10-Q 1 fm10q-063009.txt 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 JUNE 30, 2009 or [_] 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) DELAWARE 33-0102707 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 N. CRESCENT DRIVE, BEVERLY HILLS, CALIFORNIA 90210 (Address of principal executive offices) (310) 432-1958 (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 [_] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [_] No [_] 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 [_] Accelerated filer [_] Non- accelerated filer [X] Smaller reporting company [_] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [ X ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. ISSUED AND OUTSTANDING AT CLASS JUNE 30, 2009 ----- ------------------------- Common Stock, $0.001 par value 113,595,268 As of June 30, 2009, 113,595,268 shares of Common Stock of the Registrant were issued and outstanding. This includes 4,658,216 shares of Treasury Stock INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES FORM 10-Q JUNE 30, 2009 TABLE OF CONTENTS -------------- Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements ........................................ 3 Condensed Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008 ........................... 3 Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2009 and 2008 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2009 and 2008 (unaudited) ......... 5 Notes to Condensed Consolidated Financial Statements (unaudited) ................................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................... 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk .. 15 Item 4T. Controls and Procedures ..................................... 15 PART II. OTHER INFORMATION Item 1A. Risk Factors ................................................ 16 Item 6. Exhibits .................................................... 16 SIGNATURES ............................................................. 17 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 2009 2008 ------------- ------------- (unaudited) ASSETS Current Assets: Cash .......................................................... $ 16,000 $ 0 Trade receivables ............................................. 96,000 87,000 Inventories ................................................... 13,000 1,000 Deposits ...................................................... 5,000 7,000 Prepaid expenses .............................................. 5,000 11,000 Other receivables ............................................. 10,000 9,000 ------------- ------------- Total current assets ....................................... 145,000 115,000 Property and Equipment, net ........................................ 41,000 48,000 Other Assets - Intellectual Properties ............................. 126,000 0 ------------- ------------- Total assets ....................................................... $ 312,000 $ 163,000 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Drawings in excess of cash balances ........................... 0 24,000 Convertible note payable ...................................... 0 53,000 Account payable and accrued expenses .......................... 1,404,000 1,209,000 Deferred income ............................................... 804,000 710,000 Note payable to officer and directors ......................... 481,000 469,000 ------------- ------------- Total current liabilities ........................... 2,689,000 2,465,000 ------------- ------------- Commitments and contingencies Stockholders' Deficit: Preferred stock, $0.001 par value 5,000,000 shares authorized; no shares issued or outstanding, Common stock, $0.001 par value 300,000,000 shares authorized; 113,595,268 and 108,140,301 shares issued and outstanding in 2009 and 2008 .............................................. 114,000 108,000 Paid-in capital .................................................... 123,266,000 122,309,000 Accumulated deficit ........................................... (125,878,000) (124,842,000) Accumulated other comprehensive income (loss) ................. 121,000 123,000 Treasury stock of 4,658,216 shares ............................ 0 0 ------------- ------------- Total stockholders' deficit ......................... (2,377,000) (2,302,000) ------------- ------------- Total liabilities and stockholders' deficit .............. $ 312,000 $ 163,000 ============= =============
See accompanying notes. 3 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------ ------------------------------ 2009 2008 2009 2008 ------------- ------------- ------------- ------------- (In thousands, except per share amounts) Revenues .................................... $ 251,000 $ 40,000 $ 345,000 $ 104,000 Cost of goods sold .......................... 109,000 2,000 136,000 2,000 ------------- ------------- ------------- ------------- Gross profit ........................... 142,0000 38,000 209,000 102,000 ------------- ------------- ------------- ------------- Operating expenses: Marketing and sales .................... -- -- -- -- General and administrative ............. 874,000 495,000 1,189,000 829,000 Product Development .................... 52,000 86,000 117,000 161,000 ------------- ------------- ------------- ------------- Total operating expenses .......... 926,000 581,000 1,306,000 990,000 ------------- ------------- ------------- ------------- Operating income (loss) ..................... (784,000) (543,000) (1,097,000) (888,000) Other income (expense): Interest expense ....................... (11,000) (8,000) (21,000) (17,000) Other .................................. 24,000 59,000 82,000 70,000 ------------- ------------- ------------- ------------- Total other income (expenses) ..... 13,000 51,000 61,000 53,000 ------------- ------------- ------------- ------------- Income (loss) before benefit for income taxes (771,000) (492,000) (1,036,000) (835,000) Income taxes ................................ -- -- -- -- ------------- ------------- ------------- ------------- Net income (loss) ........................... $ (771,000) $ (492,000) $ (1,036,000) $ (835,000) ============= ============= ============= ============= Net income (loss) per common share: Basic .................................. $ (0.007) $ (0.005) $ (0.01) $ (0.008) ============= ============= ============= ============= Diluted ................................ $ (0.007) $ (0.005) $ (0.01) $ (0.008) ============= ============= ============= ============= Shares used in calculating net income (loss) per common share: Basic .................................. 108,937,000 99,197,000 106,466,000 99,197,000 ============= ============= ============= ============= Diluted ................................ 108,937,000 99,197,000 106,466,000 99,197,000 ============= ============= ============= =============
See accompanying notes. 4 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, -------------------------- 2009 2008 ----------- ----------- Cash flows from operating activities: Net (loss) income ................................................. $(1,036,000) $ (835,000) Adjustments to reconcile net (loss) income to cash (used) provided by operating activities: Depreciation and amortization .................................. 7,000 4,000 Additional paid in capital - option and warrant expense ........ 635,000 158,000 Changes in operating assets and liabilities: Trade receivables, net ......................................... (9,000) (204,000) Inventories .................................................... (13,000) 0 Deposits ....................................................... 2,000 (5,000) Prepaid expenses ............................................... 6,000 4,000 Other current assets, net ...................................... (1,000) (6,000) Accounts payable and accrued expenses .......................... 197,000 (303,000) Note Payable Officers and Directors ............................ 12,000 (96,000) Deferred income ................................................ 94,000 213,000 Accumulated other compensation income .......................... (2,000) (1,000) ----------- ----------- Net cash provided by (used in) operating activities ........ (108,000) (1,071,000) ----------- ----------- Cash flows from investing activities: Purchasing of property and equipment .............................. 0 (45,000) ----------- ----------- Net cash used in investing activities ...................... 0 (45,000) ----------- ----------- Cash flows from financing activities: Sale of stock ..................................................... 148,000 0 ----------- ----------- Net cash provided by (used in) financing activities ........ 148,000 0 ----------- ----------- Net increase (decrease) in cash ...................................... 40,000 (1,116,000) Cash, beginning of period ............................................ (24,000) 1,138,000 ----------- ----------- Cash, end of period .................................................. $ 16,000 $ 22,000 =========== =========== Supplemental cash flow information: Cash paid for: Interest ....................................................... $ 0 $ 0 =========== =========== Non Cash Transactions Supplemental Disclosure of Non-Cash Financing and Investing: Issuance of common stock for partial reduction of Note Payable officer ................................................... $ 0 $ 56,000 =========== =========== Issuance of common stock for liquidation of Convertible Note Payable ...................................................... $ 53,000 $ 0 =========== =========== Acquisition of intellectual property for the exchange of common stock ...................................................... $ 126,000 $ 0 =========== ===========
See accompanying notes. 5 INTERPLAY ENTERTAINMENT AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2009 (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, 2008 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, 2008 as filed with the U.S. Securities and Exchange Commission ("SEC"). FACTORS AFFECTING FUTURE PERFORMANCE AND GOING CONCERN STATUS The Company's independent public accountant included a "going concern" explanatory paragraph in his audit report on the December 31, 2008 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 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. USE OF ESTIMATES The preparation of 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 disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made in preparing the consolidated financial statements include, among others, sales returns and allowances, allowances for uncollectible receivables, cash flows used to evaluate the recoverability of prepaid licenses and royalties and long-lived assets, and certain accrued liabilities related to restructuring activities and litigation. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The accompanying 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. 6 NOTE 2. NOTE PAYABLE The Company issued on June 27, 2008 to Interactive Game Group a convertible promissory note in the amount of $52,000 for consideration received in cash. The unpaid principal balance of this Convertible Note shall bear interest at a per annum rate equal to the three (3) months Libor interest rate plus one percent adjusted quarterly and due with a six month term. (Current interest rate of 2.26 %). The note was convertible into 400,000 shares of the Company's common stock price as of June 30, 2008 ($0.13 per share) which was the market price at the date of the agreement. The note was fully repaid on March 26, 2009. (See Note 7) NOTE 3. NOTE 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. A total of $481,000 in principal and interest remains outstanding under the demand notes as of June 30, 2009. Interest accrued on the demand notes as of June 30, 2009 was $12,000. NOTE 4. ADVANCES FROM DISTRIBUTORS AND LICENSEES WHICH ARE CONSIDERED DEFERRED INCOME Non refundable but recoupable advances received by the Company for future distribution and license rights as of June 30, 2009 amounted to $804,000. 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:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------------------- ---------------------------------------- 2009 2008 2009 2008 ------------------ ------------------ ------------------ ------------------ AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------- ------- ------- ------- ------- ------- ------- ------- (Dollars in thousands) North America .. $ 226 90% $ 0 0% $ 285 83% $ 0 0% International .. 25 10% 40 100% 60 17% 104 100% OEM, royalty and licensing ...... 0 0% 0 0% 0 0% 0 0% ------- ------- ------- ------- ------- ------- ------- ------- $ 251 100% $ 40 100% $ 345 100% $ 104 100% ======= ======= ======= ======= ======= ======= ======= =======
7 NOTE 6. EMPLOYEE STOCK OPTIONS STOCK-BASED COMPENSATION The Company utilizes SFAS No. 123(R), "SHARE-BASED PAYMENT" ("SFAS 123R"), which requires the measurement and recognition of compensation cost at fair value for all share-based payments, including stock options and restricted stock awards. At June 30, 2009, the Company has one stock-based employee compensation plan. Stock options and warrants were granted under the plan during the six months ended June 30, 2009. On June 18, 2009, Michel Welter and Eric Caen were granted 150,000 options each for serving on the Board of Directors through June 2009. Alberto Haddad and Xavier De Portal received 300,000 options each for joining the Board of Directors. Such options have an exercise price of $0.065 (market value at the date of grant) and are exercisable consistent with the Company's stock option plan. On June 18, 2009 various employees received a total of 1,150,000 stock incentive options. Such options are exercisable consistent with the Company's stock option plan Also on June 18, 2009 the Board of Directors extended the suspension of cash compensation for Directors fees through September 2009 and issued 3,428,400 warrants to Eric Caen, Alberto Haddad, Xavier de Portal and Michel Welter respectively as Directors. Michel Welter and Xavier De Portal each were granted 999,950 , Alberto Haddad was granted 857,100 and Eric Caen was granted 571,400. Such warrants have a term of 10 years an exercise price of $0.065, and are immediately exercisable. 6,000,000 10 year warrants were issued on June 18, 2009 at an exercise price of $0.065 to Herve Caen, the Chief Executive Officer and Interim Chief Financial Officer, to reduce his compensation to $250,000 through June 30, 2010. Stock-based compensation cost approximated $608,000 and $635,000 as reflected in net loss for the quarter and six months ended June 30, 2009. NOTE 7. SALE OF COMMON STOCK On March 24, 2009 the Company sold to Microprose, LLC, an affiliate of Interactive Game Group, 5,454,967 shares of Common Stock of the Company and issued a warrant to purchase 1,677,483 shares of Common Stock of the Company for a total consideration of $327,298. 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. Such warrant has a term of 3 years, an exercise price of $0.06, and is immediately exercisable. Out of the consideration of $327,298, $148,000 was received in cash, $126,000 was satisfied by the acquisition of certain intellectual property rights by the Company, and $53,298 was satisfied by the cancellation of the convertible promissory note (see Note 2) in the amount of $52,000 and accrued interest thereon from Interactive Game Group. These warrants were valued using the Black-Scholes Model. The amount of $ 23,000 was charged to 2009 operations. NOTE 8. SUBSEQUENT EVENT On July 2, 2009, Herve Caen, Chief Executive Officer and Interim Chief Financial Officer, exercised 2,100,000 warrants issued in 2006 at an exercise price of 0.0279. These shares were paid for by reducing the balance due from the Company to Herve Caen including accrued interest (see Note 2). 8 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, 2007, 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 I of our Form 10-K. 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. MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including, among others, those related to revenue recognition, prepaid licenses and royalties and software development costs. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. RESULTS OF OPERATIONS The following table sets forth certain selected consolidated statements of operations data, segment data and platform data for the periods indicated in dollars and as a percentage of total net revenues: 9 INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended June 30, Six months ended June 30, ------------------------------------------- ------------------------------------------- 2009 2008 2009 2008 -------------------- -------------------- -------------------- -------------------- % of Net % of Net % of Net % of Net Amount Revenues Amount Revenues Amount Revenues Amount Revenues -------- -------- -------- -------- -------- -------- -------- -------- (Dollars in thousands) Revenues ......................... $ 251 100% $ 40 100% $ 345 100% $ 104 100% Cost of goods sold ............... 109 43% 2 5% 136 39% 2 2% -------- -------- -------- -------- -------- -------- -------- -------- Gross Profit ................ 142 57% 38 95% 209 61% 102 98% Operating Expenses : Marketing and sales ........... 0 0% -- 0% 0 0% -- 0% Product Development ........... 52 21% 86 215% 117 34% 161 155% General and administrative .... 874 348% 495 1,238% 1,189 345% 829 797% -------- -------- -------- -------- -------- -------- -------- -------- Total operating expenses ... 926 369% 581 1,453% 1,306 379% 990 952% -------- -------- -------- -------- -------- -------- -------- -------- Operating income (loss) .......... (784) -312% (543) -1,358% $ (1,097) -318% (888) -854% Other income (expenses): Other income (expenses) ....... 13 5% 51 128% 61 18% 53 51% Income taxes .................. -- -- -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) ............. $ (771) -307% $ (492) -1,230% $ (1,036) -300% $ (835) -803% ======== ======== ======== ======== ======== ======== ======== ======== Net revenues by geographic region: --------------------------------- North America .................... 226 90% -- 0% 285 83% -- 0% International .................... 25 10% 40 100% 60 17% 104 100% OEM, royalty and licensing ....... 0 0% -- 0% 0 0% -- 0% -------- -------- -------- -------- -------- -------- -------- -------- $ 251 100% $ 40 100% $ 345 100% $ 104 100% ======== ======== ======== ======== ======== ======== ======== ======== Net revenue by platform: ----------------------- Personal computers ............... $ 225 90% 39 98% 285 83% 98 94% Video game console ............... $ 26 10% 1 2% 60 17% 6 6% OEM, royalty and licensing ....... 0 0% 0 0% 0 0% -- 0% -------- -------- -------- -------- -------- -------- -------- -------- $ 251 100% $ 40 100% $ 345 100% $ 104 100% ======== ======== ======== ======== ======== ======== ======== ========
10 NORTH AMERICAN, INTERNATIONAL AND OEM, ROYALTY AND LICENSING NET REVENUES Geographically, our net revenues, for the three and six months ended June 30, 2009 and 2008 break down as follows: (in thousands) Three Months Ended June 30 2009 2008 Change % Change ------------------------------ -------- -------- -------- -------- North America ................ $ 226 $ 0 $ 226 100% International ................ 25 40 (15) (38%) OEM, Royalty & Licensing ..... 0 0 0 0% -------- -------- -------- -------- Net Revenues ................. $ 251 $ 40 $ 211 527% ======== ======== ======== ======== Six Months Ended June 30 2009 2008 Change % Change ------------------------------ -------- -------- -------- -------- North America ................ $ 285 $ 0 $ 285 100% International ................ 60 104 (44) (42%) OEM, Royalty & Licensing ..... 0 0 0 0% -------- -------- -------- -------- Net Revenues ................. $ 345 $ 104 $ 241 231% ======== ======== ======== ======== Net revenues for the three months ended June 30, 2009 were $251,000, an increase of 527% compared to the same period in 2008. This increase resulted from a 100% increase in North American net revenues, and a 38% decrease in International net revenues. Net revenues for the six months ended June 30, 2009 were $345,000, an increase of 231% compared to the same period in 2008 due to the increase in back catalog sales. This increase resulted from a 100% increase in North American net revenues, and a 42% decrease in International net revenues. North American net revenues for the three months ended June 30, 2009 were $226,000. The increase in North American net revenues in 2009 was mainly due to a 100% increase in back catalog sales. North American net revenues for the six months ended June 30, 2009 were $285,000. The increase in North American net revenues in 2009 was mainly due to a 100% increase in back catalog sales. International net revenues for the three months ended June 30, 2009 were $25,000. The decrease in International net revenues for the three months ended June 30, 2009 was mainly due to a 38% decrease in back catalog sales. International net revenues for the six months ended June 30, 2009 were $60,000. The decrease in International net revenue for the six months ended June 30, 2009 was mainly due to a 42% decrease in back catalog sales. PLATFORM NET REVENUES Our platform net revenues, for the three and six months ended June 30, 2009 and 2008 break down as follows: (in thousands) Three Months Ended June 30 2009 2008 Change % Change -------------------------------- -------- -------- -------- -------- Personal Computer .............. $ 225 $ 39 $ 186 476% Video Game Console ............. 26 1 25 2,500% OEM, Royalty & Licensing ....... 0 0 0 N/A -------- -------- -------- -------- Net Revenues ................... $ 251 $ 40 $ 211 527% ======== ======== ======== ======== Six Months Ended June 30 2009 2008 Change % Change ------------------------------- -------- -------- -------- -------- Personal Computer ............. $ 285 $ 98 $ 187 190% Video Game Console ............ 60 6 54 90% OEM, Royalty & Licensing ...... 0 0 0 (100%) -------- -------- -------- -------- Net Revenues .................. $ 345 $ 104 $ 241 231% ======== ======== ======== ======== 11 PC net revenues for the three months ended June 30, 2009 were $225,000, an increase of 476% compared to the same period in 2008. The increase in PC net revenues in 2009 was primarily due to increase of back catalog sales. Video game console net revenues were $26,000, an increase of 2,500% for the three months ended June 30, 2009 compared to the same period in 2008, due to the royalties earned from electronic distribution of back catalog titles. PC net revenues for the six months ended June 30, 2009 were $285,000, an increase of 190% compared to the same period in 2008. The increase in PC net revenues in the six months ended June 30, 2009 was primarily due to increase of back catalog sales. Video Game console net revenues were $60,000, an increase of 90% for the six months ended June 30, 2009 compared to the same period in 2008, mainly due to the royalties earned from electronic distribution of back catalog titles. COST OF GOODS SOLD GROSS PROFIT MARGIN Our net revenues, cost of goods sold and gross margin for the three and six months ended June 30, 2009 and 2008 breakdown as follows: (in thousands) Three Months Ended June 30 2009 2008 Change % Change ---------------------------- -------- -------- -------- -------- Net Revenues ............... $ 251 $ 40 $ 211 527% Cost of Goods Sold ......... 109 2 107 5,350% Gross Profit Margin ........ $ 142 $ 38 $ 1,044 271% Six Months Ended June 30 2009 2008 Change % Change ---------------------------- -------- -------- -------- -------- Net Revenues ............... $ 345 $ 104 $ 241 231% Cost of Goods Sold ......... 136 2 134 6,700% Gross Profit Margin ........ $ 209 $ 102 $ 107 104% Three Months Ended June 30 2009 2008 Change ----------------------------------- -------- -------- -------- Net Revenues ...................... 100% 100% 0% Cost of Goods Sold ................ 43% 5% 38% Gross Profit Margin ............... 57% 95% (38%) Six Months Ended June 30 2009 2008 Change ----------------------------------- -------- -------- -------- Net Revenues ...................... 100% 100% 0% Cost of Goods Sold ................ 39% 2% 37% Gross Profit Margin ............... 61% 98% (37)% 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 is 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 paid 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 number 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 5,350% at $109,000 in the three months ended June 30, 2009 compared to the same period in 2008. The increase in cost of goods sold was primarily due to increase in back catalog sales. Our cost of goods sold increased 6,700% to $136,000 in the six months ended June 30, 2009 compared to the same period in 2008. The increase in cost of goods sold was primarily due to increase in back catalog sales. Our gross margin decreased to 57% for the three months ended June 30, 2009 from 95% in the comparable period in 2008. 12 Our gross margin decreased to 61% for the six months ended June 30, 2009 period from 98% in the comparable 2008 period. MARKETING AND SALES Our marketing and sales expense for the three months ended June 30, 2009 and 2008 breakdown as follows: (in thousands) Marketing and Sales 2009 2008 Change % Change ---------------------------------- -------- -------- -------- -------- Three Months Ended June 30 ....... $ 0 $ 0 $ (0) N/A Six Months Ended June 30 ......... $ 0 $ 0 $ (0) N/A Marketing and sales expenses primarily consist of advertising and retail marketing support, marketing and sales personnel, customer support services and other related operating expenses. Marketing and sales expenses for the three months ended June 30, 2009 were $0. Marketing and sales expenses for the six months ended June 30, 2009 were $0. PRODUCT DEVELOPMENT Our Product Development expense for the three months ended June 30, 2009 and 2008 breakdown as follows: (in thousands) Product Development 2009 2008 Change % Change --------------------------------- -------- -------- -------- -------- Three Months Ended June 30 ...... $ 52 $ 86 $ (34) (40%) Six Months Ended June 30 ........ $ 117 $ 161 $ (44) (27%) Product development expenses were $52,000, a 40% decrease as compared to the same period in 2008. Our product development decreased 27% to $117,000 for the six months ended June 30, 2008 period compared to the same period in 2008. GENERAL AND ADMINISTRATIVE Our general and administrative expense for the three and six months ended June 30, 2009 and 2008 breakdown as follows: (in thousands) General and Administrative 2009 2008 Change % Change --------------------------------- -------- -------- -------- -------- Three Months Ended June 30 ...... $ 874 $ 495 $ 379 76% Six Months Ended June 30 ........ $ 1,189 $ 829 $ 360 43% 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 June 30, 2009 were $874,000, a 76% increase as compared to the same period in 2008. The increase results from stock option and warrant compensation of $608,000. General and administrative expenses for the six months ended June 30, 2009 were $1,189,000 a 43% increase as compared to the same period in 2008. The significant component of the increase results from stock option compensation of $635,000. OTHER EXPENSE (INCOME), NET Our other expense (income) for the three months ended June 30, 2009 and 2008 breakdown as follows: (in thousands) Other (Income) Expenses 2009 2008 Change % Change ------------------------------- -------- -------- -------- -------- Three Months Ended June 30 .... $ (13) $ (51) $ (38) (75%) Six Months Ended June 30 ..... $ (61) $ (53) $ 8 15% 13 Other expenses for the three months ended June 30, 2009 consists primarily, interest expense on debt in the amount of $11,000, foreign currency exchange transactions loss of $2,000 and other nonrecurring income of ($26,000), Other expenses for the six months ended June 30, 2009 was $61,000 consists primarily, interest expense on debt in the amount of $21,000, foreign currency exchange transactions losses of $6,000 and other nonrecurring income of the licensing settlements in the amount of ($35,000) prior year reversals of accruals ($49,000) and rental income of ($4,000). LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2009, we had a working capital deficit of approximately $2,544,000, and our cash balance was approximately $16,000. We have entered into a binding letter of intent with Masthead Studios to fund the development of a Massively Multiplayer Online Game (MMOG), code named "Project: V13." The game has been in design and development at Interplay since November 2007. Masthead and Interplay teams are working together under the direction and control of Interplay to complete development of the project. As a part of the agreement, the game utilizes Masthead's proprietary tools and MMOG technology developed for Masthead's MMO "Earthrise" project We sold "Fallout" to a third party and entered into, subject to satisfaction of various conditions, the license back which could allow us to create, develop and exploit a "Fallout" MMOG. We also retained perpetual exclusive worldwide merchandising right to the existing Fallout games at the time (Fallout, Fallout 2, Fallout Tactics and Fallout Brotherhood of steel). We have reinitiated our in-house game development studio, and have hired game developers. We are exploiting, or planning to exploit, our portfolio of gaming properties through sequels and various development and publishing arrangements in the following ways: o Sequels for video game consoles and personal computers o Downloadable existing and new content for video game consoles o Electronic distribution of existing content for personal computers o Electronic distribution of new content for mobile devices We have entered into a Game Production Agreement with Interactive Game Group which provides for the financing of the development of games under certain conditions. 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 generated cash of $40,000 during the six months ended June 30, 2009. We entered into various licensing agreements during the three months ended June 30, 2009 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. No assurance can be given that funding can be obtained by us on acceptable terms, or at all. OFF BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements under which we have obligations under a guaranteed contract that has any of the characteristics identified in GAAP. "Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". We do not 14 have any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets. We also do not have any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument. We have no obligations, including a contingent obligation arising out of a variable interest in an unconsolidated entity that is held by, and material to, us, where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with us. CONTRACTUAL OBLIGATIONS The following table summarizes certain of our contractual obligations under non-cancelable contracts and other commitments at June 30, 2009, and the effect such obligations are expected to have on our liquidity and cash flow in future periods. (in thousands)
Less than 1 - 3 3 - 5 More than CONTRACTUAL OBLIGATION Total 1 Year Years Years 5 Years ------------------------------------------------------------------------------------ Lease Commitments (1) .. 11 3 8 -- -- --------- --------- --------- --------- --------- Total ................. 11 3 8 -- -- ========= ========= ========= ========= =========
(1) We had a lease commitment at the Beverly Hills office through April 2008. The Company is presently in negotiations to extend that lease but no commitments have been made. We also have a lease commitment in Irvine for our new development offices through March 31, 2009. The Company is presently in negotiations to extend that lease but no commitments have been made. We also have a lease commitment at the French representation office through February 28, 2011 with an option for an additional 3 years. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not have any derivative financial instruments as of June 30, 2009. 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, but we anticipate we may establish a line of credit in the future. 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 losses of $6,000 and a gain of $4,000 during the six months ended June 30, 2009 and 2008 respectively, primarily in connection with foreign exchange fluctuations in the timing of payments received on accounts receivable. ITEM 4T. 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 June 30, 2009 that have materially affected or are reasonably likely to materially affect these controls. 15 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. PART II - OTHER INFORMATION ITEM 1A. RISK FACTORS There have been no material changes to the risk factors disclosed in Item 1A to Part 1 of our form 10-K for the fiscal year ended December 31, 2008. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of the stockholders of the Company was held on June 30, 2009. The following resolution was passed: (1) Election of each director listed below: For Withheld ---------- ---------- Herve Caen 69,069,652 910,381 Eric Caen 69,197,834 782,199 Michel Welter 68,990,592 989,441 Xavier De Portal 69,176,056 803,977 Alberto Haddad 68,949,632 1,030,401 ITEM 6. EXHIBITS (a) Exhibits - The following exhibits, other than exhibit 32.1 which is being furnished herewith, are filed as part of this report: EXHIBIT NUMBER EXHIBIT TITLE ------- ------------- 31.1 Certificate of Herve Caen, Chief Executive Officer of Interplay Entertainment Corp. pursuant to Rule 13a-14(a) of the Securities and Act of 1934, as amended. 31.2 Certificate of Herve Caen, Interim Chief Financial Officer of Interplay Entertainment Corp. pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended. 32.1 Certificate of Herve Caen, Chief Executive Officer and Interim Chief Financial Officer of Interplay Entertainment Corp. pursuant to Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended. 16 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. INTERPLAY ENTERTAINMENT CORP. Date: August 18, 2009 By: /S/ HERVE CAEN ---------------------------------- Herve Caen, Chief Executive Officer and Interim Chief Financial Officer (Principal Executive and Financial and Accounting Officer) 17