishing opportunities. The investments in next generation platforms
are however marginally larger than for the previous generation
platforms.
Playlogic has
created a healthy balance between games available for the current and the next
generation platforms. To spread risk and broaden Playlogic’s portfolio, both
Next Gen titles for the Playstation 3, Xbox 360 and Nintendo Wii as well
as PC games and handheld titles are a all part of the line-up for the
coming year.
We have
released 14 games to date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
release
|
|
Game
|
|
Studio
|
|
Platform
|
|
date
to retail
|
|
Completed
Games
|
|
|
|
|
|
|
|
Alpha
Black Zero
|
|
Khaeon
(NL)
|
|
PC
|
|
Released
|
|
Airborne
Troops
|
|
Widescreen
Games (F)
|
|
PS2,
PC
|
|
Released
|
|
Cyclone
Circus
|
|
Playlogic
Game Factory (NL)
|
|
PS2
|
|
Released
|
|
Xyanide
|
|
Overloaded
(NL)
|
|
Mobile
Phones
|
|
Released
|
|
World
Racing 2
|
|
Synetic
(D)
|
|
PS2,
Xbox, PC
|
|
Released
|
|
Knights
of the Temple 2
|
|
Cauldron
(SK)
|
|
PS2,
Xbox, PC
|
|
Released
|
|
Gene
Troopers
|
|
Cauldron
(SK)
|
|
PS2,
Xbox, PC
|
|
Released
|
|
Xyanide
|
|
Playlogic
Game Factory (NL)
|
|
Xbox
|
|
Released
|
|
Age
of Pirates: Caribbean Tales
|
|
Akella
(Russia)
|
|
PC
|
|
Released
|
|
Infernal
|
|
Metropolis
(Poland)
|
|
PC
|
|
Released
|
|
Ancient
Wars: Sparta
|
|
Visionvale
(Cyprus)
|
|
PC
|
|
Released
|
|
Evil
days of Luckless John
|
|
3A
entertainment (British Virgin Islands)
|
|
PC
|
|
Released
|
|
Xyanide
Resurrection
|
|
Playlogic
Game Factory (NL)
|
|
PSP
|
|
Released
|
|
Obscure
II
|
|
Hydravision
(France)
|
|
PC,
PS2
|
|
Released
|
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 2007 to Fiscal 2006
Revenues
. Revenues for Fiscal
2007 were $10,099,746 as compared to $$5,042,516 for Fiscal 2006. This increase
of more than 100% in revenues is primarily the result of increased sales volumes
following various titles, the release of 4 new titles globally and 3
rd
party
development activities. The Company focused mainly on PC titles in previous
years. Starting 2007 we expand this focus on bring titles to market on consoles
as well. During 2007 we have launched two games on Playstation 2 platform and
one on the PSP platform.
Gross Profit
. Gross profit
totaled $5,039,848 for Fiscal 2007. For Fiscal 2006, gross profit totaled
$1,205,437. This increase in gross profit is primarily the result of an increase
in net sales as well as the ability to sell at higher prices. Furthermore, we
had one time expenses related to certain sales that decreased the
margin.
Research and
development
expenses
. Research and
development expenses totaled $542,215 for Fiscal 2007. For Fiscal 2006, research
and development expenses totaled $2,135,832. This represents a decrease of
$1,593,617 or 74%. This decrease is due to a higher amount of capitalized
personnel expenses in our development studio in Fiscal 2007 for the game we are
developing in-house. Furthermore, the expenses in 2006 contained R&D
expenses for the Sony contract as well as the feasibility of the game we are
developing in-house.
Selling, marketing, general and
administrative expenses
. Selling, marketing, general and
administrative expenses totaled $4,451,357 for the Fiscal 2007. For fiscal 2006,
selling, general and administrative expenses totaled $7,223,642. Although 2006
contained a lot of one-time expenses, the Company has implemented strong and
detailed focus on controlling the operating expenses. This led to lower expenses
during the year.
Depreciation
. Depreciation
expense totaled $297,292 for Fiscal 2007. For Fiscal 2006, depreciation expense
totaled $315,174. The decrease of $17,882 or 6% is caused by some fully
depreciated items in fixed assets.
Asset impairment charges.
We
review our Capitalized Software whenever events or changes in circumstances
indicate that the related carrying amounts may not be recoverable. Asset
impairment charges totaled $68,566 for fiscal 2007 versus $1,907,117 in Fiscal
2006. The Fiscal 2006 amount primarily reflects our decisions to terminate the
development of two games following our assessment of changes in marketability of
these games.
Interest expense
. Interest
expense totaled $1,164,250 for Fiscal 2007. For Fiscal 2006, interest expense
totaled $917,972. This represents an increase of $246,277 and is primarily the
result of an increase of our short term debts. Furthermore, an interest penalty
expense for late repayment of an outstanding loan amounting to $1,254,100 has
been recognized during 2006. This penalty was waived during the third quarter of
2007 and has therefore been recognized as an interest income. The penalty
amounted to € 1,000,000. Due to the increased Euro rate to the Dollar, the
amount is slightly higher for 2007.
Net Result
. Our net profit
was $743,729 for Fiscal 2007. For Fiscal 2006 we had a net loss that totaled
$12,548,400. The increase of the net result is primarily due to higher revenues
as well as a continued focus to reduce operating expenses. Furthermore, we were
able to restructure some of our debts which led to incidental
gains.
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 $(617,751) for the Fiscal 2007 and
$(908,018) for Fiscal 2006.
Equity
. The total
stockholders’ equity as of December 31, 2007 amounted to $695,753 as oppose
to $(10,889,671) as of December 31, 2006. The improvement of equity is caused by
the net result the Company made for the year as well as new equity subscriptions
and loan conversions during the year.
Cash flow from operations.
We
showed a net profit for the year, however the cash flow from operations is
negative. This is due to the fact that we had some old debts on the balance
sheet that we had to repay. Furthermore, $1.2 million of our revenue was
collected already during the year 2006, whereas the revenue could only be
recognized in 2007.
Liquidity
and Capital Resources
As of
December 31, 2007, our cash balance was $349,464 as compared to $18,433 at
December 31, 2006.
On March
20, 2008, we announced that we have successfully closed a $7 million financing.
These are the terms and conditions of this financing:
1. Equity:
The Company sold
3,000,000 shares of its common stock to an accredited investor based in the
Netherlands at $ 1.00 per share for a total cash consideration of $3,000,000.
The sale was made pursuant to the terms of a subscription agreement dated March
27, 2008. The Company will pay a placement fee of 7% (being $210,000) on this
sale.
Concurrent
with this sale, the Company issued 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.
2. Loan :
On March 27, 2008,
the Company has entered into a loan agreement with two lenders 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 this loan agreement of March 27, 2008, the Company issued to these lenders
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 warrant will be exercised cashless
and have a mandatory call clause when the stock price is $4.00.
The
Company has received the funds on it’s bank account on March 27, 2008, netted
with the placement fee totaling $250,000. An amount of $ 6,750,000 was
received.
We will
use this cash to further bring down our short term borrowings and the bank line
of credit (totaling to approximately $ 2 million). The remaining $5million, will
be used to invest in our game portfolio for 2008 and
2009.
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, 2007 was $671,148, as compared to $749,579 at
December 31, 2006. The decrease is due to a continued focus on collection
of receivables. Although the revenue has increased we managed to bring down the
average DSO ratio.
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, 2007:
|
Contractual
Obligations
|
|
Payments
Due By Period (in thousands)
|
|
|
|
|
Total
|
|
|
Less
than 1 Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More
than 5 Years
|
|
|
Long-Term
Debt Obligations
|
|
$
|
172
|
|
|
$
|
117
|
|
|
$
|
55
|
|
|
|
-
|
|
|
|
-
|
|
|
Capital
Lease Obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Operating
lease Obligations (Including Rent)
|
|
|
2,090
|
|
|
$
|
385
|
|
|
$
|
682-
|
|
|
$
|
682
|
|
|
$
|
341
|
|
|
Purchase
obligations
|
|
$
|
3,225
|
|
|
$
|
3,225
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
contractual obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
5,487
|
|
|
$
|
3,727
|
|
|
$
|
737
|
|
|
$
|
682
|
|
|
$
|
341
|
|
Summary
of Significant Accounting Policies
Accounts
receivable
Accounts
receivable are shown after deduction of a provision for bad and doubtful debts
where appropriate.
Software
Development Costs
Capitalized
software development costs include payments made to independent software
developers under development agreements, as well as direct costs incurred for
internally developed products. We account for software development costs in
accordance with SFAS No. 86 “Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed.” Software development costs are capitalized
once technological feasibility of a product is established and such costs are
determined to be recoverable.
We
utilize both internal development teams and third-party software developers to
develop our products.
We
capitalize internal software development costs and other content costs
subsequent to establishing technological feasibility of a title. Amortization of
such costs as a component of cost of sales is recorded on a title-by-title basis
based on the greater of the proportion of current year sales to the total of
current and estimated future sales for the title or the straight-line method
over the remaining estimated useful life of the title. At each balance sheet
date, we evaluate the recoverability of capitalized software costs based on
undiscounted future cash flows and charge to cost of sales any amounts that are
deemed unrecoverable. Our agreements with third-party developers generally
provide us with exclusive publishing and distribution rights and require us to
make advance payments that are recouped against royalties due to the developer
based on the contractual amounts of product sales, adjusted for certain
costs.
Prepaid
royalties
We
capitalize external software development costs (prepaid royalties) and other
content costs subsequent to establishing technological feasibility of a
title.
Advance
payments are amortized as royalties in cost of sales on a title-by-title basis
based on the greater of the proportion of current year sales to the total of
current and estimated future sales for that title or the contractual royalty
rate based on actual net product sales as defined in the respective agreements.
At each balance sheet date, we evaluate the recoverability of advanced
development payments and unrecognized minimum commitments not yet paid to
determine the amounts unlikely to be realized through product sales. Advance
payments are charged to cost of sales in the amount that management determines
is unrecoverable in the period in which such determination is made or if
management determines that it will cancel a development project.
Revenue
Recognition
We
evaluate the recognition of revenue based on the criteria set forth in
SOP 97-2, “Software Revenue Recognition”, as amended by SOP 98-9,
“Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions” and Staff Accounting Bulletin (“SAB”) No. 101,
“Revenue Recognition in Financial Statements”, as revised by SAB 104,
“Revenue Recognition”. We evaluate revenue recognition using the following basic
criteria:
|
|
·
|
Evidence
of an arrangement: We recognize revenues when we have evidence of an
agreement with the customer reflecting the terms and conditions to deliver
products.
|
|
|
·
|
Delivery:
Delivery is considered to occur when the products are shipped and risk of
loss has been transferred to the customer.
|
|
|
·
|
Fixed
or determinable fee: If a portion of the arrangement fee is not fixed or
determinable, we recognize that amount as revenues when the amount becomes
fixed or determinable.
|
|
|
·
|
Collection
is deemed probable: At the time of the transaction, we conduct a credit
review of each customer involved in a significant transaction to determine
the creditworthiness of the customer. Collection is deemed probable if we
expect the customer to be able to pay amounts under the arrangement as
those amounts become due. If we determine that collection is not probable,
we recognize revenues when collection becomes probable (generally upon
cash collection).
|
Product
Revenues
Product
revenues, including sales to resellers and distributions, are recognized when
the above criteria are met. We reduced product revenues for estimated customer
returns by distributing our products through experienced distributors with whom
we had previously worked.
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement”
(“FAS 157”). FAS 157 provides a single definition of fair value, together
with a framework for measuring it, and requires additional disclosure about the
use of fair value to measure assets and liabilities. FAS 157 emphasizes
that fair value is a market-based measurement, not an entity-specific
measurement, and sets out a fair value hierarchy with the highest priority being
quoted prices in active markets. FAS 157 is effective for fiscal years
beginning after November 15, 2007, which will be our fiscal year
2008. We are evaluating the impact, if any, the adoption of this statement
will have on our results of operations, financial position or cash
flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — Including an Amendment of
FASB Statement No. 115” (“FAS 159”). FAS 159 permits an entity to choose to
measure many financial instruments and certain other items at fair value at
specified election dates. Subsequent unrealized gains and losses on items for
which the fair value option has been elected will be reported in earnings. FAS
159 is effective for fiscal years beginning after November 15, 2007, which
will be our fiscal year 2008. We are evaluating the impact, if any, the adoption
of this statement will have on our results of operations, financial position or
cash flows.
In
December 2007, the FASB issued SFAS No. 141, “Business Combinations”
(“FAS 141R”). FAS 141R retains the fundamental requirements in FAS 141
that the acquisition method of accounting (which FAS 141 called the purchase
method) be used for all business combinations and for an acquirer to be
identified for each business combination. FAS 141R defines the acquirer as
the entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control. FAS 141R is effective for business combination
transactions for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008,
which will be our fiscal year 2009. We are evaluating the impact, if any,
the adoption of this statement will have on our results of operations, financial
position or cash flows.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements” (“FAS 160”). This Statement amends
ARB 51 to establish accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a non-controlling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. FAS 160 is effective for fiscal years
and interim periods within those fiscal years, beginning on or after
December 15, 2008, which will be our fiscal year 2009. We are
evaluating the impact, if any, the adoption of this statement will have on our
results of operations, financial position or cash flows.
Related
Party Transactions
See below
Part III.
ITEM 7. FINANCIAL STATEMENTS
The
required financial statements begin on Page F-1 of this document.
ITEM 8. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On April
2, 2007, the Company’s Board of Directors authorized the appointment of
Cordovano and Honeck, CPA’s of Englewood Colorado as the Company's new
independent auditors for periods subsequent to the September 30, 2006 . The
Company, its Board of Directors and/or management, did not consult with
Cordovano and Honeck at any time prior to the April 2, 2007 appointment,
regarding the Company's two most recent fiscal years ended December 31, 2006 and
2005, the subsequent interim period through the April 2, 2007 filing of the Form
8-K announcing this appointment event, and any of the matters or events set
forth in Item 304(a)(2)(i) and (ii) of Regulation S-B
.
ITEM 8A. DISCLOSURE
CONTROLS AND PROCEDURES
Definition
and Limitations of Disclosure Controls
Disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are controls
and other procedures that are designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer, or CEO, and Interim Chief Financial
Officer, or CFO, as appropriate, to allow timely decisions regarding required
disclosure.
It should
be noted that there are inherent limitations to the effectiveness of any system
of disclosure controls and procedures. These limitations include the
possibility of human error, the circumvention or overriding of the controls and
procedures and reasonable resource constrains. In addition, the
design of any system of control is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote. Accordingly, our controls and
procedures, by their nature, only provide reasonable assurance regarding
achieving the management's control objectives.
Evaluation
of Disclosure Controls and Procedures
As of
the end of the period covered by this report, we conducted an evaluation, under
the supervision and with the participation of our management, including our CEO
and CFO, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based upon this evaluation, our CEO and CFO concluded
that our disclosure controls and procedures were not effective to ensure that
the information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms, and is accumulated and
communicated to our management, including our CEO and CFO, as appropriate to
allow timely decisions regarding the required disclosure. We failed
to include a management’s report on internal control over financial reporting in
our original annual report filed on March 28, 2008, which rendered our annual
report material deficient. In light of such reporting error, our
management revised its conclusion on the effectiveness of our disclosure
controls and procedures contained in the original annual report and concluded
that our disclosure controls and procedures were not effective as of the end of
2007. This error was caused by insufficient review of the disclosure
in the annual report in light of the updated SEC rules by our
management. We have taken remedial measures and corrected this error
by including such management’s report in Amendment No. 1 to the annual report
subsequently filed with the SEC on August 21, 2008. Notwithstanding
the deficiency in disclosure controls and procedures that existed as of December
31, 2007, management has concluded that the consolidated financial statements
included in this annual report on Form 10-KSB present fairly, in all material
respects, the financial position, results of operation and cash flows of the
Company and its subsidiaries in conformity with U.S generally accepted
accounting principles (“GAAP”).
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act). Internal control over financial reporting is
a process designed under the supervision of our principal executive and
principal financial officers to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP. Internal control over financial
reporting is a process designed by, or under the supervision of, our principal
executive and principal financial officers, or persons performing similar
functions, and effected by our board of directors, management and other
personnel, 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 and
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 GAAP, 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.
Our
internal control over financial reporting is designed to provide reasonable, but
not absolute, assurance regarding the reliability of financial reporting and the
preparation of financial statements in accordance with generally accepted
accounting principles. There are inherent limitations to the
effectiveness of any system of internal control over financial
reporting. These limitations include the possibility of human error,
the circumvention or overriding of the system and reasonable resource
constraints. Because of its inherent limitations, our internal
control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with our
policies or procedures may deteriorate.
Under the
supervision and with the participation of our management, including our CEO and
CFO, we conducted an evaluation of the effectiveness of our internal control
over financial reporting as of December 31, 2007, based on the criteria
established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organization of Treadway Commission, or the COSO model. Based on
this assessment, our management believes that, as of the end of our most
recently completed fiscal year, our internal control over financial reporting
was effective as of December 31, 2007.
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
Controls
In
preparation for management’s report on internal control over financial
reporting, we documented and tested the design and operating effectiveness of
our internal control over financial reporting. Except as otherwise
discussed herein, there have been no changes in our internal controls over
financial reporting identified in connection with the evaluation required by
paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred
during the fourth fiscal quarter that has materially affected, or is
reasonably likely to materially, affect, our internal control over financial
reporting.
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Our
directors and executive officers are as follows:
|
Name
|
Age
|
Position
|
|
|
Willem
M. Smit
|
61
|
Director,
President, and Chief Executive Officer
|
|
|
Willy
J. Simon
|
57
|
Chairman
of the Board of Directors
|
|
|
George
M. Calhoun
|
55
|
Member
of the Board of Directors
|
|
|
Erik
L.A. van Emden
|
59
|
Member
of the Board of Directors
|
|
|
Rogier
W. Smit
|
33
|
Executive
Vice President
|
|
|
Wilbert
Knol
|
40
|
Chief
Financial Officer (ad interim)
|
|
|
Stefan
Layer
|
37
|
Chief
Marketing & Sales Officer
|
|
|
Dominique
Morel
|
34
|
Chief
Technology Officer
|
|
|
Pierre-Yves
Thiercelin
|
33
|
International
Sales Director
|
|
Biographical
Information
The
principal occupations and brief summary of the background of each director and
executive officer are as follows:
Willem M. Smit
has been the
Chief Executive Officer of Playlogic International since 2001. In July 2005, he
became Chief Executive Officer of the Company. In 1976, he founded Datex
Software B.V., where he grew the company over nine years from 20 to 900
employees. Datex went public in 1985 and it merged with Getronics in 1987. Since
that time, Mr. Smit has been a private investor in various companies. He is the
father of Rogier W. Smit, the Company's Executive Vice President.
Willy J. Simon
has been on
Playlogic International N.V.'s Supervisory Board (which is similar to the board
of directors of a US company) since 2003. In July 2005, he became Chairman and
Non Executive Director of the Company. He currently serves as a Non-Executive
Director of Redi & Partners Ltd., a hedge fund of hedge funds. He served
among others as Director of IMC Holding and Chairman of Bank Oyens & van
Eeghen. Moreover he acted as an Advisor to the Board of NIB Capital. From
1997-2001, he was an executive member of the Board of Fortis Bank
NL.
George M. Calhoun
became Non
Executive Director of the Company in November 2005. George Calhoun is currently
serving on the faculty of the Howe School of Technology Management at the
Stevens Institute of Technology in Hoboken, New Jersey. He was Chairman and CEO
of Illinois Superconductor Corporation from 1999 until 2002. He has more than 23
years of experience in high-tech wireless systems development, beginning in 1980
as part of the team that organized Inter Digital Communications Corporation,
where he participated in the development of the first commercial application of
digital TDMA radio technology, and introduced the first wireless local loop
system to the North American telecommunications industry. Dr. Calhoun holds a
Ph.D. in Systems Science from the Wharton School at the University of
Pennsylvania, as well as a B.A. from the same university.
Erik L.A. van Emden
has been
on Playlogic International N.V.’s Supervisory Board since December 2003. In
July 2005, he became Non Executive Director of the Company. Since 1993 Van Emden
has been an attorney and partner with Bosselaar & Strengers, a law firm
based in Utrecht, the Netherlands, which focuses on large and medium-sized
companies. The firm specializes in practices including employment, liability
& insurance, real estate and corporate. Van Emden specializes in corporate
law and is coordinator of the corporate law practice group. Previously, Van
Emden was Board Member of the Amsterdam Stock Exchange and Member of the
Executive Board of Credit Lyonnais Bank Nederland N.V. He also held positions at
Barclays Bank and Algemene Bank Nederland. In addition, Van Emden currently
serves as a Director of several private Dutch companies.
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.
Stefan Layer
has been Chief
Marketing & Sales Officer / VP of Playlogic International N.V. since April
2005 and of the Company since July 2005. From 1999 until joining us, Mr. Layer
was the Vice President Licensing Europe for Atari Deutschland GmbH where he was
responsible for the expansion to new markets, the European licensing business
and the acquisition of IP rights. Mr. Layer defined the European licensing
strategy of Atari Europe for digital distribution, OEM and premium sales and
managed the expansion to Eastern Europe.
Wilbert Knol
became the
Company's Chief Financial Officer ad interim on November 1, 2006 following Jan
Willem Kohne’s resignation as CFO per the same date. Mr. Knol has held several
financial and operational positions with among others Hill Rom a division of
Hillebrand Industries Inc. (NYSE) (1999-2005) and Coopers & Lybrand
(1992-1997). Mr. Knol received his RA Degree (the Dutch equivalent of a CPA
Degree) from Amsterdam University the Netherlands in 1999.
Dominique
Morel
has joined the Company
as Chief Technology Officer in September 2005. He has a key strategic role in
our business development, evaluation process and current and future line-up.
Before Morel joined the company, he was Project Evaluation & Business
Development Manager of Atari Europe. In this position he signed major deals
(Next-Gen, PC, PS2). He also initiated and established the "Business
Opportunities On-line Database" for Atari worldwide. In this period with Atari
he has acquired an extensive network in the European developer community. Prior
to this, Morel worked as Project Evaluation & Game Play Consulting Manager
for Atari/Infogrames, which involved analyzing and ensuring the Game Play and
Game Design Consulting for over 120 published games. All together Morel worked
with Atari for more than 10 years and has been an important internal consultant
for many production decisions for Atari worldwide.
Pierre-Yves Thiercelin
has
joined the Company as International Sales Director in March 2007 and actively
contributes to the further development of the company’s distribution network.
Mr. Thiercelin has over 9 years experience in international trade working for
various video games companies such as Midway, Novalogic and Ignition and also
for non video games companies such as Samsung.
The
directors named above will serve until the next annual meeting of our
stockholders or until his successor is duly elected and has qualified. Directors
will be elected for one-year terms at the annual stockholders meeting. There is
no arrangement or understanding between any of our directors or officers and any
other person pursuant to which any director or officer was or is to be selected
as a director or officer, and there is no arrangement, plan or understanding as
to whether non-management stockholders will exercise their voting rights to
continue to elect the current directors to our Board of Directors. There are
also no arrangements, agreements or understandings between non-management
stockholders that may directly or indirectly participate in or influence the
management of our affairs.
Indemnification of
Officers and Directors
Our
Certificate of Incorporation provides that we will indemnify any officer or
director, or former officer or director, to the fullest extent permitted by law.
Our bylaws provide for the indemnification of our directors, officers,
employees, and agents, under certain circumstances, against expenses incurred by
them in any litigation to which they become a party arising from their
association with or activities on behalf of our Company. We will also bear the
expenses of such litigation for any of our directors, officers, employees, or
agents, upon such person's promise to repay us therefore if it is ultimately
determined that any such person shall not have been entitled to
indemnification.
Conflicts of
Interest
Our officers, directors and principal
stockholders may actively negotiate for the purchase of a portion of their
common stock as a condition to, or in connection with, a proposed merger or
acquisition transaction. It is anticipated that a substantial premium may be
paid by the purchaser in conjunction with any sale of shares by our officers,
directors and principal stockholders made as a condition to, or in connection
with, a proposed merger or acquisition transaction. The fact
that a substantial premium may be paid
to members of our management to acquire their shares creates a conflict of
interest for them and may compromise their state law fiduciary duties to our
other stockholders. In making any such sale, members of our management may
consider their own personal pecuniary benefit rather than our best interests and
the best interests of our other stockholders, and the other stockholders are not
expected to be afforded the opportunity to approve or consent to any particular
buy-out transaction involving shares held by members of our management.
Although our management has no current
plans to cause the Company to do so, it is possible that we may enter into an
agreement with an acquisition candidate requiring the sale of all or a portion
of the common stock held by our current stockholders to the acquisition
candidate or principals thereof, or to other individuals or business entities,
or requiring some other form of payment to our current stockholders, or
requiring the future employment of specified officers and payment of salaries to
them. It is more likely than not that any sale of securities by our current
stockholders to an acquisition candidate would be at a price substantially
higher than that originally paid by such stockholders. Any payment to current
stockholders in the context of an acquisition involving our Company would be
determined entirely by the largely unforeseeable terms of a future agreement
with an unidentified business entity.
Involvement
in Certain Legal Proceedings
During
the past five years, no present or former director, executive officer or person
nominated to become a director or an executive officer of our
Company:
|
|
1.
|
was
a general partner or executive officer of any business against which any
bankruptcy petition was filed, either at the time of the bankruptcy or two
years prior to that time;
|
|
|
2.
|
was
convicted in a criminal proceeding or named subject to a pending criminal
proceeding (excluding traffic violations and other minor
offenses);
|
|
|
3.
|
was
subject to any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities or banking activities;
or
|
|
|
4.
|
was
found by a court of competent jurisdiction (in a civil action), the
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment has not
been reversed, suspended or
vacated.
|
Beneficial
Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 and regulations of the SEC there
under require the Company’s executive officers and directors, and persons who
own more than ten percent of a registered class of the Company’s equity
securities, to file reports of initial ownership and changes in ownership with
the SEC. Based solely on its review of copies of such forms received by the
Company, or on written representations from certain reporting persons that no
other reports were required for such persons, the Company believes that during
2007, 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
2007, the Company's Board of Directors had four Directors. During 2007 the Board
met five times on an executive base.
Audit
Committee
The
Company established an Audit Committee on October 31, 2005. Messrs. Calhoun
(Chairman), Van Emden and Simon are the members of the Audit
Committee.
The Audit
Committee assists the Board of Directors in its oversight of the integrity of
the Company's accounting, auditing and reporting practices. The Board of
Directors has determined that Mr. Simon possesses the attributes to be
considered financially sophisticated and has the background to be considered an
"audit committee financial expert" as defined by the rules and regulations of
the SEC. The Audit Committee will meet with the Company's independent
accountants at least annually to review the results of the Company's annual
audit and discuss the financial statements. The Committee will also meet
quarterly with our independent accountants to discuss the results of the
accountants' quarterly reviews as well as quarterly results and quarterly
earnings releases; recommend to the Board that the independent accountants be
retained; and receive and consider the accountants' comments as to internal
controls, adequacy of staff and management performance and procedures in
connection with audit and financial controls.
The Audit
Committee will review all financial reports prior to filing with the SEC. The
specific responsibilities in carrying out the Audit Committee's oversight role
are set forth in the Audit Committee's Charter. All of the members of the Audit
Committee are independent directors as contemplated by Section 10A (m)(3) of the
Securities and Exchange Act, as amended.
During
2007 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
2007 one meeting were 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
2007 no meetings were held by the Governance Committee
Code
of Business Conduct and Ethics
The
Company's board of directors has adopted in December 2005 a Code of Business
Conduct and Ethics that applies to all of our directors, officers and employees
and an additional Code of Business Ethics that applies to our Chief Executive
Officer and senior financial officers.
The
Company plans to satisfy the disclosure requirement under Item 5.05 of Form 8-K
relating to amendments to or waivers from provisions of these codes by
describing on our Internet website, located at
http://www.playlogicinternational.com, within four business days following the
date of a waiver or a substantive amendment, the nature of the amendment or
waiver, the date of the waiver or amendment, and the name of the person to whom
the waiver was granted.
Information
on the Company’s internet website is not, and shall not be deemed to be, a part
of this 10-KSB or incorporated into any other filings the Company makes with the
SEC.
Director
Nomination
Criteria for Board
Membership.
In selecting candidates for appointment or re-election to the
Board, the Nominating and Governance Committee considers the appropriate balance
of experience, skills and characteristics required of the Board of Directors,
and seeks to insure that at least a majority of the directors are independent
under the rules of the NASDAQ Stock Market, and that members of the Company’s
Audit Committee meet the financial literacy and sophistication requirements
under the rules of the NASDAQ Stock Market and at least one of them qualifies as
an “audit committee financial expert” under the rules of the Securities and
Exchange Commission. Nominees for director are selected on the basis of their
depth and breadth of experience, integrity, ability to make independent
analytical inquiries, understanding of the Company’s business environment, and
willingness to devote adequate time to Board duties.
Stockholder Nominees.
The
Nominating Committee will consider written proposals from stockholders for
nominees for director. Any such nominations should be submitted to the
Nominating Committee c/o the Secretary of the Company and should include the
following information: (a) all information relating to such nominee that is
required to be disclosed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 (including such person’s written consent to being named in
the Proxy Statement as a nominee and to serving as a director if elected);
(b) the names and addresses of the stockholders making the nomination and
the number of shares of the Company’s common stock which are owned beneficially
and of record by such stockholders; and (c) appropriate biographical
information and a statement as to the qualification of the nominee, and should
be submitted in the time frame described in the Bylaws of the Company and under
the caption, “Stockholder Proposals for the Next Annual Meeting”
below.
Process for Identifying and
Evaluating Nominees.
The Nominating Committee believes the Company is
well-served by its current directors. In the ordinary course, absent special
circumstances or a material change in the criteria for Board membership, the
Nominating Committee will renominate incumbent directors who continue to be
qualified for Board service and are willing to continue as directors. If an
incumbent director is not standing for re-election, or if a vacancy on the Board
occurs between annual stockholder meetings, the Nominating Committee will seek
out potential candidates for Board appointment who meet the criteria for
selection as a nominee and have the specific qualities or skills being sought.
Director candidates will be selected based on input from members of the Board,
senior management of the company and, if the nominating committee deems
appropriate, a third-party search firm. The Nominating Committee will evaluate
each candidate's qualifications and check relevant references; in addition, such
candidates will be interviewed by at least one member of the nominating
committee. Candidates meriting serious consideration will meet with all members
of the Board. Based on this input, the Nominating Committee will evaluate which
of the prospective candidates is qualified to serve as a director and whether
the committee should recommend to the Board that this candidate be appointed to
fill a current vacancy on the Board, or presented for the approval of the
stockholders, as appropriate.
The Company has never received a
proposal from a stockholder to nominate a director. Although the Nominating
Committee has not adopted a formal policy with respect to stockholder nominees,
the committee expects that the evaluation process for a stockholder nominee
would be similar to the process outlined above.
ITEM
10. EXECUTIVE COMPENSATION
The
following table sets forth information regarding compensation for the fiscal
years ended December 31, 2005, 2006 and 2007 received by the individual who
served as Playlogic International's Chief Executive Officer during 2007 and
Playlogic International’s other most highly compensated executive officers whose
total annual salary and bonus for fiscal year 2007 exceeded $100,000 (the “Named
Officers”).
Summary
Compensation Table
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|
|
Long-Term
|
Payouts
|
All
Other Compensation
|
|
|
Annual
Compensation
|
Compensation
Awards
|
|
|
|
Name
and Principal Position as of December 31, 2007
|
Year
|
Salary
€/($)
|
Bonus
($)
|
Other
Annual Compensation ($)
|
Restricted
Stock Awards (2)
|
Securities
Underlying Options/SARs (#)
|
LTIP
Payouts ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
Willem
M. Smit (1)
Chief
Executive Officer
|
2007
2006
2005
|
€0
€0
€0
|
|
--
|
|
200,000
(8)
|
--
|
|
|
Sloterhof
Investments N.V. (of which Mr. Willem M. Smit is the beneficial owner)
Managing
Director
|
2007
2006
2005
|
€0
€0
€0
|
|
--
|
|
|
--
|
|
|
Rogier
W. Smit
Executive
Vice President
|
2007
2006
2005
|
€143,000/$196,098
€143,000/$188,559
€143,000/$178,250
|
|
--
|
|
200,000
(11)
|
--
|
|
|
Wilbert
Knol Chief Financial Officer a.i.
|
2007
2006
2005
|
€105,413/$144,554
€99,537/$131,249
€7,716/$10,174
|
|
|
|
60,000
(7)
|
|
|
|
Stefan Layer Chief Marketing
& Sales Officer / VP
|
2007
2006
2005
|
€143,000/$196,098
€143,000/$188,559
€143,000/$178,250
|
$16,800
$67,200
$67,200
|
--
|
$245,000
(3)
|
|
--
|
|
|
Maarten
Minderhoud General Counsel
|
2007
2006
2005
|
€143,000/$196,098
€143,000/$188,559
€143,000/$178,250
|
0
|
--
|
$21,000
(4)
|
40,000
(5)
|
--
--
|
|
|
Dominique Morel Chief Technology
Officer
|
2007
2006
2005
|
€143,000/$196,098
€143,000/$188,559
€143,000/$178,250
|
0
|
--
|
|
100,000
(9)
100,000
(6)
|
--
--
|
|
|
Pierre-Yves
Thiercelin
International
Sales Director (10)
|
2007
2006
2005
|
€
48,500/$66,500
-
-
|
|
--
|
|
75,000
(10)
|
--
|
|
_____________________
|
(1)
|
Willem
M. Smit, the Company's Chief Executive Officer, will not receive any
salary until there are positive cash flows from operations. Currently, the
Company only pays Mr. Smit for his business related expenses, and it
provides him a company car.
|
|
(2)
|
Calculated
by multiplying the amount of restricted stock by the restated value for
Dutch income tax purposes of the restricted stock grant ($.70 per
share).
|
|
(3)
|
In
connection with Mr. Layer’s employment arrangement, we sold 364,556
restricted shares to Mr. Layer, our Chief Marketing & Sales Officer at
an aggregate price of $1. The restricted shares have two years’ lock-up
period during which Mr. Layer cannot sell the
shares.
|
|
(4)
|
In
connection with Mr. Minderhoud’s employment arrangement with the Company
we sold 30,000 restricted shares to Mr. Minderhoud at an aggregate price
of $1. The restricted shares have a two-year lock up period during which
Mr. Minderhoud can not sell the
shares.
|
|
(5)
|
We
granted to Mr. Minderhoud, 40,000 options to purchase shares of our common
stock at an exercise price of $3.50 per share. A total of 10,000 shares of
these options vested on October 1, 2007, and the remaining options will
vest in three equal installments on September 1, 2008, September 1, 2009
and September 1, 2010.
|
|
(6)
|
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
|
|
(7)
|
We
granted to Mr. Knol, 60,000 options to purchase shares of our common stock
at an exercise price of $2.50 per share. A total of 20,000 shares of these
options will vest on May 4, 2008, and the remaining options will vest in
two equal installments on May 4, 2009, May 4,
2010.
|
|
(8)
|
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.
|
|
(9)
|
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.
|
|
(10)
|
We
granted to Mr. P.Y. Thiercelin, 75,000 options to purchase shares of our
common stock at an exercise price of $1.30 per share. A total of 25,000
shares of these options will vest on August 28, 2009, and the remaining
options will vest in two equal installments on August 28, 2010 and August
28, 2011. Mr. Thiercelin joined the Company in March 2007 as International
Sales Director.
|
STOCK OPTIONS AND STOCK APPRECIATION
RIGHTS
We
established a stock option plan for employees that became effective in August
2007.
The
following table contains information concerning the grant of stock options under
individual employment arrangements with the Executive Officers made during the
fiscal year of 2007.
|
Name
(1)
|
Grant
and
approval
date
|
Closing
Price
on
Grant date
|
Number
of
Securities
Underlying
Options/SARs
granted
|
Percentage
of Total
Options/SARs
granted to
employees
in fiscal year
|
Exercise
or
Base
Price ($/Sh)
|
Expiration
date
|
|
Willem
M. Smit (Chief Executive Officer)
|
August
28, 2007
|
$0.75
|
200,000
|
21%
|
$1.30
|
August
28, 2011
|
|
Rogier
W. Smit (Executive vice President)
|
August
28, 2007
|
$0.75
|
200,000
|
21%
|
$1.30
|
August
28, 2011
|
|
Dominque
Morel (CTO)
|
August
28, 2007
|
$0.75
|
100,000
|
10%
|
$1.30
|
August
28, 2011
|
|
W.
Simon (Chairman of the Board of Directors)
|
August
28, 2007
|
$0.75
|
112,500
|
12%
|
$1.30
|
August
28, 2010
|
|
E.
van Emden (member of the Board of Directors)
|
August
28, 2007
|
$0.75
|
62,500
|
6%
|
$1.30
|
August
28, 2010
|
|
G.
Calhoun (member of the Board of Directors)
|
August
28, 2007
|
$0.75
|
62,500
|
6%
|
$1.30
|
August
28, 2010
|
|
Pierre-Yves
Thiercelin (International Sales Director)
|
August
28, 2007
|
$0.75
|
75,000
|
7%
|
$1.30
|
August
28, 2011
|
____________
(1)
See applicable
footnotes to above Summary Compensation
Table.
|
Option
Exercises and Holdings
During
the fiscal year ended December 31, 2007, 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 as disclosed in the table above. The
options have a three year term and vest on April 1, 2008. The stock price on the
day of the option grant was $0.75.
Employment
Agreements
Mr. Rogier W. Smit,
Executive Vice President has an employment agreement for an indefinite period,
but can be terminated by the Company upon twelve months notice or by Mr. Smit
upon six months notice. Mr. Smit´s base salary amounts to $16,000 (€11,000) per
month. In addition to his salary, Mr. Smit is entitled to a company car.
Pursuant to the agreement, Mr. Smit is also subject to confidentiality,
non-competition and invention assignment requirements.
Mr. Stefan Layer, Chief
Marketing & Sales Officer, has an employment agreement for an indefinite
period, but can be terminated by the Company upon six months notice or by Mr.
Layer upon three months notice. Mr. Layer's base salary is $16,000 (€11,000) per
month. In addition to his salary, Mr. Layer is entitled to an annual bonus equal
to 1% of our net profit of the net consolidated year figures after taxes and a
company car. Under this agreement, Mr. Layer received 500,000 ordinary shares of
Playlogic International at a nominal value of $0.068 (€0.05) per share which
were exchanged for 364,556 shares of the Company's common stock. Such shares are
subject to a two-year lock up period. After the lock up period Mr. Layer will be
permitted to sell up to 50% of his shares each year. If Mr. Layer terminates the
agreement or is dismissed, the shares he still owns must be sold back to the
Company at nominal value. Pursuant to the agreement, Mr. Layer is also subject
to confidentiality, non-competition and invention assignment
requirements.
Mr.
Maarten Minderhoud , General Counsel, has an employment agreement for an
indefinite period but can be terminated by the Company upon six months notice or
by Mr. Minderhoud upon 3 months notice. Mr. Minderhoud’s base salary is $16,100
( € 11,034) per month. . In addition to his salary, Mr. Minderhoud is
entitled to a company car. On September 1, 2005, pursuant to the agreement, Mr.
Minderhoud received 30,000 shares of the Company's common stock at par value of
$0.001. Such shares will be subject to a two-year lock up period. After the lock
up period Mr. Minderhoud will be permitted to sell up to 50% of his shares each
year. Pursuant to the agreement, Mr. Minderhoud was granted 40,000 options to
purchase shares of common stock of the Company at an exercise price of $3.50 per
share. 10,000 of these options vested on September 1, 2007, and 10,000 of the
remaining options will vest on September 1, 2008, September 1, 2009 and
September 1, 2010. Pursuant to the agreement, Mr. Minderhoud is also subject to
confidentiality, non-competition and invention assignment
requirements.
Mr.
Dominique Morel, Chief Technology Officer, has an employment agreement for an
indefinite period but can be terminated by the Company upon six months notice or
by Mr. Morel upon 3 months notice. Mr. Morel’s base salary will be $16,000
(€11,000) per month. In addition to his salary, Mr. Morel is entitled to a
company car. Pursuant to the agreement, Mr. Morel was granted 100,000 options to
purchase shares of common stock of the Company at an exercise price of $3.50 per
share. 25,000 of these options vested on October 1, 2007, and 25,000 of the
remaining options will vest on October 1, 2008, October 1, 2009 and October 1,
2010. Pursuant to the agreement, Mr. Morel is also subject to confidentiality,
non-competition and invention assignment requirements.
Mr. Wilbert
Knol, Interim Chief Financial Officer, has an employment agreement is for an
indefinite period but can be terminated by the Company upon two months notice or
by Mr. Knol upon 1 months notice. Mr. Knol ’s base salary as CFO a.i. is $13,700
(€9,336) per month. In addition to his salary, Mr. Knol is entitled to a company
car. Pursuant to the agreement w e granted to Mr. Knol, 60,000 options to
purchase shares of our common stock at an exercise price of $2.50 per share. A
total of 20,000 shares of these options will vest on May 4, 2008, and the
remaining options will vest in two equal installments on May 4, 2009, May 4,
2010. Pursuant to the agreement, Mr. Knol is also subject to confidentiality,
non-competition and invention assignment requirements.
Mr.
Pierre-yves Thiercelin, International Sales Director, joined Playlogic in March
2007 and actively contributes to the further development of the company’s
distribution network. Mr. Thiercelin has over 9 years experience in
international trade working for various video games companies such as Midway,
Novalogic and Ignition and also for non video games companies such as
Samsung.
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 2007, 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, 2007.
|
Name
and Address
(1)
|
|
Number
of Shares
of
Common Stock
|
|
|
Percentage
of
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
Sloterhof
Investments N.V.
Pietermaai
15
Curacao,
Netherlands Antilles
|
|
|
7,303,357
|
|
|
|
18.95
|
%
|
|
Castilla
Investments B.V.
Concertgebouwplein
13
1071
LL Amsterdam
The
Netherlands
|
|
|
1,777,496
|
|
|
|
4.6
|
%
|
|
Wind
Worth Luxembourg Holding S.A.H
19
Rue de l’Industrie
8069
Betrange
Luxembourg
|
|
|
2,138,874
|
|
|
|
5.55
|
%
|
|
Willem
Smit
(2)
|
|
|
7,303,357
|
|
|
|
18.95
|
%
|
|
Rogier
Smit
(3)
|
|
|
1,777,496
|
|
|
|
4.6
|
%
|
|
Stefan
Layer
|
|
|
364,556
|
|
|
|
*
|
|
|
Erik
L.A. van Emden
|
|
|
0
|
|
|
|
*
|
|
|
Willy
J. Simon
|
|
|
87,494
|
|
|
|
*
|
|
|
George
M. Calhoun
|
|
|
200
|
|
|
|
*
|
|
|
All
directors and executive officers as a group
|
|
|
9,533,103
|
|
|
|
24.74
|
%
|
*Less
than 1%
___________
(1)
Unless otherwise
indicated, the address is our address at Concertgebouwplein 13, 1071 LL
Amsterdam, and The Netherlands.
(2)
Includes shares held by
Sloterhof Investments N.V. a company beneficially owned by Mr. W.
Smit.
(3)
Includes shares held by
Castilla Investments B.V. a company beneficially owned by Mr. R.
Smit.
I
TEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
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.
I
TEM 13. EXHIBITS
AND FINANCIAL STATEMENTS
SCHEDULES
|
|
(a)
|
Documents
filed as part of Form 10-KSB
|
The
following financial statements of the Company are submitted in a separate
section pursuant to the requirements of Form 10-KSB, Part I, Item 8 and Part IV,
Items 14(a) and 14(d):
Index to Consolidated Financial Statements
Report
of Independent Registered Public Accounting Firm
Consolidated Balance Sheet
Consolidated Statements of Operations and Comprehensive Income
Consolidated Statement of Changes in Shareholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to
Consolidated Financial Statements
2.
Schedules
Supporting Financial Statements:
All
schedules are omitted because they are not required, are inapplicable, or the
information is otherwise shown in the consolidated financial statements or notes
to the consolidated financial statements.
3. Exhibits:
Exhibit
Index
|
Exhibit
31.1
|
Certification
of Chief Executive Officer pursuant to Rule
13a-14(a)/15-14(a)
|
Filed
Herewith
|
|
Exhibit
31.2
|
Certification
of Chief Financial Officer pursuant to Rule
13a-14(a)/15-14(a)
|
Filed
Herewith
|
|
Exhibit
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
|
Filed
Herewith
|
|
Exhibit
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
|
Filed
Herewith
|
I
TEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit
Fees.
The
aggregate fees billed by Cordovano & Honeck for professional services
rendered for the review of financial statements included in the Company's Forms
10-QSB for the quarters ended March 31, 2007, June 30, 2007 and September 30,
2007 as included in the Company’s Forms 10-QSB as well as for the audit of the
financial statements ended December 31, 2007 as included in the Company’s 10-KSB
were $99,000.
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-QSB for the quarter ended March 31, 2007, June 30, 2007 and September 30,
2007 as well as for the audit of the financial statements ended December 31,
2007 as included in the Company’s 10-KSB were $78,000.
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, 2007.
Tax
Fees.
The
aggregate fees billed for tax compliance, tax advice or tax planning services by
DRV for the fiscal year ended December 31, 2007 were $8,150.
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, 2007.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
|
|
|
|
|
Playlogic
International, INC.
|
|
|
|
|
|
Dated: October
10, 2008
|
By:
|
/s/ Willem
M. Smit
|
|
|
Chief
Executive Officer
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
|
Capacity
in Which Signed
|
Date
|
|
|
|
|
|
|
/s/Willy J.. Simon
|
|
Chairman
of the Board
|
October
10, 2008
|
|
Willy
J. Simon
|
|
|
|
|
|
|
|
|
|
/s/ Willem M. Smit
|
|
Director
and Chief Executive Officer
|
October
10, 2008
|
|
Willem
M. Smit
|
|
|
|
|
|
|
|
|
|
/s/ Wilbert Knol
|
|
Chief
Financial Officer
(Principal
Financing and Accounting Officer)
|
October
10, 2008
|
|
Wilbert
Knol
|
|
|
|
|
|
|
|
|
|
/s/ Erik L.A. van Emden
|
|
Director
|
October
10, 2008
|
|
Erik
L.A. van Emden
|
|
|
|
|
|
|
|
|
|
/s/ George M. Calhoun
|
|
Director
|
October
10, 2008
|
|
George
M. Calhoun
|
|
|
|
PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
CONTENTS
|
|
Page
|
|
|
|
|
Reports of Independent
Registered Public Accounting Firms
|
F-2
|
|
|
|
|
Consolidated
Financial Statements
|
|
|
|
|
|
Consolidated
Balance Sheet as of December 31, 2007
|
F-3
|
|
|
|
Consolidated
Statements of Operations
for the year ended December 31, 2007 and
2006
|
F-4
|
|
|
|
|
Consolidated
Statement of Changes in Shareholders' Equity for the year ended December
31, 2007 and 2006
|
F-5
|
|
|
|
|
Consolidated
Statements of Cash Flows for the year ended December 31, 2006 and 2006
|
F-6
|
|
|
|
|
Notes
to the Consolidated Financial Statements
|
F-7
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders
Playlogic
Entertainment, Inc.
We have
audited the accompanying consolidated balance sheet of Playlogic Entertainment,
Inc. as of December 31, 2007, and the related consolidated statements of
operations and comprehensive loss, changes in shareholders equity, and cash
flows for the years ended December 31, 2007 and 2006. 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 audit.
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 audit 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, 2007, and the consolidated results of
their operations and their cash flows for the years ended December 31, 2007 and
2006 in conformity with accounting principles generally accepted in the United
States of America.
/s/
Cordovano and Honeck LLP
Cordovano
and Honeck LLP
Englewood,
Colorado
March 24,
2008
March 24, 2008, (except Note A –
“revenue recognition policy”, which is August 21,
2008)
PLAYLOGIC
ENTERTAINMENT INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET
December
31, 2007
|
ASSETS
|
|
|
Current
Assets
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
349,464
|
|
|
Receivables
|
|
|
|
|
|
Trade,
net of allowance for doubtful accounts of $356,043
|
|
|
671,148
|
|
|
Officers
|
|
|
78,754
|
|
|
Related
party
|
|
|
50,620
|
|
|
Current
portion of software development costs
|
|
|
6,244,843
|
|
|
Prepaid
expenses and other
|
|
|
892,855
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
8,287,684
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation of
$2,091,749
|
|
|
753,768
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
Software
development costs, net of current portion
|
|
|
1,040,510
|
|
|
|
|
|
|
|
|
|
|
$
|
10,081,962
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Accounts
and notes payable
|
|
|
|
|
|
Accounts
payable
|
|
$
|
4,785,678
|
|
|
Note
payable to bank
|
|
|
1,056,552
|
|
|
Note
payable, other
|
|
|
397,845
|
|
|
Other
current liabilities
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
|
44,205
|
|
|
Accrued
liabilities
|
|
|
2,142,754
|
|
|
Deferred
revenues
|
|
|
148,750
|
|
|
Indebtedness
to related party
|
|
|
589,400
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
9,165,184
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
|
|
|
Note
payable, net of current maturities
|
|
|
221,025
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
9,386,209
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
Preferred
stock - $0.001 par value. 20,000,000 shares authorized. None issued and
outstanding
|
|
|
-
|
|
|
Common
stock - $0.001 par value.100,000,000 shares
authorized. 38,532,580 shares issued and
outstanding
|
|
|
38,533
|
|
|
Additional
paid-in capital
|
|
|
54,081,832
|
|
|
Deferred
Compensation-Employee Stock Options
|
|
|
374,571
|
|
|
Accumulated
currency translation adjustments reserve
|
|
|
(3,057,297
|
)
|
|
Accumulated
deficit
|
|
|
(50,741,886
|
)
|
|
|
|
|
695,753
|
|
|
|
|
|
|
|
|
|
|
$
|
10,081,962
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
PLAYLOGIC
ENTERTAINMENT INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
Years
ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Sales,
net of returns and allowances
|
|
$
|
10,099,746
|
|
|
$
|
5,042,516
|
|
|
Cost
of sales
|
|
|
|
|
|
|
|
|
|
Direct
costs and license fees
|
|
|
(2,673,675
|
)
|
|
|
(3,001,618
|
)
|
|
Amortisation
of software development costs
|
|
|
(2,386,223
|
)
|
|
|
(835,461
|
)
|
|
|
|
|
(5,059,898
|
)
|
|
|
(3,837,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
5,039,848
|
|
|
|
1,205,437
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
542,215
|
|
|
|
2,135,832
|
|
|
Selling
and marketing
|
|
|
1,020,674
|
|
|
|
1,343,722
|
|
|
General
and administrative
|
|
|
3,430,683
|
|
|
|
5,879,920
|
|
|
Asset
impairment charges
|
|
|
68,566
|
|
|
|
1,907,117
|
|
|
Depreciation
|
|
|
297,292
|
|
|
|
315,174
|
|
|
Total
operating expenses
|
|
|
5,359,430
|
|
|
|
11,581,765
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(319,582
|
)
|
|
|
(10,376,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
income/(expense)
|
|
|
|
|
|
|
|
|
|
Gain
on debt restructuring
|
|
|
850,411
|
|
|
|
-
|
|
|
Interest
expense
|
|
|
(1,164,250
|
)
|
|
|
(917,972
|
)
|
|
Loan
penalty expense
|
|
|
1,377,150
|
|
|
|
(1,254,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for income taxes
|
|
|
743,729
|
|
|
|
(12,548,400
|
)
|
|
Provision
for Income Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
743,729
|
|
|
$
|
(12,548,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
|
-
basic and fully diluted
|
|
$
|
0.03
|
|
|
$
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of shares of common stock outstanding
|
|
|
|
|
|
|
|
|
|
-
basic and fully diluted
|
|
|
29,410,954
|
|
|
|
24,482,474
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Additional
Paid-in
Capital
|
|
|
Deferred
Compensation
|
|
|
Stock
Subscription Receivable
|
|
|
Accumulated
deficit
|
|
|
Accumulated
Other Comprehensive Loss
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at January 1, 2006
|
|
|
24,057,207
|
|
|
$
|
24,057
|
|
|
$
|
39,963,035
|
|
|
$
|
-
|
|
|
$
|
(1,229,344
|
)
|
|
$
|
(38,937,215
|
)
|
|
$
|
(1,531,523
|
)
|
|
$
|
(1,710,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for cash
|
|
|
647,887
|
|
|
|
648
|
|
|
|
1,706,474
|
|
|
|
-
|
|
|
|
(190,560
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,516,562
|
|
|
Offering
costs
|
|
|
|
|
|
|
|
|
|
|
(17,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,599
|
)
|
|
Loan
conversions into shares
|
|
|
627,015
|
|
|
|
627
|
|
|
|
720,442
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
721,069
|
|
|
Common
stock warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Collections
on stock subscriptions receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,419,904
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,419,904
|
|
|
Capital
contributed to support operations
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
Change
in currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(908,017
|
)
|
|
|
(908,017
|
)
|
|
Stock
options issued pursuant to Employee Compensation Plan
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
414,040
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
414,040
|
|
|
Non
cash interest charge
|
|
|
-
|
|
|
|
-
|
|
|
|
123,760
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
123,760
|
|
|
Net
loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,548,400
|
)
|
|
|
-
|
|
|
|
(12,548,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2006
|
|
|
25,332,109
|
|
|
|
25,332
|
|
|
|
42,596,112
|
|
|
|
414,040
|
|
|
|
-
|
|
|
|
(51,485,615
|
)
|
|
|
(2,439,541
|
)
|
|
|
(10,889,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for cash
|
|
|
2,648,278
|
|
|
|
2,649
|
|
|
|
2,732,370
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,735,019
|
|
|
Issuing
costs
|
|
|
|
|
|
|
|
|
|
|
(113,052
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(113,052
|
)
|
|
Common
stock issued to settle vendor payables
|
|
|
3,413,598
|
|
|
|
3,414
|
|
|
|
2,921,018
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,924,432
|
|
|
Common
stock issued in exchange for debt
|
|
|
7,138,595
|
|
|
|
7,139
|
|
|
|
5,845,384
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,852,523
|
|
|
Capital
contributed to support operations
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
Stock
options issued pursuant to Employee Compensation Plan
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(39,469
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
(39,469
|
)
|
|
Change
in currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(617,757
|
)
|
|
|
(617,751
|
)
|
|
Net
loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
743,729
|
|
|
|
|
|
|
|
743,723
|
|
|
Balances
at December 31, 2007
|
|
|
38,532,580
|
|
|
$
|
38,533
|
|
|
$
|
54,081,832
|
|
|
$
|
374,571
|
|
|
$
|
-
|
|
|
$
|
(50,741,886
|
)
|
|
$
|
(3,057,297
|
)
|
|
$
|
695,753
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
Years
ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
743,729
|
|
|
$
|
(12,548,400
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
287,292
|
|
|
|
315,174
|
|
|
Amortization
of software development costs
|
|
|
1,343,229
|
|
|
|
835,461
|
|
|
Bad
debt expense
|
|
|
-
|
|
|
|
280,834
|
|
|
Share-based
payment
|
|
|
(39,469
|
)
|
|
|
537,800
|
|
|
Warrant
derivatives
|
|
|
-
|
|
|
|
8,800
|
|
|
Asset
impairment charge
|
|
|
-
|
|
|
|
1,907,117
|
|
|
Management
fees contributed as capital
|
|
|
100,000
|
|
|
|
100,000
|
|
|
(Increase)/
Decrease in cash attributable to changes in operating assets and
liabilities :
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
160,105
|
|
|
|
(146,420
|
)
|
|
Accounts
receivable - trade and other
|
|
|
154,940
|
|
|
|
(308,987
|
)
|
|
Prepaid
expenses and other
|
|
|
(17,345
|
)
|
|
|
(993,488
|
)
|
|
Increase
/ (Decrease) in:
|
|
|
|
|
|
|
|
|
|
Deferred
revenue
|
|
|
(1,234,181
|
)
|
|
|
1,244,976
|
|
|
Accounts
payable - trade
|
|
|
(67,904
|
)
|
|
|
1,828,600
|
|
|
Payroll
taxes payable
|
|
|
(1,863,260
|
)
|
|
|
1,874,025
|
|
|
Payroll
taxes paid through equity subscription
|
|
|
1,644,587
|
|
|
|
-
|
|
|
Other
current liabilities
|
|
|
(2,714,705
|
)
|
|
|
380,592
|
|
|
Net
cash used in operating activities
|
|
|
(1,492,970
|
)
|
|
|
(4,683,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Cash
paid for software development
|
|
|
(1,981,477
|
)
|
|
|
(3,695,342
|
)
|
|
Cash
paid to acquire property and equipment
|
|
|
(69,180
|
)
|
|
|
(361,571
|
)
|
|
Net
cash used in investing activities
|
|
|
(2,050,657
|
)
|
|
|
(4,056,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Borrowing
under bank line of credit
|
|
|
-
|
|
|
|
81,547
|
|
|
Payments
on bank line of credit
|
|
|
(880,805
|
)
|
|
|
-
|
|
|
Borrowing
under short term notes
|
|
|
2,564,353
|
|
|
|
376,230
|
|
|
Payments
on short term notes
|
|
|
(967,177
|
)
|
|
|
-
|
|
|
Borrowing
under long-term notes
|
|
|
-
|
|
|
|
1,748,945
|
|
|
Principal
payments on long-term debt
|
|
|
(41,138
|
)
|
|
|
(37,623
|
)
|
|
Related
party advances
|
|
|
-
|
|
|
|
3,860,929
|
|
|
Proceeds
from sales of common stock
|
|
|
2,788,939
|
|
|
|
2,917,591
|
|
|
Net
cash provided by financing activities
|
|
|
3,464,172
|
|
|
|
8,947,619
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange on cash
|
|
|
410,486
|
|
|
|
(328,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
in Cash
|
|
|
331,031
|
|
|
|
(121,327
|
)
|
|
Cash
at beginning of the year
|
|
|
18,433
|
|
|
|
139,760
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at end of the year
|
|
$
|
349,464
|
|
|
$
|
18,433
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of interest and income taxes paid
|
|
|
|
|
|
|
|
|
|
Interest
paid during the period
|
|
$
|
1,331,716
|
|
|
$
|
75,408
|
|
|
Income
taxes paid (refunded)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
|
Common
stock issued to repay notes payable
|
|
$
|
5,852,523
|
|
|
$
|
721,069
|
|
|
Cost
of acquiring capital paid with issuance of common stock
|
|
$
|
113,052
|
|
|
$
|
13,200
|
|
|
Payments
paid to vendors directly by equity subscribers
|
|
$
|
2,924,432
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
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 in the globally, focusing on the United States, Europe and
Asia.
Management
acknowledges that it is solely responsible for adopting sound accounting
practices, establishing and maintaining a system of internal accounting control
and preventing and detecting fraud. The Company’s system of internal accounting
control is designed to assure, among other items, that 1) recorded transactions
are valid; 2) valid transactions are recorded; and 3) transactions are recorded
in the proper period in a timely manner to produce consolidated financial
statements which present fairly the consolidated financial condition, results of
operations and cash flows of the Company for the respective periods being
presented
Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of
net revenue and expenses during the reporting periods. The most significant
estimates and assumptions relate to the recoverability of software development
costs, licenses and intangibles, and the adequacy of allowances for returns,
price concessions and doubtful accounts. Actual amounts could differ
significantly from these estimates.
Principles of
consolidation
The
consolidated financial statements include the consolidated financial
statements of Playlogic Entertainment, Inc. a Delaware corporation, Playlogic
International N.V. (a corporation domiciled in The Netherlands) and its
wholly-owned subsidiary Playlogic Game Factory B.V. (a corporation domiciled in
The Netherlands). All inter-company accounts and transactions have
been eliminated in consolidation.
For
reporting purposes, the Company operated in only one industry for all periods
presented in the accompanying consolidated financial statements and makes all
operating decisions and allocates resources based on the best benefit to the
Company as a whole.
Basis of
presentation
The
accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. At December 31, 2007, we had a
working capital deficit of approximately $900,000 resulting from recurring
negative operating cash flow which raised substantial doubts about our ability
to continue as a going concern. Our continued existence as a going concern is
dependent upon our ability to generate sufficient cash flows to support our
ongoing operations by meeting our current obligations as they come due and
servicing our long-term debt on a timely basis.
PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
The
market for software games is characterized by relative short lifecycles and
requires the frequent introduction of new titles. A significant percentage of
our sales of new titles occur within the first year after release. In
addition, titles that do not achieve wide market acceptance do not generate a
sufficient level of sales to offset the costs associated with development.
Therefore, our ability to generate sufficient cash flow to support our on going
operations depends upon our ability to develop and sell new, commercially
successful titles to replace revenues from titles in the later stages of their
lifecycles. Any competitive, financial, technological or other factor which
delays or impairs our ability to introduce and sell commercially successful
titles could adversely affect our future cash flows.
On March
27, 2008, however, we closed on a private placement financing totaling
approximately $6,750,000; consisting of approximately $2,750,000 in equity and
$4,000,000 in debt. See also, Note N Subsequent Events, for additional details
of the financing. As a result, the aforementioned substantial doubt about our
ability to continue as a going concern has been
alleviated.
The
accompanying consolidated financial statements are reported in U.S.
Dollars. Accounts of foreign operations are translated into U.S.
dollars using exchange rates for assets and liabilities at the balance sheet
date and average prevailing exchange rates for the period for revenue and
expense accounts. Adjustments resulting from translation are included in other
comprehensive income (loss). Realized and unrealized transaction gains and
losses are included in income in the period in which they occur, except on
inter-company balances considered to be long term. Transaction gains and losses
on inter-company balances considered to be long term are recorded in other
comprehensive income.
Comprehensive
income (loss) is defined to include all changes in equity except those resulting
from investments by owners and distributions to owners. The Company’s items of
other comprehensive income (loss) are foreign currency translation adjustments,
which relate to investments that are permanent in nature and therefore do not
require tax adjustments.
The Euro
is the functional currency of our operating subsidiaries domiciled in The
Netherlands. We translate Euro into US Dollars, in accordance with the following
table:
|
Financial
statement element
|
Applicable
rate
|
|
|
Assets
|
Balance
sheet date *
|
|
|
Liabilities
|
Balance
sheet date *
|
|
|
Equity
|
Historical
|
|
|
Revenues
|
Annual
average**
|
|
|
Expenses
|
Annual
average**
|
|
|
Gains
|
Annual
average**
|
|
|
Losses
|
Annual
average**
|
|
*$1.4735
at December 31, 2007
**
Average for the year ended December 31, 2007 $1.3713
Average
for the year ended December 31, 2006 $1.2541
Cash and cash
equivalents
The
Company considers all cash on hand and in banks, certificates of deposit and
other highly-liquid investments with maturities of three months or less, when
purchased, to be cash and cash equivalents.
Concentration of Credit
Risk
Financial
instruments which potentially subject us to concentration of credit risk consist
principally of accounts receivable. Our customer base includes distributors and
retailers. We perform ongoing credit evaluations of our customers and maintain
an allowance for potential credit losses. We generally do not require collateral
or other security from our customers. Our four largest customers accounted for
77%, and 88% of consolidated net revenues in each of the two years ended
December 31, 2007, and 2006, respectively. As of December 31, 2007, the four
largest customers accounted for 35% of our consolidated accounts receivable
balance. Except for the largest customers noted above, all receivable balances
from the remaining individual customers are less than 10% of the Company’s
consolidated net receivable balance. Management believes that the receivable
balances from these largest customers do not represent a significant credit risk
based on past collection experience. We are currently investigating to insure
our debtors in order to limit credit risks.
Financial
Instruments
The
estimated fair values of financial instruments have been determined using
available market information and valuation methodologies described below.
However, considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
may not be indicative of the amounts that we could realize in a current market
exchange. The use of different market assumptions or valuation methodologies may
have a material effect on the estimated fair value amounts.
PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
The
carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, and accrued expenses approximate fair value due to their short-term
nature. Short-term investments are carried at fair value with fair values being
estimated based on quoted market prices.
Accounts receivable -
trade
Our
customers are located principally within Europe. We typically make sales on
account, with terms that vary depending upon the customer's credit history,
liquidity, credit limits and sales history. From time to time, distributors and
retailers in the interactive entertainment software industry have experienced
significant fluctuations in their business operations and a number of them have
failed. The failure of a significant customer could have a material negative
impact on our cash flow.
Because
of the credit risk involved, management has provided an allowance for doubtful
accounts receivable, totaling $356,043 at December, 31, 2007, which we believe
will eventually become uncollectible. This amount was already expensed in 2006.
We have not recorded expenses for doubtful debt during the year
2007.
Property
and equipment is recorded at cost and is depreciated on a straight-line basis,
over the estimated useful lives (generally 3 to 10 years) of the respective
asset. 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.
Software game development
costs
Capitalized
software game development costs include payments made in the form of milestone
payments to independent software developers under development agreements, as
well as direct costs incurred for internally developed titles. We account for
software development costs in accordance with Statement of Financial Accounting
Standard (“SFAS”) No. 86
Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed
. Initially, we charge
software development costs to research and development expense. We capitalize
software game development costs after the technological feasibility of a title
is established and such costs are determined to be recoverable against future
revenues. Amortization of such costs, as a component of cost of
sales, is recorded on a title-by-title basis based on the greater of the
proportion of current year sales to the total of current and estimated future
sales for the title or the straight-line method over the remaining estimated
useful life of the title. At each balance sheet date, the Company evaluates the
recoverability of capitalized software costs based on net undiscounted future
cash flows and charges to operations any amounts that are deemed unrecoverable.
For the years ended December 31, 2007 and 2006, the Company recognized
impairment charges of approximately of $69,000 and $1,907,000, respectively and
amortization charges of approximately $2,368,000 and $ 835,000
respectively.
Our
agreements with third-party developers generally provide us with exclusive
publishing and distribution rights in exchange for advance payments that are
recouped against royalties due to the developer based on the contractual amounts
of product sales, adjusted for certain costs.
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 expense totaled approximately $542,000 and $2,136,000
respectively, for the years ended December 31, 2007 and 2006.
Advertising
expenses
We
expense advertising costs as incurred. Advertising expense for the years ended
December 31, 2007 and 2006 amounted to approximately $988,000, and $683,000,
respectively.
We
utilize the asset and liability method of accounting for income taxes. At
December 31, 2007, the deferred tax asset and deferred tax liability accounts,
as recorded when material, are entirely the result of temporary differences.
Temporary differences generally represent differences in the recognition of
assets and liabilities for tax and consolidated financial reporting purposes,
primarily accumulated depreciation and amortization and the anticipated
utilization of net operating loss carry forwards to offset current taxable
income.
On
January 1, 2007, we adopted FASB issued FIN 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the
accounting and reporting for uncertainties in income tax law. FIN 48 prescribes
a comprehensive model for the financial statement recognition, measurement,
presentation, and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns.
PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
Share-Based Payment
Arrangements
We
adopted SFAS 123(R),
Share-Based Payment
on
January 1, 2006. SFAS 123(R) requires that compensation related to all
share-based payment transactions with employees, including grants of employee
stock options, to be measured based on their estimated grant-date fair value and
recognized as compensation expense over the requisite service period in which
the share-based payment is considered earned. The Company used the modified
prospective application method when adopting SFAS 123(R), whereby the estimated
fair value of unvested stock awards granted prior to January 1, 2006 were
recognized as compensation expense in the statement of operations over the
remaining requisite service period. For the year ended December 31, 2007 and
2006, the Company recorded approximately $72,000 and $345,000 respectively, of
incremental stock-based compensation expense in connection with its adoption of
SFAS 123(R). See Note J for a full discussion of the Company’s stock-based
compensation arrangements.
Earnings (loss) per
share
SFAS
No. 128,
Earnings per
Share
, requires dual presentation of basic and diluted income per share
for all periods presented. Basic income per share excludes dilution and is
computed by dividing earnings available to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company. The earnings per share for the year ended
December 31, 2007 amounts to $0.03 compared to $(0.51) for the year ended
December 31, 2006.
Unexercised
stock options to purchase 1,312,500 and 350,000 shares of the Company’s common
stock as of December 31, 2007 and 2006, 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 6,402,778 shares and 1,097,962 shares of our common stock
as of December 31, 2007 and 2006, respectively, were excluded from the
computation of diluted earnings per share because to do so would artificially
inflate per-share amounts.
Revenue
recognition
We earn
sales revenue from the sale of internally developed interactive software titles
and from the sale of titles developed by and/or licensed from third-party
developers and from contractual development activities.
We
recognize revenue based in accordance with SOP 97-2,
Software Revenue Recognition
,
as amended by SOP 98-9,
Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions
and U. S.
Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 101,
Revenue Recognition in
Financial Statements
, as revised by SAB 104,
Revenue
Recognition
. As such, we recognize revenue when the following
conditions are met:
|
|
|
|
1.
|
Evidence
of an arrangement: The Company recognizes revenue when it has evidence of
an agreement with the customer reflecting the terms and conditions to
deliver products.
|
|
|
|
|
2.
|
Delivery:
Delivery is considered to occur when the products are shipped and risk of
loss has been transferred to the customer.
|
|
|
|
|
3.
|
Fixed
or determinable fee: If a portion of the arrangement fee is not fixed or
determinable, the Company recognizes that amount as revenue when the
amount becomes fixed or determinable.
|
|
|
|
|
4.
|
Collection
is deemed probable: At the time of the transaction, we conduct a credit
review of each customer involved in a significant transaction to determine
the creditworthiness of the customer. Collection is deemed probable if the
credit review shows that customer is able to pay amounts under the
arrangement as those amounts become due. If we later determine that
collection is not probable, we recognize revenue when collection becomes
probable (generally upon cash
collection).
|
The
Company defers revenues on sales which do not conform to the above listed
criteria until such time that the billed amount is either paid or any attached
right-of-return expires/terminates.
Certain
of the Company’s software products provide limited online functionality at no
additional cost to the consumer. Currently, none of the Company’s
products require an internet connection for use, and online functionality is
perceived to be of only incidental value to the software product
itself. When such functionality is provided to the consumer, the
Company does not provide ongoing technical support, nor does it provide hosting
services. As the online functionality features do not meet any of the
criteria of EITF 00-21 ("Revenue Arrangements with Multiple Deliverables”), the
Company does not defer revenue related to products containing outline
features.
PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
Revenue
is recognized after deducting estimated reserves for returns, price concessions
and other allowances. In circumstances when the Company does not have a reliable
basis to estimate returns and price concessions or is unable to determine that
collection of a receivable is probable, it defers the revenue until such time as
it can reliably estimate any related returns and allowances and determine that
collection of the receivable is probable.
Allowances for Returns,
Price Concessions and Other Allowances
Our
policy is to accept returns and we grant price concessions in connection with
our publishing arrangements. Following reductions in the price of its products,
we grant price concessions which permit customers to take credits for unsold
merchandise against amounts they owe us. Our customers must satisfy certain
conditions to allow them to return products or receive price concessions,
including compliance with applicable payment terms and confirmation of field
inventory levels. We estimate future product returns and price
concessions related to current period product revenue based upon, among other
factors, historical experience and performance of the titles in similar genres,
historical performance of a hardware platform, customer inventory levels,
analysis of sell-through rates, sales force and retail customer feedback,
industry pricing, market conditions and changes in demand and acceptance of its
products by consumers. We make significant judgments and estimates in
connection with establishing the allowance for returns and price concessions in
any accounting period. We believe we can make reliable estimates of returns and
price concessions. However, actual results may differ from initial estimates as
a result of changes in circumstances, market conditions and assumptions.
Adjustments to estimates are recorded in the period in which they become
known.
New accounting
pronouncements
In
September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS
No. 157, Fair Value Measurements. SFAS No. 157 establishes a framework for
measuring the fair value of assets and liabilities. This framework is intended
to provide increased consistency in how fair value determinations are made under
various existing accounting standards which permit, or in some cases require,
estimates of fair market value. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Earlier application is encouraged, provided that the reporting entity has
not yet issued financial statements for that fiscal year, including any
financial statements for an interim period within that fiscal year. The Company
is currently in the process of evaluating the impact of SFAS No. 157 on our
consolidated financial position and results of operations.
Reclassifications
Certain
2006 amounts have been reclassified to conform to the 2007
presentation.
NOTE
B – RELATED PARTY TRANSACTIONS
Willem M.
Smit, our 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 is imputed as the value of his services and recorded as
additional contributed capital to the Company.
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 services (among others house keeping and cleaning
services) provided by Altaville to the Company an annual aggregate amount of
approximately $50,000 which is paid in twelve monthly installments. An amount of
$ 50,000 has been recorded during the year ended December 31, 2007.
NOTE C
- COMPREHENSIVE INCOME/(LOSS)
Components
of comprehensive income/(loss) are as follows:
|
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net income
/ (loss)
|
|
$
|
746,729
|
|
|
$
|
(12,548,400)
|
|
Foreign
currency translation adjustment
|
|
|
(617,751)
|
|
|
|
(908,017)
|
|
Comprehensive income
/ (loss)
|
|
$
|
128,978
|
|
|
$
|
(13,456,417)
|
|
|
|
|
|
|
|
|
|
PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
D- PROPERTY AND EQUIPMENT
Property
and equipment consists of the following at December 31, 2007:
|
|
|
|
|
Estimated
life
|
|
|
Computers
and office equipment
|
|
$
|
2,044,528
|
|
3-5
years
|
|
|
Leasehold
improvements
|
|
|
395,269
|
|
Lease
term
|
|
|
Software
|
|
|
405,721
|
|
3-5
years
|
|
|
|
|
|
2,845,518
|
|
|
|
|
Less
accumulated depreciation
|
|
|
(2,091,750
|
)
|
|
|
|
Net
property and equipment
|
|
$
|
753,768
|
|
|
|
Depreciation
expense for the years ended December 31, 2007, and 2006, was $297,292, and
$315,174, respectively.
NOTE E - SOFTWARE DEVELOPMENT
COSTS
The
following table provides the details of software development costs for the year
ended December 31, 2007:
|
Beginning
balance
|
|
|
|
|
$
|
4,463,430
|
|
|
|
Additions
|
|
|
|
|
|
4,593,036
|
|
|
|
Less:
|
|
|
|
|
|
9,056,466
|
|
|
|
Amortization
|
|
|
2,386,223
|
|
|
|
|
|
|
|
Write
down
|
|
|
68,566
|
|
|
|
|
|
|
|
Foreign
exchange
|
|
|
(683,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,771,113
|
)
|
|
|
|
|
|
|
|
|
|
7,285,353
|
|
|
|
Less:
current portion
|
|
|
|
|
|
|
(6,244,843
|
)
|
|
|
Non-current
portion
|
|
|
|
|
|
$
|
1,040,510
|
|
|
The
amount of software development costs resulting from advance payments and
guarantees to third-party developers were $6,407,550 and $3,466,638,
respectively, at December 31, 2007 and 2006. In addition, software development
costs totaling $1,795,870 at December 31, 2007, related to titles that have
not been released yet. The non-current portion of the capitalized software
development costs is expected to be amortized in 2009.
NOTE
F - NOTES PAYABLE
Note payable to
bank
On
March 10, 2006, the Company entered into a credit facility with ABN-AMRO
Bank N.V. in the amount of €1,250,000, or approximately $1.6 million. This
credit facility bears interest at 7.0%. The Company is anticipating repaying the
outstanding amount (as of December 31, 2007 amounting to approximately $1
million) during the year 2008. The Company has agreed with ABN-AMRO
to bring the facility back to zero in mutual agreement. No end date has been
agreed. Under the terms of this credit facility, the Company entered into a
negative pledge arrangement on the Intellectual Property owned by the Company.
Additionally, the Company’s CEO Mr. Willem M. Smit has issued a personal
guarantee to ABN AMRO Bank N.V. for this credit facility.
Note payable,
other
On
May 3, 2006, the Company entered into a loan agreement with a lender based
in The Netherlands, pursuant to which the Company borrowed the principal amount
of €400,000, or approximately $590,000. This loan bears compound interest at a
rate of 60% per annum, and repayment of principal and interest was due on
August 4, 2006, which due date was extended for an indefinite period of
time under the same terms and conditions.
PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
G — ACCRUED LIABILITIES
As of
December 31, 2007, accrued liabilities can be specified as
follows:
|
Payroll
Taxes payable (a)
|
|
$
|
1,326,649
|
|
|
|
Interest
payable
|
|
|
104,686
|
|
|
|
Royalties
payable
|
|
|
200,391
|
|
|
|
Wages,
salaries and related personnel costs
|
|
|
218,060
|
|
|
|
Other
accrued expenses
|
|
|
134,089
|
|
|
|
Board
remuneration to be paid
|
|
|
158,879
|
|
|
|
|
|
$
|
2,142,754
|
|
|
(a)
Payroll
taxes payable have been partly offset against VAT refund claimed, in accordance
with Dutch law.
Furthermore
payroll taxes include local taxes to be paid on employee shares.
NOTE
H - LONG-TERM DEBT
Long-term
debt consists of the following note payable at December 31, 2007:
|
Note
payable to landlord for leasehold improvements, payable in quarterly
installments of approximately $11,050, matures in 2013,
unsecured
|
|
$
|
265,230
|
|
|
|
Less:
current maturities
|
|
|
(44,205
|
)
|
|
|
|
|
$
|
221,025
|
|
|
Future
maturities of long-term debt are as follows:
|
Year
ending
|
|
|
|
|
|
December
31,
|
|
|
|
|
|
2008
|
|
$
|
44,205
|
|
|
|
2009
|
|
|
44,205
|
|
|
|
2010
|
|
|
44,205
|
|
|
|
2011
|
|
|
44,205
|
|
|
|
2012
|
|
|
44,205
|
|
|
|
Thereafter
|
|
|
44,205
|
|
|
NOTE
I - INCOME TAXES
The
components of income tax (benefit) expense for each of the years ended December
31, 2007 and 2006, respectively, are as follows:
PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
|
|
Year
Ended
|
|
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Domestic:
|
|
$
|
|
|
|
$
|
|
|
|
Current
|
|
|
0
|
|
|
|
0
|
|
|
Deferred
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
0
|
|
|
|
0
|
|
|
Deferred
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
State:
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
0
|
|
|
|
0
|
|
|
Deferred
|
|
|
0
|
|
|
|
0
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
As of
December 31, 2007, the Company has a net operating loss carry forward of
approximately $500,000 to offset future United States taxable income and
approximately $40,000,000 to offset future Netherlands taxable income. Subject
to current United States regulations, the approximate $500,000 carry forward
will begin to expire in 2020. The amount and availability of the net operating
loss carry forwards may be subject to limitations set forth by the Internal
Revenue Code and the Dutch Government. Factors such as the number of shares
ultimately issued within a three year look-back period; whether there is a
deemed more than 50 percent change in control; the applicable long-term tax
exempt bond rate; continuity of historical business; and subsequent income of
the Company all enter into the annual computation of allowable annual
utilization of the United States carry forwards.
The
Company's income tax expense (benefit) for the years ended December 31, 2007 and
2006, respectively, differed from the statutory rate of 26% as noted
below:
|
|
|
Year
ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Statutory
rate applied to result before income taxes
|
|
$
|
746,729
|
|
|
$
|
(12,548,400
|
)
|
|
Increase
(decrease) in income taxes resulting from:
|
|
|
|
|
|
|
Foreign
income taxes
|
|
|
(707,260
|
)
|
|
|
11,979,589
|
|
|
State
income taxes
|
|
|
-
|
|
|
|
-
|
|
|
Deferred
income taxes
|
|
|
-
|
|
|
|
-
|
|
|
Non-deductible
items:
|
|
|
|
|
|
|
|
|
|
Stock
option expenses
|
|
|
(39,469
|
)
|
|
|
414,040
|
|
|
|
|
|
|
|
|
|
|
|
|
Other,
including reserve for deferred tax asset
|
|
|
|
|
|
|
|
|
|
and
effect of graduated tax brackets
|
|
|
-
|
|
|
|
154,771
|
|
|
Total
income tax expense (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE
J - SHAREHOLDER’S EQUITY
Preferred
stock
As of
December 31, 2007, 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.
PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
Common
stock
During
the year ended December 31, 2007, the Company sold 3,182,609 units at $1.15 per
share to unrelated third parties for proceeds of $3,660,000 pursuant to an
exemption from registration claimed under Rule 4(2) of the Securities Act of
1933, as amended. Each unit consisted of two shares of the Company’s
par value common stock and one Common Stock Warrant to purchase the Company’s
common stock at $2.75 per share at any time within the next 5 years. In total
1,591,308 warrants have been issued in relation to this sale. Furthermore, the
Company sold 270,000 shares to an unrelated third party at par value for
facilitating the share issuances.
During
the year ended December 31, 2007, the Company issued 9,147,861 units at $0.80
per share to unrelated third parties for proceeds of approximately $7,313,000
pursuant to an exemption from registration claimed under Rule 4(2) of the
Securities Act of 1933, as amended. In relation to this sale
2,500,000 warrants have been issued to purchase the Company’s common stock at
$1.35 per share at any time within the next 5 years. Of this subscription,
6,287,273 shares were used to convert outstanding debt amounting to $5,024,899.
The remaining 2,288,471 shares have been sold for cash which was paid directly
by subscriber to vendors.
During
the year, the Company sold 600,000 shares of its common stock to an
accredited investor based in the Netherlands at $0.90 per share for a total cash
consideration of $538,604 pursuant to an exemption from registration claimed
under Rule 4(2) of the Securities Act of 1933, as amended.
The above
transactions can be summarized as follows:
|
Issuance
price
|
|
|
Cash
|
|
|
Settlement
of vendor payables
|
|
|
Debt
conversion
|
|
|
Total
|
|
|
Units
|
|
|
$
|
1.15
|
|
|
$
|
2,735,019
|
|
|
$
|
635,961
|
|
|
$
|
289,020
|
|
|
$
|
3,660,000
|
|
|
$
|
3,182,609
|
|
|
$
|
0.80
|
|
|
|
-
|
|
|
|
2,288,471
|
|
|
|
5,024,899
|
|
|
|
7,313,370
|
|
|
|
9,147,861
|
|
|
$
|
0.90
|
|
|
|
|
|
|
|
|
|
|
|
538,604
|
|
|
|
538,604
|
|
|
|
600,000
|
|
|
$
|
par
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
270
|
|
|
|
270,000
|
|
|
|
|
|
|
$
|
2,735,289
|
|
|
$
|
2,924,432
|
|
|
$
|
5,852,523
|
|
|
$
|
11,512,244
|
|
|
$
|
13,200,470
|
|
Stock
options
On August
28, 2007, we granted to Willy J. Simon, the Company’s Chairman and Non Executive
Director, 112,500 options to purchase shares of the Company’s common stock at an
exercise price of $1.35 per share. A total of 112,500 shares of these options
will vest on April 1, 2008. The options will expire after 3 years.
On August
28, 2008, we granted to George M. Calhoun, one of the Company’s Non Executive
Directors, 62,500 options to purchase shares of the Company’s common stock at an
exercise price of $1.35 per share. A total of 62,500 shares of these options
will vest on April 1, 2008. The options will expire after 3
years.
On August
28, 2008, we granted to Erik L.A. van Emden, one of the Company’s Non Executive
Directors, 62,500 options to purchase shares of the Company’s common stock at an
exercise price of $1.35 per share. A total of 62,500 shares of these options
will vest on April 1, 2008. The options will expire after 3 years.
On August
28, 2008, we granted to certain employees and officers a total of 725,000
options (in accordance with the table below) to purchase shares of the Company’s
common stock at an exercise price of $1.35 per share. These options vest ratably
over three years and will expire in 4 years.
PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
Optionee
|
|
Number
of options
|
|
|
W.M.
Smit, Chief Executive Officer
|
|
|
200,000
|
|
|
R.W.
Smit, Executive Vice President
|
|
|
200,000
|
|
|
D.
Morel, Chief Technology Officer
|
|
|
100,000
|
|
|
P.Y.
Thiercelin, Director of Sales
|
|
|
75,000
|
|
|
B.
Mulderij, Marketing Manager
|
|
|
75,000
|
|
|
M.
Janse, Executive Producer
|
|
|
25,000
|
|
|
O.
Klooster, Assistant Controller
|
|
|
25,000
|
|
|
I.
Frid, Managing Director
|
|
|
15,000
|
|
|
L.
Leatomu, PA to the CEO
|
|
|
10,000
|
|
|
|
|
|
725,000
|
|
A summary
of our stock options for the two years ended December 31, 2007 is as
follows:
|
|
|
Number
of shares
|
|
|
Weighted-average
exercise price
|
|
|
Weighted-average
remaining contractual term (months)
|
|
|
Aggregate
intrinsic value
|
|
|
Outstanding
at December 31, 2006 (none exercisable)
|
|
|
350,000
|
|
|
$
|
3.07
|
|
|
|
44
|
|
|
$
|
493,060
|
|
|
Granted
|
|
|
962,500
|
|
|
$
|
1.30
|
|
|
|
41
|
|
|
$
|
182,471
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
Forfieted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
Outstanding
at December 31, 2007
|
|
|
1,312,500
|
|
|
$
|
1.77
|
|
|
|
42
|
|
|
$
|
675,531
|
|
|
Exercisable
at December 31, 2007
|
|
|
35,000
|
|
|
$
|
3.50
|
|
|
|
45
|
|
|
$
|
96,145
|
|
|
Vested
at December 31, 2007
|
|
|
35,000
|
|
|
$
|
3.50
|
|
|
|
45
|
|
|
$
|
96,145
|
|
Options
outstanding that are expected to vest are net of estimated future
forfeitures. No options have been exercised during the year ended
December 31, 2007.
The fair
value of options granted during 2007 was estimated at the grant date using the
Black-Scholes option-pricing model. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options, which do not have vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. The
following table summarizes the assumptions and variables used to compute the
weighted average fair value of stock option grants:
|
Risk-free
interest rate
|
4%
|
|
|
Dividend
yield
|
0%
|
|
|
Volatility
factor
|
51.35%
|
|
|
Weighted-average
expected life
|
4
Years
|
|
PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
K - COMMITMENTS AND CONTINGENCIES
Litigation
On
November 27, 2007, we have won the legal proceedings in copyrights to the game
Ancient Wars: Sparta. So has decided the District Court of Amsterdam in the case
of Playlogic Entertainment against WorldForge/Visionvale Ltd. from
Cyprus and Burut Co. from Russia.
The
provisional judge of the District Court of Amsterdam concludes that all the
copyrights to the game Ancient Wars: Sparta always belonged to Playlogic
pursuant to the agreement with WorldForge / Visionvale and Burut. The judge
ruled in Playlogic’s favor on all counts and WorldForge / Visionvale and Burut
have to pay a penalty of € 10,000 each time they state the contrary or refrain
from publishing rectifications of former wrong statements.
Moreover
the Company is involved in a few minor legal actions incidental to its ordinary
course of business.
With
respect to the above matters, the Company believes that it has adequate legal
claims or defenses and/or provided adequate accruals for related costs such that
the ultimate outcome will not have a material adverse effect on the Company’s
future consolidated financial position or results of operations
.
Office
leases
The
Company leases it’s executive offices located at Concertgebouwplein 13 in
Amsterdam from Mr. D. Valerio. This lease agreement expires on June 30,
2008. The lease requires annual payments of approximately $83,000 (€59,000) per
year, to be paid in quarterly installments.
Our
subsidiary, Playlogic Game Factory, B. V., previously operated in leased
offices, located at Hoge Mosten 16-24 in Breda, from Kantoren Fonds Nederland
B.V. pursuant to a lease agreement which expired on February 28, 2007. Playlogic
Game Factory, B. V., leases offices located at Hambroeklaan 1 in Breda from
Neglinge BV pursuant to a lease agreement which expires on October 1, 2013. This
lease agreement contains an extension option, which if exercised, will extend
the expiration date to October 1, 2018. At the execution of this lease
agreement, the landlord committed itself to invest approximately $425,000
(€300,000) in leasehold improvements which are scheduled to be repaid by
Playlogic Game Factory B.V. over a 10 year period. The lease requires annual
payments of approximately $425,000 (€300,000) per year, payable in quarterly
installments.
Future
minimum non-cancelable lease payments on the above leases for office space are
as follows:
|
December
31,
|
|
|
|
|
|
2008
|
|
$
|
399,000
|
|
|
|
2009
|
|
|
355,000
|
|
|
|
2010
|
|
|
355,000
|
|
|
|
2011
|
|
|
355,000
|
|
|
|
2012
|
|
|
355,000
|
|
|
|
Thereafter
|
|
|
355,000
|
|
|
|
Total
|
|
|
2,174,000
|
|
|
Transportation
leases
The
Company leases 14 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 $20,000.
Future
minimum non-cancelable lease payments on the above transportation leases are as
follows:
PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
|
December
31,
|
|
|
|
|
2008
|
|
$
|
79,500
|
|
|
2009
|
|
|
37,400
|
|
|
2010
|
|
|
-
|
|
|
2011
|
|
|
-
|
|
|
2012
|
|
|
-
|
|
|
Thereafter
|
|
|
-
|
|
|
Total
|
|
|
116,900
|
|
Debt
restructuring
During
the year ended December 31, 2007, we settled accounts payable to our outside
legal counsel for a gain of $180,000 provided that we agree pay a premium of
approximately $210,000 in any future engagements. We reflected the gain in other
income and expenses in the accompanying consolidated financial
statements.
Software development
contracts
The
Company has entered into seven (7) separate software development contracts with
unrelated entities. These contracts require periodic payments of agreed-upon
amounts upon the achievement of certain developmental milestones, as defined in
each individual contract. All of these contracts have completion deadlines of
less than one (1) year from the contract execution and will require an aggregate
funding liability of approximately $3.2 million through completion.
NOTE
L - SEGMENT INFORMATION AND REVENUE CONCENTRATIONS
The
Company sells its products to wholesale distributors in various domestic and
foreign markets. The following table shows the Company’s gross revenue
composition:
|
|
|
For
the year ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Europe and United
Kingdom
|
|
|
|
|
|
|
|
|
Customer
A
|
|
2,320,721
|
23%
|
|
1,872,371
|
37%
|
|
|
Customer
B
|
|
1,473,039
|
15%
|
|
1,238,058
|
25%
|
|
|
Customer
C
|
|
512.799
|
5%
|
|
167,235
|
3%
|
|
|
Customer
D *
|
|
3,348,524
|
33%
|
|
0
|
0%
|
|
|
Others
|
|
2,208,296
|
22%
|
|
376,694
|
7%
|
|
|
|
|
9,863,379
|
98%
|
|
3,654,358
|
72%
|
|
|
Middle
East/Africa
|
|
|
|
|
|
|
|
|
Others
|
|
73,603
|
1%
|
|
54,636
|
1%
|
|
|
|
|
73,603
|
1%
|
|
54,636
|
1%
|
|
|
|
|
|
|
|
|
|
|
|
United States &
Canada
|
|
|
|
|
|
|
|
|
Customer
F *
|
|
0
|
0%
|
|
905,075
|
18%
|
|
|
Customer
G
|
|
162,764
|
2%
|
|
417,933
|
8%
|
|
|
Others
|
|
0
|
0%
|
|
10,514
|
0%
|
|
|
|
|
162,764
|
2%
|
|
1,333,522
|
26%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
10,099,746
|
100%
|
|
5,042,516
|
100%
|
|
* The
Company entered into a license contract with Customer A, for global distribution
of certain games. As the Company is located in Europe, the revenue has been
allocated to Europe and UK. Part of this revenue should however be read as US
market revenue.
PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
M – OTHER INCOME & EXPENSES
Debt
restructuring
During
the year ended December 31, 2007, the Company has negotiated a discount
amounting to $100,000 with vendor A resulting in the obligation to pay an amount
of $100,000 as a premium to the next capital raise. The realized gain following
the agreed discount has been included in gain on debt restructuring.
Furthermore, the Company has negotiated a discount amounting to $80,000 with
vendor B resulting in the obligation to pay an amount of $110,000 as a premium
to the next capital raise. The realized gain following the agreed discount has
been included in gain on debt restructuring. With the same vendor (B) the
Company agreed on a settlement of $197,000 based on agreed
payments. The Company estimates the chance of a future successful
capital raise to be probable.
During
the year 2007, the Company negotiated discounts resulting in the following
gains, as presented under gains on debt restructuring totaling $850,411 over 4
different vendors. The total gains from settlements are summarized as
follows:
|
Vendor
|
|
Gain
recognized in 2007
|
|
|
Vendor
A
|
|
$
|
100,000
|
|
|
Vendor
B
|
|
|
285,000
|
|
|
Vendor
C
|
|
|
115,000
|
|
|
Vendor
D
|
|
|
350,411
|
|
|
|
|
$
|
850,411
|
|
Loan
penalty expense
During
the year ended December 31, 2007, one of the Company’s loan providers, who
imposed a penalty for being in default of repayment of a loan, amounting to
$1,242,000 (€ 1,000,000) has waived that penalty. As a result we have reversed
that transaction and we have recorded this reversal as a gain, amounting to
$1,377,000 (€ 1,000,000).
NOTE
N – SUBSEQUENT EVENTS
On March
20, 2008, we announced that we have successfully closed a $7 million financing.
These are the terms and conditions of this financing:
1. Equity:
The Company sold
3,000,000 shares of its common stock to an accredited investor based in the
Netherlands at $ 1.00 per share for a total cash consideration of $3,000,000.
The sale was made pursuant to the terms of a subscription agreement dated March
27, 2008. The Company will pay a placement fee of 7% (being $210,000) on this
sale.
Concurrent
with this sale, the Company issued 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.
2. Loan :
On March 27, 2008,
the Company has entered into a loan agreement with two lenders 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 this loan agreement of March 27, 2008, the Company issued to these lenders
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 warrant will be exercised cashless
and have a mandatory call clause when the stock price is $4.00.
The
Company has received the funds on it’s bank account on March 27, 2008, netted
with the placement fee totaling $250,000. An amount of $ 6,750,000 was
received.
The newly
attracted funds will improve the working capital and equity position of the
Company and will allow the Company to execute its business plan and adhere to
release schedules for the year 2008.
F - 19
Playlogic Entertainment (CE) (USOTC:PLGC)
Gráfica de Acción Histórica
De May 2024 a Jun 2024
Playlogic Entertainment (CE) (USOTC:PLGC)
Gráfica de Acción Histórica
De Jun 2023 a Jun 2024
