IPLY Interplay Entertainment Corp (CE)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2011

 

or

 

o      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number 0-24363

 

Interplay Entertainment Corp.

(Exact name of the registrant as specified in its charter)

 

 

12301 Wilshire Blvd, Los Angeles, California   90025

(Address of principal executive offices)

 

(310) 979-7070

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant:   (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x      No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  

 

Large accelerated filer   o      Accelerated filer   o      Non- accelerated filer   x      Smaller reporting company

 

Indicate by check mark whether the registrant is shell company (as defined in Rule 12b-2 of the Exchange Act)     Yes   o      No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

 

 

INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

 

FORM 10-Q

 

March 31, 2011

 

TABLE OF CONTENTS

 

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

See accompanying notes.

 

 

INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

See accompanying notes.

 

 

INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF   CHANGES IN CASH FLOWS

(Unaudited)

 

 

See accompanying notes.

 

Interplay Entertainment and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three Months Ended March 31, 2011

(Unaudited)

 

Note 1.   Basis of Presentation  

 

The accompanying unaudited condensed consolidated financial statements of Interplay Entertainment Corp.  (which we refer to as the “Company” in these Notes) and its subsidiaries reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the results for the interim period in accordance with instructions for Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements.  The results of operations for the current interim period are not necessarily indicative of results to be expected for the current year or any other period.  The balance sheet at December 31, 2010 has been derived from the audited consolidated financial statements at that date, but does not include all information and footnotes required by GAAP for complete financial statements.

 

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the U.S. Securities and Exchange Commission (“SEC”).  

 

Factors Affecting Future Performance and Going Concern Status

 

The Company’s independent public accounting firm included a “going concern” explanatory paragraph in their audit report on the December 31, 2010 consolidated financial statements which were prepared assuming that the Company will continue as a going concern.  

 

The Company continues to seek external sources of funding including, but not limited to, a private placement or public offering of the Company’s capital stock, the sale of selected assets, the licensing of certain product rights in selected territories, selected distribution agreements, and/or other strategic transactions sufficient to provide short-term funding, and potentially achieve the Company’s long-term strategic objectives.   Although the Company has had some success in licensing certain of its products in the past, no assurance can be given that the Company will do so in the future.

 

The Company expects that it will need to obtain additional financing or income.   However, no assurance can be given that alternative sources of funding can be obtained on acceptable terms, or at all.   These conditions, combined with the Company’s historical operating losses and its deficits in stockholders’ equity and working capital, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that might result from the outcome of this uncertainty.

Litigation

 

On September 8, 2009, Bethesda Softworks LLC filed a Complaint for Declaratory Judgment, Preliminary Injunction and Other Relief against the Company in the United    States    District    Court for the District of Maryland.    Bethesda seeks to terminate the rights the Company holds to sell and develop certain FALLOUT-branded video games, including an MMOG, and has amended its complaint to allege that the Company held a license to develop a game called FALLOUT in name only, but without reference to any other element of the FALLOUT franchise.    The Company disputes all claims raised by Bethesda and has answered the lawsuit and asserted Counter-Claims,    including claims for Breach of Contract,    Rescission,    Accounting and Declaratory Relief seeking an award of damages and other relief.    Interplay also seeks a declaration from the Court that it has not infringed upon the    FALLOUT(R)    mark    and    that it has    satisfied    the    terms    of    the Trademark Licensing Agreement related to Interplay's production of a FALLOUT(R) massively-multiplayer online    game, which the parties intended to include and necessarily must include copyrightable elements of the FALLOUT franchise.    The Court denied Bethesda's   Motion for Preliminary Injunction on December 10, 2009 and on January 14, 2011, denied Bethesda's Motion to Dismiss Interplay's Breach of Contract Counter-Claims.  Interplay will continue to defend its rights and pursue its Counter-Claims against Bethesda.

 

On September 24, 2010, the Company initiated a lawsuit against TopWare Interactive, Inc., in the United States District Court for the Central District of California over TopWare's infringement of the Company's  Battle Chess   trademark.   The Company's lawsuit alleges various violations of federal trademark laws, as well as state claims for unfair competition.  The Court granted a preliminary injunction against TopWare, precluding further use of  Battle Chess   or any confusingly similar title by TopWare, its officers, directors, employees, attorneys, affiliated companies, and anyone acting in concert with them.  On November 17, 2010, Interplay filed a first amended complaint adding TopWare's distributor, SouthPeak Interactive Corporation, as a defendant.   Interplay will continue to enforce its intellectual property rights against potential infringement. 

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of Interplay Entertainment Corp. and its wholly-owned subsidiaries, Interplay Productions Limited (U.K.), Interplay OEM, Inc., Interplay Co., Ltd., (Japan) the business of which was closed during the 4th quarter 2006 (immaterial to consolidated results) and Games On-line.   All significant inter-company accounts and transactions have been eliminated.

 

Interplay Entertainment and Subsidiaries

Notes to Condensed Consolidated  Financial Statements

Three Months Ended March 31, 2011

(Unaudited)

 

 

Note 3.  Notes Payable to Officer and Directors

 

The Company issued on October 2, 2006 to the following officer and directors, Herve Caen, Eric Caen and Michel Welter conditional demand notes which have since become demand notes (due to the change in control resulting from Financial Planning and Development SA’s acquisition of approximately 56% of the Company’s outstanding stock) bearing a 5% annual interest rate. The demand notes were issued for the earned but unpaid directors’ fees to Herve Caen for $50,000, to Eric Caen for $50,000, to Michel Welter for $85,000, and for earned but unpaid salary to Herve Caen in the amount of $500,000.  For the three months ended March 31, 2011 Herve Caen was repaid $33,000. A total of $209,000 in principal and interest remains outstanding under the demand notes as of March 31, 2011.   Interest accrued on the demand notes as of March 31, 2011 was $3,000.

 

Note 4.  Advances from Distributors and Licensee which are Considered Deferred Income  

 

Non-refundable but recoupable advances received by the Company for future distribution and license rights as of March 31, 2011 and 2010 amounted to $540,000 and $681,000, respectively.

 

Note 5.  Segment and Geographical Information      

 

The Company operates in one principal business segment, which is managed primarily from the Company’s U.S. headquarters.  

 

Net revenues by geographic regions were as follows:

 

Note 6.  Employee Stock Options

 

Stock-Based Compensation  

 

The Company accounts for stock based compensation costs at fair value for all share-based payments, including stock options and restricted stock awards.

 

At March 31, 2011, the Company has one stock-based employee compensation plan. Stock-based employee compensation cost approximated $9,000 and  $9,000  as reflected in the net loss for the quarters ended March 31, 2011 and March 31, 2010, respectively. No employee stock options were granted during the quarter ended March 31, 2011.  

 

Note 7.  Sale of Common Stock

 

On March 17, 2010 the Company sold to Dotcorp Asset Management 11,625,000 shares of Common Stock of the Company (including 4,658,216 existing shares previously held by the Company as treasury stock) and issued a warrant to purchase 7,500,000 shares of Common Stock of the Company for a total consideration of $982,650.   The warrant has a term of four years, an exercise price of $0.10 and is immediately exercisable. Such shares and warrant were issued, and any underlying shares of Common Stock would be issued, in a private placement exempt from registration pursuant to section 4(2) of the Securities Act of 1933.  

 

Note 8.  Subsequent Events

 

On April 01, 2011 Ker Ventures LLC, formerly known as Microprose, LLC, purchased 1,677,483 shares of common stock pursuant to the terms of a warrant agreement dated March 24, 2009, at an exercise price of $0.06 per share.

 

Subsequent events have been evaluated up to and including the date these financial statements were issued.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Statement  

 

Interplay Entertainment Corp., which we refer to in this Report as "we," "us," or "our," is a developer, publisher and licensor of interactive entertainment software and intellectual properties for both core gamers and the mass market.   The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended December 31, 2010, as amended, and presumes that readers have access to, and will have read, the “Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K, as amended.  

 

This Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and such forward-looking statements are subject to the safe harbors created thereby.   For this purpose, any statements contained in this Form 10-Q, except for historical information, may be deemed to be forward-looking statements.   Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "estimate" or "continue" or the negative or other variations thereof or comparable terminology are intended to help identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements.  

 

The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties, as well as on certain assumptions.   For example, any statements regarding future cash flow, revenue or expense expectations, including those forward-looking statements in “Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations”, financing activities, future cash flows, cash constraints, sales or mergers and cost reduction measures are forward-looking statements and there can be no assurance that we will effect any or all of these objectives in the future. Specifically, the forward-looking statements in this Item 2 assume that we will continue as a going concern.   Risks and Uncertainties that may affect our future results are discussed in more detail in the section titled “Risk Factors” in Item 1A of part II of this Form   10-Q.   Assumptions relating to our forward-looking statements involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control.   Although we believe that the assumptions underlying the forward-looking statements are reasonable, our industry, business and operations are subject to substantial risks, and the inclusion of such information should not be regarded as a representation by management that any particular objective or plans will be achieved.   In addition, risks, uncertainties and assumptions change as events or circumstances change.   We disclaim any obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-Q with the SEC or otherwise to revise or update any oral or written forward-looking statement that may be made from time to time by us or on our behalf.

 

 

Results of Operations

 

The following table sets forth certain selected condensed consolidated statements of operations data, segment data and platform data for the periods indicated in dollars and as a percentage of total net revenues:

 

 

 

North American, International and OEM, Royalty and Licensing Net Revenues

 

        Geographically, our net revenues, for the three months ended March 31, 2011 and 2010 break down as follows: (in thousands)

 

Net revenues for the three months ended March 31, 2011 were $205,000, a decrease of 26% compared to the same period in 2010.  This resulted from a 28% decrease in North American net revenues, and a 21% decrease in International net revenues.   

 

North American net revenues for the three months ended March 31, 2011 were $127,000. The decrease in North American net revenues for the three months ended March 31, 2011 was mainly due to a 28% decrease in retail distribution and electronic distribution of back catalog sales. 

 

International net revenues for the three months ended March 31, 2011 were $78,000.  The decrease in International net revenues for the three months ended March 31, 2011 was mainly due to a $20,000 write off of deferred revenue during the quarter ending March 31, 2010 decreasing international sales by 21%.

 

Platform Net Revenues

 

  Our platform net revenues, for the three months ended March 31, 2011 and 2010 break down as follows: (in thousands)

 

PC net revenues for the three months ended March 31, 2011 were $117,000, a decrease of 26% compared to the same period in 2010.  The decrease in PC net revenues in 2011 was primarily due to decrease from retail distribution and electronic distribution of back catalog sales. 

 

Video game console net revenues were $44,000, an increase of 38%, for the three months ended March 31, 2011 compared to the same period in 2010, due to the increase from electronic distribution of back catalog titles.

 

Mobile  revenues earned were $14,000, a decrease of 66%  for the three months ended March 31, 2011 compared to the same period in 2010, due to the decrease in electronic distribution of back catalog titles.

 

OEM, royalty and licensing net revenues for the three months ended March 31, 2011 were $30,000, a decrease of 31% compared to the same period in 2010, due to the decrease of back catalog sales. 

 

Cost of Goods Sold Gross Profit Margin

 

Our revenue, cost of goods sold and gross profit for the three months ended March 31, 2011 and 2010 breakdown as follows: (in thousands)

 

 

Cost of goods sold related to PC and video game console net revenues represents the manufacturing and related costs of interactive entertainment software products, including costs of media, manuals, duplication, packaging materials, assembly, freight and royalties paid to developers, licensors and hardware manufacturers. Cost of goods sold related to royalty-based net revenues primarily represents third party licensing fees and royalties paid by us. Typically, cost of goods sold as a percentage of net revenues for video game console products are higher than cost of goods sold as a percentage of net revenues for PC based products due to the relatively higher manufacturing and royalty costs associated with video game console and affiliate label products. We also include in the cost of goods sold the amortization of prepaid royalty and license fees we pay to third party software developers. We expense prepaid royalties over a period of six months commencing with the initial shipment of the title at a rate based upon the numbers of units shipped. We evaluate the likelihood of future realization of prepaid royalties and license fees quarterly, on a product-by-product basis, and charge the cost of goods sold for any amounts that we deem unlikely to realize through future product sales.

 

 

Our cost of goods sold increased 88% to $30,000 in the three months ended March 31, 2011 compared to the same period in 2010. The increase in cost of goods sold for the three months ended March 31, 2011 is attributable to the retail distribution and electronic distribution of back catalog games.

 

Our gross margin percentage decreased to 85% for the three months ended March 31, 2011 from 94% in the comparable period in 2010.

 

Marketing and Sales

 

Our marketing and sales expense for the three months ended March 31, 2011 and 2010 breakdown as follows: (in thousands)

 

 

Marketing and sales expenses primarily consist of sales commissions, and other related operating expenses. Marketing and sales expenses for the three months ended March 31, 2011 were $39,000, a 33% decrease as compared to the same period in 2010. The decrease in marketing and sales expense was primarily due to a reduction in sales commission.

 

G eneral and Administrative

 

Our general and administrative expense for the three months ended March 31, 2011 and 2010 breakdown as follows: (in thousands)

 

 

General and administrative expenses primarily consist of administrative personnel expenses, facilities costs, professional fees, stock option compensation, bad debt expenses and other related operating expenses. 

 

General and administrative expenses for the three months ended March 31, 2011 were $347,000, a 6% decrease as compared to the same period in 2010.

 

Product Development

 

Our Product Development expense for the three months ended March 31, 2011 and 2010 breakdown as follows: (in thousands)

 

 

Product development expenses for the three months ended March 31, 2011 were $147,000, a 31% increase as compared to the same period in 2010. This increase was mainly due to a increase in staffing and overhead attributable to the continued development on PV13.

 

 

Other Income, net

 

Our other income, net for the three months ended March 31, 2011 and 2010 breakdown as follows: (in thousands)

 

 

Other income, net for the three months ended March 31, 2011 was $11,000 and consists primarily of interest expense on debt in the amount of $7,000, foreign currency exchange transactions loss of $1,000, and additional miscellaneous adjustments of  ($19,000).

 

Liquidity and Capital Resources

 

As of March 31, 2011, we had a working capital deficit of approximately $3,227,000, and our cash balance was approximately $4,000.  

 

During 2007 we sold 'Fallout' to a third party and entered into, subject to satisfaction of various conditions, a license which could allow us to create, develop and exploit a 'Fallout' Massively Multiplayer Online Game (MMOG). We plan to exploit the license to create the 'Fallout' MMOG.

 

We have contracted with Masthead Studios to fund the development of a MMOG, code named "Project: V13." As a part of the agreement, the game utilizes Masthead's proprietary tools and MMOG technology developed for Masthead's "Earthrise" project.

 

We are leveraging our portfolio of gaming properties through sequels and various development and publishing arrangements. We are developing sequels to some of our most successful games, including Battlechess, Clayfighter, Earthworm Jim, Dark Alliance, Descent, MDK2 and Stonekeep. We have reinitiated our inhouse game development studio, and have hired game developers. We have obtained distribution rights to Prehistorik Man and Legendary Wars: T-Rex Rumble for Nintendo DSi.

 

 

We continue to seek external sources of funding, including but not limited to, incurring debt, the selling of assets or securities, licensing of certain product rights in selected territories, selected distribution agreements, and/or other strategic transactions sufficient to provide short-term funding, and achieve our long-term strategic objectives.

 

If we do not receive sufficient financing or income we may (i) liquidate assets, (ii) sell the company (iii) seek protection from our creditors including the filing of voluntary bankruptcy or being the subject of involuntary bankruptcy, and/or (iv) continue operations, but incur material harm to our business, operations or financial conditions. These conditions, combined with our historical operating losses and our deficits in stockholders' equity and working capital, raise substantial doubt about our ability to continue as a going concern.

 

Our primary capital needs have historically been working capital requirements necessary to fund our operations. Our operating activities provided cash of  $50,000 during the three months ended March 31, 2011.

 

We entered into various licensing agreements during the three months ended March 31, 2011 under which we licensed others to exploit games that we have intellectual property rights to. We expect to enter into similar license arrangements to generate cash for the Company’s operations during the remainder of the fiscal year.

 

 

Item 3.   Quantitative and Qualitative Disclosures about Market Risk  

 

We do not have any derivative financial instruments as of March 31, 2011. However, we are exposed to certain market risks arising from transactions in the normal course of business, principally the risk associated with foreign currency fluctuations. We do not hedge our interest rate risk, or our risk associated with foreign currency fluctuations.

 

INTEREST RATE RISK

 

  Currently, we do not have a line of credit.  

 

FOREIGN CURRENCY RISK

 

Our earnings are affected by fluctuations in the value of our foreign subsidiary's functional currency, and by fluctuations in the value of the functional currency of our foreign receivables.

 

We recognized loss es of $1,000 and $11,000 during the three months ended March 31, 2011 and 2010 respectively, primarily in connection with foreign exchange fluctuations in the timing of payments received on accounts receivable or payments made on accounts payable in foreign currencies.  

 

Item 4. Controls and Procedures  

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer, and interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and interim Chief Financial Officer concluded that our disclosure controls and procedures   were effective, at the reasonable assurance level, in ensuring that information required to be disclosed is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and in timely alerting him to material information required to be included in this report.

 

There were no changes made in our internal controls over financial reporting that occurred during the quarter ended March 31, 2011 that have materially affected or are reasonably likely to materially affect these controls.  

 

Our management, including the Chief Executive Officer   and Interim Chief   Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material errors. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  

 

 

Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations on all internal control systems, our internal control system can provide only reasonable assurance of achieving its objectives and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, and/or by management override of the control. The design of any system of internal control is also based in part upon certain assumptions about the likelihood of future events, and there can be no absolute assurance but only reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in circumstances, and/or the degree of compliance with the policies and procedures may deteriorate.

 

PART II - OTHER INFORMATION

 

 

Item 1.       Legal Proceedings

 

The Company may be involved in various legal proceedings, claims, and litigation arising in the ordinary course of business, including disputes arising over the ownership of intellectual property rights and collection matters.   In the opinion of management, the outcome of known routine claims will not have a material adverse effect on the Company’s business, financial condition, or results of operations.

 

 

On September 24, 2010, the Company initiated a lawsuit against TopWare Interactive, Inc., in the United States District Court for the Central District of California over TopWare's infringement of the Company's  Battle Chess   trademark.  The Company's lawsuit alleges various violations of federal trademark laws, as well as state claims for unfair competition.  The Court granted a preliminary injunction against TopWare, precluding further use of  Battle Chess   or any confusingly similar title by TopWare, its officers, directors, employees, attorneys, affiliated companies, and anyone acting in concert with them.  On November 17, 2010, Interplay filed a first amended complaint adding TopWare's distributor, SouthPeak Interactive Corporation, as a defendant.   Interplay will continue to enforce its intellectual property rights against potential infringement. 

 

 

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submitted to a vote of security holders during the three month period ending March 31, 2011.  

 

Item 6.       EXHIBITS

 

(a) Exhibits - The following exhibits are being furnished herewith, and are filed as part of this report:

 

 

 

SIGNATURES

 

Pursuant to the requirements 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.

 

 

 

 

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