UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2012
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________
to ___________
Commission file number 001-34796
INDIEPUB ENTERTAINMENT, INC.
FORMERLY ZOO ENTERTAINMENT, INC.
(Exact name of Registrant as Specified in Its Charter)
Delaware (State or other jurisdiction of incorporation or organization ) |
71-1033391 (I.R.S. Employer Identification No.) |
11258 Cornell Park Drive, Suite 608 Blue Ash, OH (Address of Principal Executive Offices) |
45242
(Zip Code) |
(513) 824-8297 (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 (§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 x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer ¨ Non-accelerated filer ¨ (do not check if a smaller reporting company) |
Accelerated filer ¨ Smaller reporting company x |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of August 8, 2012, there were 10,149,238 shares of the Registrant’s common stock, par value $0.001 per share, issued and 10,136,235 shares outstanding.
INDIEPUB ENTERTAINMENT, INC.
Table of Contents
Page | ||
PART I - FINANCIAL INFORMATION | ||
Item 1. | Financial Statements. | 3 |
Condensed Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011 | 3 | |
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) for the Three and Six Months Ended June 30, 2012 and 2011 | 4 | |
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2012 and 2011 | 5 | |
Condensed Consolidated Statement of Stockholders’ Deficit (Unaudited) for the Six Months Ended June 30, 2012 | 6 | |
Notes to Condensed Consolidated Financial Statements | 7 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 23 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 33 |
Item 4. | Controls and Procedures. | 33 |
PART II - OTHER INFORMATION | ||
Item 1. | Legal Proceedings. | 34 |
Item 1A. | Risk Factors. | 35 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 35 |
Item 3. | Defaults Upon Senior Securities. | 35 |
Item 4. | Mine Safety Disclosures. | 35 |
Item 5. | Other Information. | 35 |
Item 6. | Exhibits. | 35 |
Signatures | 37 |
2 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INDIEPUB ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
JUNE 30, | DECEMBER 31, | |||||||
2012 | 2011 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 137 | $ | 27 | ||||
Accounts receivable and due from factor, net of allowances of $59 and $20 at June 30, 2012 and December 31, 2011, respectively | 58 | 106 | ||||||
Inventory, net | – | 131 | ||||||
Prepaid expenses and other current assets | 183 | 183 | ||||||
Product development costs, net | 1,262 | 1,410 | ||||||
Deferred tax assets | – | – | ||||||
Total current assets | 1,640 | 1,857 | ||||||
Fixed assets, net | 84 | 202 | ||||||
Other non-current assets | 55 | – | ||||||
Total assets | $ | 1,779 | $ | 2,059 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,939 | $ | 4,352 | ||||
Financing arrangements | 210 | 1,141 | ||||||
Accrued expenses and other current liabilities | 2,166 | 6,289 | ||||||
Notes payable, current portion | 220 | 1,137 | ||||||
Total current liabilities | 4,535 | 12,919 | ||||||
Notes payable, non-current portion | 380 | 1,540 | ||||||
Loan agreement, net of discount | 2,888 | – | ||||||
Other long-term liabilities | 241 | 781 | ||||||
Deferred tax liabilities | – | – | ||||||
Total liabilities | 8,044 | 15,240 | ||||||
Commitments and Contingencies | ||||||||
Stockholders’ Deficit: | ||||||||
Common stock, $0.001 par value: 295,000,000 shares authorized, 10,140,204 shares issued and 10,127,201 shares outstanding at June 30, 2012 and 3,500,000,000 shares authorized, 8,024,438 shares issued and 8,011,435 shares outstanding at December 31, 2011 | 10 | 8 | ||||||
Additional paid-in capital | 80,442 | 76,570 | ||||||
Accumulated deficit | (82,016 | ) | (85,043 | ) | ||||
Accumulated other comprehensive loss | (232 | ) | (247 | ) | ||||
Treasury stock, at cost, 13,003 shares at June 30, 2012 and December 31, 2011 | (4,469 | ) | (4,469 | ) | ||||
Total stockholders’ deficit | (6,265 | ) | (13,181 | ) | ||||
Total liabilities and stockholders' deficit | $ | 1,779 | $ | 2,059 |
See accompanying notes to condensed consolidated financial statements.
3 |
INDIEPUB ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME (LOSS)
(In thousands, except share and per share amounts)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenue | $ | 69 | $ | 3,651 | $ | 474 | $ | 7,432 | ||||||||
Cost of goods sold | 579 | 6,100 | 750 | 10,791 | ||||||||||||
Gross loss | (510 | ) | (2,449 | ) | (276 | ) | (3,359 | ) | ||||||||
Operating expense: | ||||||||||||||||
General and administrative | 836 | 2,739 | 2,615 | 4,938 | ||||||||||||
Selling and marketing | 104 | 715 | 173 | 1,760 | ||||||||||||
Research and development | – | 1,802 | – | 2,263 | ||||||||||||
Impairment of intangible assets | – | 1,749 | – | 1,749 | ||||||||||||
Depreciation and amortization | 24 | 453 | 55 | 906 | ||||||||||||
Total operating expenses | 964 | 7,458 | 2,843 | 11,616 | ||||||||||||
Loss from operations | (1,474 | ) | (9,907 | ) | (3,119 | ) | (14,975 | ) | ||||||||
Gain on extinguishment of liabilities | 2,392 | – | 6,561 | – | ||||||||||||
Other expense | (47 | ) | – | (65 | ) | – | ||||||||||
Interest expense | (220 | ) | (181 | ) | (350 | ) | (679 | ) | ||||||||
Income (loss) from operations before income taxes | 651 | (10,088 | ) | 3,027 | (15,654 | ) | ||||||||||
Income taxes | – | – | – | – | ||||||||||||
Net income (loss) | 651 | (10,088 | ) | 3,027 | (15,654 | ) | ||||||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||||||
Net unrealized (loss) gain on pension benefit obligation | (24 | ) | – | 15 | – | |||||||||||
Net comprehensive income (loss) | $ | 627 | $ | (10,088 | ) | $ | 3,042 | $ | (15,654 | ) | ||||||
Income (loss) per common share – basic and diluted: | ||||||||||||||||
Basic: | ||||||||||||||||
Income (loss) per share | $ | 0.07 | $ | (1.54 | ) | $ | 0.34 | $ | (2.47 | ) | ||||||
Weighted average common shares outstanding – basic | 9,892,395 | 6,571,783 | 8,993,648 | 6,334,523 | ||||||||||||
Diluted: | ||||||||||||||||
Income (loss) per share | $ | 0.04 | $ | (1.54 | ) | $ | 0.17 | $ | (2.47 | ) | ||||||
Weighted average common shares outstanding – diluted | 24,612,321 | 6,571,783 | 18,852,578 | 6,334,523 |
See accompanying notes to condensed consolidated financial statements.
4 |
INDIEPUB ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS ENDED JUNE 30, | ||||||||
2012 | 2011 | |||||||
Operating activities: | ||||||||
Net income (loss) | $ | 3,027 | $ | (15,654 | ) | |||
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | ||||||||
Write-off of product development costs to research and development | – | 2,263 | ||||||
Provision for returns and allowances | 40 | 1,483 | ||||||
Depreciation and amortization | 55 | 906 | ||||||
Impairment of intangible assets | – | 1,749 | ||||||
Amortization of product development costs and other write-offs | 592 | 2,914 | ||||||
Stock-based compensation | 134 | 752 | ||||||
Gain on extinguishment of liabilities | (6,561 | ) | – | |||||
Loss on disposal of assets | 64 | – | ||||||
Accretion of interest on financing facilities | 208 | 40 | ||||||
Other changes in assets and liabilities: | ||||||||
Accounts receivable and due from factor, net | 9 | 10,670 | ||||||
Inventory, net | – | 4,724 | ||||||
Product development costs, net | (497 | ) | (2,432 | ) | ||||
Prepaid expenses and other current assets | (2 | ) | 436 | |||||
Accounts payable | (448 | ) | 598 | |||||
Accrued expenses and other liabilities | 143 | (880 | ) | |||||
Net cash (used in) provided by operating activities | (3,236 | ) | 7,569 | |||||
Investing activities: | ||||||||
Purchase of fixed assets | (3 | ) | (65 | ) | ||||
Proceeds from sale of fixed assets | 1 | – | ||||||
Net cash used in investing activities | (2 | ) | (65 | ) | ||||
Financing activities: | ||||||||
Net repayments in connection with purchase order and receivable financing facilities | – | (9,606 | ) | |||||
Borrowings in connection with MMB Loan Agreement | 4,381 | – | ||||||
Borrowings in connection with Panta and MMB financing facilities | 857 | 1,575 | ||||||
Repayments in connection with Panta and MMB financing facilities | (1,841 | ) | – | |||||
Issuance of notes payable | – | 183 | ||||||
Repayments of notes payable | (49 | ) | – | |||||
Net cash provided by (used in) financing activities | 3,348 | (7,848 | ) | |||||
Net increase (decrease) in cash | 110 | (344 | ) | |||||
Cash at beginning of period | 27 | 379 | ||||||
Cash at end of period | $ | 137 | $ | 35 |
See accompanying notes to condensed consolidated financial statements.
5 |
INDIEPUB ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 2012
(In thousands)
Accumulated | ||||||||||||||||||||||||||||||||
Common Stock | Other | Treasury Stock | ||||||||||||||||||||||||||||||
Shares |
Par Value | Additional Paid-in Capital | Accumulated Deficit | Comprehensive Loss |
Shares |
Cost |
Total | |||||||||||||||||||||||||
Balance at December 31, 2011 | 8,024 | $ | 8 | $ | 76,570 | $ | (85,043 | ) | $ | (247 | ) | 13 | $ | (4,469 | ) | $ | (13,181 | ) | ||||||||||||||
Stock-based compensation | – | – | 134 | – | – | – | – | 134 | ||||||||||||||||||||||||
Common stock issued to satisfy liabilities | 2,116 | 2 | 1,888 | – | – | – | – | 1,890 | ||||||||||||||||||||||||
Issuance of warrants | – | – | 1,850 | – | – | – | – | 1,850 | ||||||||||||||||||||||||
Other comprehensive income | – | – | – | – | 15 | – | – | 15 | ||||||||||||||||||||||||
Net income | – | – | – | 3,027 | – | – | – | 3,027 | ||||||||||||||||||||||||
Balance at June 30, 2012 | 10,140 | $ | 10 | $ | 80,442 | $ | (82,016 | ) | $ | (232 | ) | 13 | $ | (4,469 | ) | $ | (6,265 | ) |
See accompanying notes to condensed consolidated financial statements.
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indiePub Entertainment, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
NOTE 1. DESCRIPTION OF ORGANIZATION
indiePub Entertainment, Inc., (formerly Zoo Entertainment, Inc.) (“indiePub” or the “Company”) was incorporated under the laws of the State of Nevada on February 13, 2003, under the name Driftwood Ventures, Inc. On December 3, 2008, Driftwood Ventures, Inc. changed its name to Zoo Entertainment, Inc. On May 17, 2012, Zoo Entertainment, Inc. changed its name to indiePub Entertainment, Inc.
indiePub is a developer, publisher and distributor of interactive entertainment software for digital distribution channels. indiePub’s digital business strategy centers on bringing fresh, innovative content to digital distribution channels and mobile devices. The Company utilizes its indiePub website (www.indiePub.com) as an innovative content creation site that is designed to unearth content for future development and eventual publication. The Company intends to release a unique distribution platform that will allow anyone to sell and monetize apps.
The Company is currently developing and/or publishing downloadable games for “connected services,” including Microsoft’s Xbox Live Arcade (XBLA), Sony’s PlayStation Network (PSN), Facebook, PC/Mac, iOS and Android devices.
As of June 30, 2012, the Company operated in one segment in the United States with a focus on developing, publishing and distributing interactive entertainment software in North American and international markets. The Company began phasing out its retail business during 2011.
Unless the context otherwise indicates, the use of the terms “we,” “our” or “us” refer to the Company and its operating subsidiaries, Zoo Games, Inc., Zoo Publishing, Inc., and indiePub, Inc.
NOTE 2. GOING CONCERN
These condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred losses since inception, resulting in an accumulated deficit of approximately $82.0 million as of June 30, 2012. In addition, the Company has a history of negative cash flows from operating activities. As of June 30, 2012, the Company’s working capital deficit was approximately $2.9 million. Given the Company’s history of net losses and generating negative cash flows from operating activities, combined with its shift to a new digital sales strategy, there can be no assurance that it will be able to generate positive cash flows from operations, nor can the Company predict whether it will have sufficient cash from operations to meet its financial obligations for the 12-month period beginning July 1, 2012, which raises substantial doubt about the Company’s ability to continue as a going concern.
The Company’s ability to continue as a going concern is dependent on, among other factors, the following significant short-term actions: (i) its ability to generate cash flow from operations sufficient to maintain its daily business activities; (ii) its ability to reduce expenses and overhead; (iii) its ongoing ability to renegotiate certain obligations; and (iv) its ability to raise additional capital or financing. Management’s active efforts in this regard include negotiations with certain vendors to satisfy cash obligations with non-cash assets or equity, reductions of headcount and overhead obligations, and the development of strategies to convert other non-cash assets into cash. There can be no assurance that all or any of these actions will meet with success.
On March 9, 2012, the Company and MMB Holdings LLC (“MMB”) entered into a Loan and Security Agreement (the “Loan Agreement”) pursuant to which MMB agreed to provide the Company with loans totaling $4,381,110. These loans were granted: (i) to repay and satisfy all of indiePub’s obligations to MMB under the Second Amended and Restated Factoring and Security Agreement, dated as of October 28, 2011, as amended through February 29, 2012, and totaling $1,831,110; (ii) for purposes of settling, at a discount, certain obligations to unsecured creditors of the Company (the “Existing Unsecured Claims”); and (iii) for working capital and other purposes permitted under the Loan Agreement. Through June 30, 2012, the Company had borrowed the entire loan facility of $4,381,110. The interest rate under the Loan Agreement is ten percent (10%) per annum, or eighteen percent (18%) per annum upon the occurrence of an event of default. The maturity date of the loans is March 31, 2014. The amounts under the Loan Agreement are secured by a first priority security interest (except to the extent subordinated by the Factoring Agreement) on all of the assets of the Company. Refer to Note 16 – Subsequent Events, for further information.
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Utilizing proceeds from the Loan Agreement, the Company entered into agreements providing for the settlement of approximately $10.8 million of liabilities owed to certain of its unsecured creditors for approximately $986,000 in cash, approximately 2.6 million shares of the Company’s common stock, approximately $131,000 of inventory, and warrants to purchase 365,000 shares of the Company’s common stock at an exercise price of $0.50 per share. As of June 30, 2012, approximately $9.7 million of the settlements were finalized for approximately $914,000 cash, the issuance of approximately 2.1 million shares of the Company’s common stock, and the issuance of a warrant to purchase 365,000 shares of the Company’s common stock at an exercise price of $0.50 per share, resulting in a gain of approximately $6.6 million, which amount is included in the category gain on extinguishment of liabilities in the Company’s condensed consolidated statements of operations and comprehensive income (loss) . The Company anticipates it will finalize the remaining agreements during the third quarter of 2012, although no assurances can be given in this regard.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary as a result of this uncertainty.
NOTE 3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Interim Financial Information
The accompanying unaudited interim condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the interim financial statement rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the condensed consolidated financial statements. The condensed consolidated financial statements should be read in conjunction with the Company’s management discussion and analysis contained elsewhere herein and the consolidated financial statements for the year ended December 31, 2011 filed with the SEC on April 16, 2012. The Company’s results for the three and six months ended June 30, 2012 might not be indicative of the results for the full year or any future period.
The condensed consolidated financial statements of the Company include the accounts of Zoo Games, Inc. and its wholly-owned subsidiaries, Zoo Publishing, Inc. (and its wholly-owned subsidiary, indiePub, Inc.) and Zoo Entertainment Europe Ltd. All intercompany accounts and transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with 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 dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. The estimates affecting the condensed consolidated financial statements that are particularly significant include: the recoverability of product development costs; the adequacy of allowances for doubtful accounts, and; the valuation of equity instruments. Estimates are based on historical experience, where applicable, or other assumptions that management believes are reasonable under the circumstances. Due to the inherent uncertainty involved in making estimates, actual results may differ from those estimates under different assumptions or conditions.
Concentration of Credit Risk
The Company maintains cash balances at what it believes are several high-quality financial institutions. While the Company attempts to limit credit exposure with any single institution, balances at times exceed Federal Deposit Insurance Corporation insurable amounts.
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If the financial condition and operations of the Company’s customers deteriorate, its risk of collection could increase substantially. On July 12, 2011, the Company entered into a sales and distribution agreement with Alter Ego Games, LLC (“AEG”), which allowed AEG to be an exclusive master distributor of the Company’s catalogue product in the United States, South America and Europe. Also on July 12, 2011, the Company entered into a sub-publishing and distribution agreement with Southpeak Interactive, LLC (“Southpeak”), an affiliate of AEG, which allowed Southpeak to sub-publish, manufacture and distribute the Company’s “Minute to Win It” game on the Microsoft platform in the United States and Latin America. Consequently, a significant portion of the Company’s revenues and accounts receivable after July 12, 2011 were concentrated in two entities related to each other. Prior to July 12, 2011, a majority of the Company’s trade receivables were derived from sales to major retailers and distributors. As the Company continues to migrate to digital sales, credit risk for collection of accounts receivable will be concentrated amongst a few digital platform operators.
During the three months ended June 30, 2012, the Company derived the majority of its revenue through sales of its digital games. For the three months ended June 30, 2011, the Company derived the majority of its revenue from the sale of its catalogue products. During that period the Company’s five largest ultimate customers accounted for approximately 71% (of which the following customers constituted balances greater than 10%: customer A – 25%; customer B – 15%; customer C – 13%; and customer D – 11%) of net revenue. For the six months ended June 30, 2012, the Company derived the majority of its revenue through the recognition of royalties under its sales and distribution agreement with AEG. For the six months ended June 30, 2011, the Company derived the majority of its revenue from the sale of its catalogue products. During that period the Company’s five largest ultimate customers accounted for approximately 62% (of which the following customers constituted balances greater than 10%: customer A – 14%; customer B – 14%; customer C – 13%; and customer D – 11%) of net revenue. During the six months ended June 30, 2012 and 2011, the Company sold $0 and approximately $11.8 million, respectively, of receivables to its factors with recourse. The factored receivables were $0 of the Company’s accounts receivable and due from factor, net, as of June 30, 2012 and December 31, 2011, respectively. The Company regularly reviews its outstanding receivables for potential bad debts and has had no history of significant write-offs due to bad debts.
Reclassifications
The accompanying condensed consolidated financial statements for the three and six months ended June 30, 2011 contain certain reclassifications to conform to the current year presentation.
Inventory
Inventory is stated at the lower of cost or market. Estimated product returns are included in the inventory balances and also recorded at the lower of actual cost or market.
Product Development Costs
The Company utilizes third-party product developers and frequently enters into agreements with these developers that require it to make payments based on agreed-upon milestone deliverable schedules for game design and enhancements. The Company receives the exclusive publishing and distribution rights to the finished game title as well as, in some cases, the underlying intellectual property rights for that game. The Company typically enters into these development agreements after it has completed the design concept for its products. The Company contracts with third-party developers that have proven technology and the experience and ability to build the designed video game as conceived by the Company. As a result, technological feasibility is determined to have been achieved at the time in which the Company enters the agreement and it therefore capitalizes such payments as prepaid product development costs. On a product-by-product basis, the Company reduces prepaid product development costs and records amortization using the proportion of current year unit sales and revenues to the total unit sales and revenues expected to be recorded over the life of the title. For its digital products, the Company amortizes prepaid product development costs into expense based upon the estimated downloads over the expected life of the product.
At each balance sheet date, or earlier if an indicator of impairment exists, the Company evaluates the recoverability of capitalized prepaid product development costs, development payments and any other unrecognized minimum commitments that have not been paid, using an undiscounted future cash flow analysis, and charges any amounts that are deemed unrecoverable to cost of goods sold if the product has already been released. If the product development process is discontinued prior to completion, any prepaid unrecoverable amounts are charged to research and development expense.
During the three and six months ended June 30, 2011, the Company wrote off approximately $1.8 and $2.3 million, respectively, of expense relating to costs incurred for the development of games that were abandoned during those periods, which amounts were recorded in research and development expense in the condensed consolidated statements of operations and comprehensive income (loss). There were no write-offs to research and development in the comparable 2012 periods. During the three and six months ended June 30, 2012 and 2011, the Company wrote off approximately $403,000 and $272,000, respectively, of product development costs relating to games that were still in development but not yet released, or games that were released but whose development costs were not expected to be recoverable. The Company determined that amounts incurred to develop the games were not recoverable from future sales of those games and included these amounts in cost of goods sold in the Company’s condensed consolidated statements of operations and comprehensive income (loss). The Company uses various measures to estimate future revenues for its product titles, including past performance of similar titles and orders for titles prior to their release. For sequels, the performance of predecessor titles is also taken into consideration.
9 |
Prior to establishing technological feasibility, the Company expenses research and development costs as incurred.
The Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) Topic 808-10-15, “Accounting for Collaborative Arrangements” (“ASC 808-10-15”), defines collaborative arrangements and requires collaborators to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) the other collaborators based on other applicable authoritative accounting literature, and in the absence of other applicable authoritative literature, a reasonable, rational and consistent accounting policy is to be elected. The Company’s arrangements with third-party developers are not considered collaborative arrangements because the third-party developers do not have significant active participation in the design and development of the video games, nor are they exposed to significant risks and rewards as their compensation is fixed and not contingent upon the revenue that the Company will generate from sales of its product. If the Company enters into any future arrangements with product developers that are considered collaborative arrangements, it will account for them accordingly.
Licenses and Royalties
Licenses consist of payments and guarantees made to holders of intellectual property rights for use of their trademarks, copyrights, technology or other intellectual property rights in the development of the Company’s products. Agreements with holders of intellectual property rights generally provide for guaranteed minimum royalty payments for use of their intellectual property.
Certain licenses extend over multi-year periods and encompass multiple game titles. In addition, certain licenses guarantee minimum license payments to licensors over the term of the license. In addition to guaranteed minimum payments, these licenses frequently contain provisions that could require the Company to pay royalties to the license holder, based on pre-agreed unit sales thresholds.
Certain licensing fees are capitalized on the condensed consolidated balance sheets in prepaid expenses and are amortized as royalties into cost of goods sold, on a title-by-title basis, at a ratio of current period revenues to the total revenues expected to be recorded over the remaining life of the title. Similar to product development costs, the Company reviews its sales projections quarterly to determine the likely recoverability of its capitalized licenses as well as any unpaid minimum obligations. When management determines that the value of a license is unlikely to be recovered by product sales, capitalized licenses are charged to cost of goods sold, based on current and expected revenues, in the period in which such determination is made. Criteria used to evaluate expected product performance and to estimate future sales for a title include: historical performance of comparable titles; orders for titles prior to release; and the estimated performance of a sequel title based on the performance of the title on which the sequel is based. In addition, the Company reviews licenses that contain guaranteed minimum payments and records expense to cost of goods sold for any unearned guaranteed minimum amounts that become payable to licensors.
Fixed Assets
Fixed assets, consisting primarily of office equipment and furniture and fixtures, are stated at cost. Major additions or improvements are capitalized, while repairs and maintenance are charged to expense. Property and equipment are depreciated on a straight-line basis over the estimated useful life of the assets. Office equipment and furniture and fixtures are depreciated over five years, computer equipment and software are generally depreciated over three years, and leasehold improvements are depreciated over the shorter of the related lease term or seven years. When depreciable assets are retired or sold, the cost and related allowances for depreciation are removed from the accounts and any gain or loss is recognized as a component of operating income or loss in the condensed consolidated statements of operations and comprehensive income (loss).
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Revenue Recognition
The Company earns its revenue from the sale of interactive software titles developed by and/or licensed from third party developers. The Company recognizes such revenue upon the transfer of title and risk of loss to its customers. Accordingly, the Company recognizes revenue for software titles when there is: (i) persuasive evidence that an arrangement with the customer exists, which is generally a customer purchase order or an online order; (ii) the product is delivered; (iii) the selling price is fixed or determinable; (iv) collection of the customer receivable is deemed probable; and (v) the Company does not have any continuing obligations. Historically, the Company’s payment arrangements with customers typically provided net 30- and 60-day terms. Advances received from customers were deferred and reported on the Company’s condensed consolidated balance sheets under the caption accrued expenses and other current liabilities. Under the Company’s current distribution agreement, payments for cost of goods sold, plus a per-unit tech fee which represents an unearned advance against future royalties, are due to the Company within three to five business days of shipment of the goods. The cost of goods sold portion is recognized as revenue at the time of sale, while the per-unit unearned advance on royalties is deferred until such time that the Company receives information from its distributor that allows it to conclude that all components of the earnings process have been completed. Under the Company’s current sub-publishing and distribution agreement, the Company receives payments for per-unit advances based upon the manufacture, sale and sell-through of the Company’s product. These per-unit advances are deferred until such time that the Company receives information from its distributor that allows it to conclude that all components of the earnings process have been completed. Unearned advances are included in the caption accrued expenses and other current liabilities in the Company’s condensed consolidated balance sheets. The Company utilizes digital platform operators, such as Apple and Microsoft, for the sale of certain of its digital games. The Company records revenue as downloads of the Company’s games are reported.
Revenue is presented net of estimated reserves for returns, price concessions and other items. 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 deemed probable, the Company defers the revenue until such time as it can reliably estimate any related returns and allowances and determine that collection of the receivable is deemed probable.
Equity-Based Compensation
The Company issued options to purchase shares of the Company’s common stock to a director during the six months ended June 30, 2011. Stock option grants vest over periods ranging from immediately to four years and expire within ten years of issuance. Stock options that vest in accordance with service conditions amortize over the applicable vesting period using the straight-line method.
The fair value of the options granted is estimated using the Black-Scholes option-pricing model. This model requires the input of assumptions regarding a number of complex and subjective variables that will usually have a significant impact on the fair value estimate. These variables include, but are not limited to, the volatility of the Company’s stock price and estimated exercise behavior. The Company used the current market price to determine the fair value of the stock price for the March 8, 2011 grant. For the stock option modifications that occurred during the first quarter of 2012 and the second quarter of 2011, the Company used the current market price to determine the fair value of the stock price as of the modification date. The following table summarizes the assumptions and variables used by the Company to compute the weighted average fair value of stock option grants and modifications:
Six Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
Risk-free interest rate | 0.19% | 0.06% – 2.47% | ||||||
Expected stock price volatility | 135.3% | 60.0% – 82.77% | ||||||
Expected term until exercise (years) | 1 | 2 – 7 | ||||||
Expected dividend yield | None | None |
For the three months ended March 31, 2011, the Company estimated the implied volatility for publicly traded options on its common shares as the expected volatility assumption required in the Black-Scholes option-pricing model. The selection of the implied volatility approach was based upon the historical volatility of companies with similar businesses and capitalization and the Company’s assessment that implied volatility was more representative of future stock price trends than historical volatility. Commencing with the second quarter of 2011, the Company began using a volatility calculation based upon its own daily stock price, as a more representative sample was available after its July 2010 stock offering and transfer to the NASDAQ stock market, and subsequently to the OTC market.
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Income (Loss) Per Share
Basic income (loss) per share (“EPS”) is computed by dividing the net income (loss) applicable to common stockholders for the period by the weighted average number of shares of common stock outstanding during the same period. A 2010 restricted stock grant, of which 44,310 and 110,775 shares were unvested as of June 30, 2012 and 2011, respectively, was excluded from the basic EPS calculation. Diluted EPS is computed by dividing the net income (loss) applicable to common stockholders for the period by the weighted average number of shares of common stock outstanding and common stock equivalents, which includes warrants, options and convertible securities outstanding during the same period, except when the effect would be antidilutive. The number of additional shares is calculated by assuming that outstanding stock options and warrants with an exercise price less than the Company’s average stock price for the period were exercised, and that the proceeds from such exercises were used to acquire shares of common stock at the average market price during the reporting period. For the three months ended June 30, 2012, no stock options and 11,761,979 warrants were included in the weighted average shares outstanding for the period. For the six months ended June 30, 2012, no stock options and 11,761,979 warrants were included in the weighted average shares outstanding for the period. The Company accounts for convertible loans using the “if converted” method. Under this method, the convertible loans are assumed to be converted to shares (weighted for the number of days outstanding in the period) at a conversion of price of $0.40 per share, and interest expense, net of taxes, related to the convertible loans is added back to net income. For the three months ended June 30, 2012, this resulted in the inclusion of an additional 9,431,312 shares outstanding for the period and the add back of approximately $212,000 of interest expense to net income. For the six months ended June 30, 2012, this resulted in the inclusion of an additional 6,134,791 shares outstanding for the period and the add back of approximately $269,000 of interest expense to net income.The Company incurred a net loss for the three and six-month periods ended June 30, 2011, therefore the diluted loss per share is the same as basic loss per share.
Income Taxes
The Company recognizes deferred taxes under the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for differences between the financial statement and tax basis of assets and liabilities at currently enacted statutory tax rates for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized as income in the period that includes the enactment date. Valuation allowances are established when the Company determines that it is more likely than not that such deferred tax assets will not be realized.
The Company follows the provisions of FASB Accounting Standards Codification Topic 740 regarding the accounting and recognition for income tax positions taken or expected to be taken in the Company’s income tax returns. As of June 30, 2012, the Company believes it does not have any material unrecognized tax liability from tax positions taken during the current or any prior period. In addition, as of June 30, 2012, tax years 2008 through 2011 remain within the statute of limitations and are subject to examination by tax jurisdictions. The Company’s policy is to recognize any interest and penalties accrued on unrecognized tax benefits as part of income tax expense.
Fair Value Measurement
In accordance with FASB Topic 820 (“Topic 820”), “Fair Value Measurements and Disclosures,” fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Topic 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
· | Level 1 — Unadjusted quoted market prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. |
· | Level 2 — Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.) and inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
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· | Level 3 — Unobservable inputs that reflect assumptions about what market participants would use in pricing assets or liabilities based on the best information available. |
As of June 30, 2012 and December 31, 2011, the carrying value of cash, accounts receivable and due from factor, inventory, prepaid expenses, accounts payable, and accrued expenses were reasonable estimates of the fair values because of their short-term maturity. The carrying value of financing arrangements, loan agreements and notes payable are reasonable estimates of fair value because interest rates closely approximate market rates.
Recently Issued Accounting Pronouncements
In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU No. 2011-11”). This ASU requires companies to disclose both net and gross information about assets and liabilities that have been offset, if any, and the related arrangements. The disclosures under this new guidance are required to be provided retrospectively for all comparative periods presented. The Company is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company does not anticipate that adoption of this ASU will have a material impact on its financial condition, results of operations or cash flows.
NOTE 4. INVENTORY, NET
Inventory consisted of:
(Amounts in Thousands) | ||||||||
June 30, | December 31, | |||||||
2012 | 2011 | |||||||
Finished products | $ | – | $ | 12 | ||||
Parts & supplies | – | 119 | ||||||
Total | $ | – | $ | 131 |
The Company utilized its remaining catalogue inventory of approximately $131,000 as partial settlement of a vendor obligation in March 2012.
NOTE 5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of:
(Amounts in Thousands) | ||||||||
June 30, | December 31, | |||||||
2012 | 2011 | |||||||
Prepaid royalties | $ | 76 | $ | 76 | ||||
Other | 107 | 107 | ||||||
Totals | $ | 183 | $ | 183 |
NOTE 6. PRODUCT DEVELOPMENT COSTS, NET
The Company’s capitalized product development costs for the six months ended June 30, 2012 were as follows (amounts in thousands):
Product development costs, net – December 31, 2011 | $ | 1,410 | ||
New product development costs incurred | 497 | |||
Write-off of product development costs | (403 | ) | ||
Amortization of product development costs | (189 | ) | ||
Product development costs, net – June 30, 2012 | $ | 1,315 |
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Amortization of product development costs for the three months ended June 30, 2012 and 2011 was approximately $128,000 and $1,300,000, respectively. Amortization of product development costs for the six months ended June 30, 2012 and 2011 was approximately $189,000 and $2,500,000, respectively. For the six months ended June 30, 2012, write-off of product development costs consisted of approximately $403,000 written off to cost of goods sold. For the six months ended June 30, 2011, write-off of product development costs consisted of approximately $2,300,000 written off to research and development expense, approximately $272,000 written off to cost of goods sold, and approximately $100,000 written off to selling and marketing expense. The Company has classified approximately $1,300,000 of product development costs as current assets and approximately $53,000 as long-term assets as of June 30, 2012.
NOTE 7. CREDIT AND FINANCING ARRANGEMENTS AND LONG-TERM DEBT
The Company used Purchase Order Financing and Receivable Financing through June 2011. In June 2011, the Company terminated those financing arrangements and entered into a Limited Recourse Agreement which remained in effect through the balance of 2011 and into 2012. In March 2012, the Company and MMB entered into a Loan Agreement which replaced a portion of the Limited Recourse Agreement. The Company’s various credit and financing arrangements are described below.
Purchase Order Financing
Zoo Publishing previously utilized purchase order financing with Wells Fargo Bank, National Association (“Wells Fargo”) to fund the manufacture of video game products. Under the terms of the agreement (the “Assignment Agreement”), Zoo Publishing assigned purchase orders received from customers to Wells Fargo, and requested that Wells Fargo purchase the required materials to fulfill such purchase orders. Wells Fargo, which could accept or decline the assignment of specific purchase orders, retained Zoo Publishing to manufacture, process and ship ordered goods, and paid Zoo Publishing for its services upon Wells Fargo’s receipt of payment from the customers for such ordered goods. Upon payment in full of the purchase order invoice by the applicable customer to Wells Fargo, Wells Fargo re-assigned the applicable purchase order to the Company. On June 24, 2011, Zoo Publishing, the Company and Wells Fargo entered into a Termination Agreement. Pursuant to the Termination Agreement, the Company paid off the balance due of approximately $148,000 and paid $50,000 in full satisfaction of the commitment fee required under the agreement. The commitment fee was included in general and administrative expenses at that date in the consolidated statements of operations and comprehensive income (loss). Wells Fargo released all security interests that they and their predecessors held in the Company’s assets.
There were no amounts outstanding as of June 30, 2012 and December 31, 2011. The effective interest rate on advances was 5.25% as of the termination date. The charges and interest expense on the advances are included in interest expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss) and were approximately $0 and $17,000 for the three months ended June 30, 2012 and 2011, respectively, and approximately $0 and $65,000 for the six months ended June 30, 2012 and 2011, respectively.
Receivable Financing
Zoo Publishing previously utilized a factoring agreement, as amended (the “Original Factoring Agreement”) with Working Capital Solutions, Inc. (“WCS”) for the approval of credit and the collection of proceeds from a portion of its sales. Under the terms of the Original Factoring Agreement, Zoo Publishing sold its receivables to WCS, with recourse. WCS, in its sole discretion, determined whether or not it would accept each receivable based upon the credit risk factor of each individual receivable or account. Once a receivable was accepted by WCS, WCS provided funding subject to the terms and conditions of the Original Factoring Agreement. The amount remitted to Zoo Publishing by WCS equaled the invoice amount of the receivable adjusted for any discounts or allowances provided to the account, less a reserve percentage (which amount was 30% at the termination of the agreement) which was deposited into a reserve account established pursuant to the Original Factoring Agreement, less allowances and fees. The amounts to be paid by Zoo Publishing to WCS for any accepted receivable included a factoring fee for each ten (10) day period the account was open (which fee was 0.56% at the termination of the agreement). Since WCS acquired the receivables with recourse, the Company recorded the gross receivables including amounts due from its customers to WCS and it recorded a liability to WCS for funds advanced to the Company from WCS. On June 24, 2011, the Company terminated its agreement with WCS (the “WCS Termination Agreement”).
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During the six months ended June 30, 2012 and 2011, the Company sold $0 and approximately $11,600,000, respectively, of receivables to WCS with recourse. At June 30, 2012 and December 31, 2011, accounts receivable and due from factor were $0 and there were no advances outstanding to the Company as of June 30, 2012 or December 31, 2011. The interest expense on the advances are included in interest expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss) and were $0 and approximately $124,000 for three months ended June 30, 2012 and 2011, respectively, and were $0 and approximately $574,000 for the six-month periods ended June 30, 2012 and 2011, respectively.
Limited Recourse Agreement
On June 24, 2011, in connection with the WCS Termination Agreement, WCS agreed to assign all of its rights, title and interest in and to the Original Factoring Agreement and all Collateral to Panta Distribution, LLC (“Panta”) pursuant to a Limited Recourse Agreement, dated as of June 24, 2011 (the “Limited Recourse Agreement”). On June 24, 2011, the Company and Panta also entered into an Amended and Restated Factoring and Security Agreement (the “New Factoring Agreement”), pursuant to which the Company agreed to pay Panta all outstanding indebtedness under the Limited Recourse Agreement and to sell to Panta its accounts receivable with recourse. Under the terms of the agreement and subsequent amendment, total actual borrowings of approximately $2,600,000 and accrued interest due of approximately $1,200,000 were required to be repaid by December 4, 2011. On October 7, 2011, the Company was notified by Panta that it was in default under the terms of the agreements; accordingly, the Company accelerated all amounts owed to Panta at that date to currently due and payable and began accruing interest at the default rate of fifteen percent (15%) per annum.
On October 28, 2011, Zoo Publishing entered into the Second Amended and Restated Factoring and Security Agreement (the “Second New Factoring Agreement”) with Panta and MMB, pursuant to which the parties agreed to amend the New Factoring Agreement, to reflect the assignment by Panta to MMB of documents and accounts, including related collateral security, under the New Factoring Agreement, and to amend certain other terms and conditions of the New Factoring Agreement. In connection with the Second New Factoring Agreement, Panta agreed to assign all of its rights, title and interest in and to the New Factoring Agreement to MMB, as agent for itself and Panta, pursuant to a Limited Recourse Assignment, dated as of October 28, 2011 (the “Limited Recourse Assignment”), for a purchase price of $850,000. Panta retained an interest in the principal amount of approximately $186,000 (together with interest and fees accruing thereon), owed by Zoo Publishing under the New Factoring Agreement. Under the Second New Factoring Agreement, MMB, as agent for itself and Panta, agreed to temporarily forbear from exercising certain of its rights under default provisions therein until the earlier of November 11, 2011, or the occurrence of an additional default or breach by the Company, unless otherwise waived by MMB. All default interest accrued at the default interest rate of 15% per annum on amounts outstanding to MMB and Panta. Pursuant to the Second New Factoring Agreement, the Company agreed to make scheduled repayments to MMB, as agent for itself and Panta, with respect to obligations owed by it beginning November 4, 2011 and through December 4, 2011 in the cumulative principal amount owed of approximately $1,036,000. The Second New Factoring Agreement terminates upon the later of: (i) the collection by MMB of all of the Purchased Accounts (as defined in the Second New Factoring Agreement); and (ii) the collection by Panta of approximately $1,036,000 net of all Incurred Expenses (as defined in the Second New Factoring Agreement). Zoo Publishing granted MMB a first priority security interest in certain of its assets as set forth in the Second New Factoring Agreement. MMB is controlled by David E. Smith, a former director of the Company, Jay A. Wolf, Executive Chairman of the Board of Directors of the Company and certain other parties.
On January 5, 2012, January 30, 2012, February 14, 2012, and February 29, 2012, the Company entered into the First, Second, Third and Fourth, respectively, Amendments to the Second Amended and Restated Factoring and Security Agreement with Panta and MMB, pursuant to which the parties agreed to amend that certain Second Amended and Restated Factoring and Security Agreement dated as of October 28, 2011, by and between Zoo Publishing, Panta and MMB. Pursuant to the amendments, MMB agreed to provide $250,000 (less legal fees of $75,000), $175,000, $232,000, and $200,000, respectively, in additional funding to Zoo Publishing under the Factoring Agreement. The additional funding bore interest at the lesser of fifteen percent (15%) per annum, or the maximum rate permitted by law.
On March 9, 2012, the amounts due to MMB were repaid utilizing borrowings under the Loan Agreement. Borrowings and accrued interest owed to Panta in the amount of approximately $210,000 remained outstanding as of June 30, 2012.
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Loan Agreement
On March 9, 2012, the Company and MMB entered into the Loan Agreement, pursuant to which MMB agreed to provide the Company with loans totaling approximately $4,381,110. These loans were granted: (i) to repay and satisfy all of Zoo’s obligations to MMB under the Second Amended and Restated Factoring and Security Agreement, dated as of October 28, 2011, as amended through February 29, 2012, and totaling approximately $1,831,000; (ii) for purposes of settling, at a discount, certain obligations to unsecured creditors of the Company (the “Existing Unsecured Claims”); and (iii) for working capital and other purposes permitted under the Loan Agreement. Under the Loan Agreement, the Company borrowed the entire $4,381,110 as of June 30, 2012. The interest rate under the Loan Agreement is ten percent (10%) per annum, or eighteen percent (18%) per annum upon the occurrence of an event of default. The maturity date of the loans is March 31, 2014. The amounts under the Loan Agreement are secured by a first priority security interest (except to the extent subordinated by the Factoring Agreement) on all of the assets of the Company. At any time during the term of the Loan Agreement, MMB may convert all of the loan balance into the Company’s common stock at a conversion price of $0.40 per share. In connection with the Loan Agreement, the Company issued MMB immediately exercisable warrants to purchase up to 10,952,775 shares of the Company’s common stock at $0.40 per share, which warrants are exercisable through March 31, 2017. The Company has agreed to provide MMB with certain registration rights with respect to its common stock issued in connection with the Loan Agreement and the warrants. The Loan Agreement contains representations and warranties and affirmative and negative covenants, as negotiated by the parties to the agreement. The fair value of the warrants issued in connection with the Loan Agreement resulted in the Company recording a deferred debt discount, which reduced the face amount of the indebtedness to approximately $1,400,000 at the date of issuance. The deferred debt discount is amortized into interest expense over the term that the borrowings are outstanding utilizing the effective interest method. Refer to Note 16 – Subsequent Events, for further information.
NOTE 8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of:
(Amounts in Thousands) | ||||||||
June 30, | December 31, | |||||||
2012 | 2011 | |||||||
Operating expenses | $ | 307 | $ | 1,078 | ||||
Product development costs | – | 600 | ||||||
Due to customers | 807 | 413 | ||||||
Unearned advances | 410 | 791 | ||||||
Royalties | 528 | 3,344 | ||||||
Interest | 114 | 63 | ||||||
Total | $ | 2,166 | $ | 6,289 |
NOTE 9. NOTES PAYABLE
Outstanding notes payable are as follows:
(Amounts in Thousands) | ||||||||
June 30, | December 31, | |||||||
2012 | 2011 | |||||||
2.95% note due June 2012, assumed from Zoo Publishing acquisition | $ | – | $ | 184 | ||||
Obligation arising from Zoo Publishing acquisition | 600 | 600 | ||||||
New World IP, LLC Note | – | 1,100 | ||||||
Zen Factory Group, LLC Promissory Notes | – | 793 | ||||||
Total | 600 | 2,677 | ||||||
Less current portion | 220 | 1,137 | ||||||
Non-current portion | $ | 380 | $ | 1,540 |
In conjunction with a May 2011 separation agreement with David Rosenbaum, Zoo Publishing’s former President, $620,000 due to Mr. Rosenbaum from the acquisition of Zoo Publishing, Inc. was converted from a current obligation recorded in accrued expenses and other current liabilities in the condensed consolidated balance sheets at the date of agreement, to a non-interest-bearing note payable. At June 30, 2012, $220,000 of the remaining amount due was classified as current and $380,000 was classified as non-current. Payments of $10,000 per month were due beginning July 2011, with a final payment of all remaining unpaid amounts due October 2013. In March 2012, the Company entered into an agreement to settle the unpaid obligation for $31,950 cash and 220,745 shares of the Company’s common stock. The Company will extinguish the liability at the date the common stock is issued.
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In conjunction with its March 2012 settlements of obligations, the Company entered into agreements to settle approximately $2,100,000 of notes payable that were recorded on the Company’s consolidated balance sheets at December 31, 2011, as well as all accrued interest due as of the date of the settlements, for approximately $268,000 cash and 768,551 shares of the Company’s common stock valued at approximately $827,000, based on the closing price of the Company’s common stock on the date the shares were issued to each creditor.
NOTE 10. INCOME TAXES
The provision for income taxes is based on income recognized for financial statement purposes and includes the effects of temporary differences between such income and that recognized for tax return purposes. For the three and six months ended June 30, 2012, a federal income tax expense recorded at a 34% rate against the Company’s income for the periods was offset fully by a decrease in the Company’s valuation allowance against its deferred tax assets. Realization of the Company’s deferred tax assets is dependent upon the generation of future taxable income, the timing and amounts of which, if any, are uncertain. Based on the Company’s history of operating losses and the uncertainty surrounding the Company’s ability to generate future income, the Company was unable to conclude that it is more likely than not that the deferred tax assets will be realized. Accordingly, the Company has recorded a valuation allowance against substantially all of its deferred tax assets at June 30, 2012 and December 31, 2011.
The Company paid approximately $2,000 and $8,000 to various state jurisdictions for income taxes during the six months ended June 30, 2012 and 2011, respectively.
As of June 30, 2012, the Company had approximately $1,200,000 of available capital loss carryforwards which expire in 2013. A valuation allowance of approximately $416,000 has been recognized to offset the deferred tax assets related to these carryforwards. If the Company is able to utilize the carryforwards in the future, the tax benefit of the carryforwards will be applied to reduce future capital gains of the Company.
As of June 30, 2012, the Company had U.S. federal net operating loss (“NOL”) carryforwards of approximately $25,500,000. This amount included approximately $1,600,000 of acquired NOLs which cannot be immediately utilized as a result of statutory limitations. As a result of such statutory limitations, the Company will only be able to utilize approximately $160,000 of NOL and capital loss carryforwards per year. The federal NOL carryforwards will begin to expire in 2028. The Company has state NOL carryforwards of approximately $24,000,000 which will be available to offset taxable state income during the carryforward period. The state NOL carryforwards will begin to expire in 2031.
NOTE 11. STOCKHOLDERS’ DEFICIT AND STOCK-BASED COMPENSATION ARRANGEMENTS
On May 17, 2012, the Company’s stockholders voted to decrease the number of authorized shares of common stock of the Company from 3,500,000,000 shares of common par value $0.001 per shares to 295,000,000 shares of common stock par value $0.001 per share. As of June 30, 2012, there were authorized 5,000,000 shares of preferred stock, par value $0.001.
Common Stock
As of June 30, 2012, there were 10,140,204 shares of common stock issued and 10,127,201 shares of common stock outstanding.
In conjunction with the settlement of certain obligations, during the first six months of 2012, the Company issued 2,115,765 shares of common stock valued at approximately $1,900,000.
On February 11, 2010, the Board of Directors approved the issuance of 281,104 shares of restricted common stock to various members of the Board of Directors. The fair value of the restricted common stock grants was determined to be $397,000, based on the price of the Company’s equity raise in the fourth quarter of 2009 and a marketability discount. The Company expensed approximately $50,000 during each of the six-month periods ending June 30, 2012 and 2011. The remaining balance as of June 30, 2012 of approximately $62,000 will be expensed throughout the remaining vesting period of the restricted common stock grants until February 2013.
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The following table summarizes the activity of non-vested restricted stock:
Non-vested shares at December 31, 2011 | 77,543 | |||
Shares granted | – | |||
Shares forfeited | – | |||
Shares vested | (33,233 | ) | ||
Non-vested shares at June 30, 2012 | 44,310 |
Preferred Stock
As of June 30, 2012 and December 31, 2011, there were no shares of preferred stock issued or outstanding.
Stock-based Compensation Arrangements
The Zoo Entertainment, Inc. 2007 Employee, Director and Consultant Stock Plan, as amended, (the “2007 Plan”) provides for the issuance of shares of common stock in connection with the issuance of incentive stock options (“ISOs”), non-qualified stock options (“NQSOs”), grants of common stock, or stock-based awards. Under the terms of the 2007 Plan, the options expire no later than ten years from the date of grant in the case of ISOs (five years in the case of ISOs granted to a 10% owner), as set forth in each option agreement in the case of NQSOs, or earlier in either case in the event a participant ceases to be an employee, director or consultant of the Company. The grants vest over periods ranging from immediately to four years. A total of 1,208,409 shares of common stock may be issued under the 2007 Plan.
In March 2012, in conjunction with a separation agreement with the Company’s former Chief Financial Officer, the Company’s Board of Directors agreed to extend the term of all vested stock options of the former Chief Financial Officer until April 15, 2013. Without such modification, the options would have expired 90 days after the date of separation from the Company. The modification to the stock option awards resulted in incremental expense of approximately $13,000, all of which was immediately recognized as a component of general and administrative expense in the Company’s condensed consolidated statements of operations and comprehensive income (loss) at that date, as the options were fully vested and no further service was required from the former employee.
On March 8, 2011, the Company granted options to purchase 42,138 shares of common stock to a newly-appointed director at an exercise price of $3.86 per share, pursuant to the 2007 Plan.
A summary of the status of the Company’s outstanding stock options as of June 30, 2012 and changes during the period is presented below:
Number of Shares | Weighted- Average Exercise Price | |||||||
Outstanding at December 31, 2011 | 1,155,883 | $ | 3.64 | |||||
Granted | – | $ | – | |||||
Forfeited and expired | (126,803 | ) | $ | 2.54 | ||||
Outstanding at June 30, 2012 | 1,029,080 | $ | 3.78 | |||||
Options exercisable at June 30, 2012 | 969,466 | $ | 3.86 |
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The following table summarizes information about outstanding stock options at June 30, 2012:
Options Outstanding | Options Exercisable | |||||||||||||||||||||
Range of Exercise Prices |
Number Outstanding | Weighted- Remaining Contractual Life (Years) |
Weighted- Exercise Price |
Number Exercisable |
Weighted- Exercise Price | |||||||||||||||||
$ | 1,548.00 | 219 | 3.3 | $ | 1,548.00 | 219 | $ | 1,548.00 | ||||||||||||||
$ | 1,350.00 | 235 | 6.2 | $ | 1,350.00 | 235 | $ | 1,350.00 | ||||||||||||||
$ | 912.00 | 1,171 | 6.2 | $ | 912.00 | 1,171 | $ | 912.00 | ||||||||||||||
$ | 180.00 | 1,250 | 6.6 | $ | 180.00 | 1,250 | $ | 180.00 | ||||||||||||||
$ | 5.50 | 14,000 | 2.4 | $ | 5.50 | 11,000 | $ | 5.50 | ||||||||||||||
$ | 3.86 | 42,138 | 8.7 | $ | 3.86 | 33,035 | $ | 3.86 | ||||||||||||||
$ | 2.46 | 250,795 | 4.5 | $ | 2.46 | 232,284 | $ | 2.46 | ||||||||||||||
$ | 1.56 | 44,000 | 6.1 | $ | 1.56 | 15,000 | $ | 1.56 | ||||||||||||||
$ | 1.50 | 675,272 | 5.8 | $ | 1.50 | 675,272 | $ | 1.50 | ||||||||||||||
$1.50 to $1,548.00 | 1,029,080 | 5.6 | $ | 3.78 | 969,466 | $ | 3.86 |
The following table summarizes the activity of non-vested outstanding stock options:
Number Outstanding |
Weighted- Exercise Price | Weighted- Remaining Contractual Life (Years) | ||||||||||
Non-vested shares at December 31, 2011 | 229,646 | $ | 3.01 | 8.9 | ||||||||
Options granted | – | $ | – | |||||||||
Options vested | (153,152 | ) | $ | 3.26 | ||||||||
Options forfeited or expired | (16,880 | ) | $ | 2.87 | ||||||||
Non-vested shares at June 30, 2012 | 59,614 | $ | 2.39 | 8.6 |
As of June 30, 2012, there was approximately $92,000 of unrecognized compensation costs related to non-vested stock option awards, which is expected to be recognized over a remaining weighted-average vesting period of approximately 1.8 years.
At June 30, 2012, there were 1,103,770 shares available for issuance under the 2007 Plan.
The intrinsic value of options outstanding at June 30, 2012 was $0.
Warrants
As of June 30, 2012, there were 12,587,843 warrants outstanding with terms expiring through 2017, all of which are currently exercisable.
On June 15, 2012, in conjunction with the settlement of an outstanding obligation, the Company issued to a former creditor a warrant to purchase 365,000 shares of the Company’s common stock at a price of $0.50 per share. The warrant was immediately exercisable and expires on June 15, 2017. The Company valued the warrant at approximately $202,000 at the date of grant.
On March 9, 2012, in conjunction with the MMB Loan Agreement, the Company issued to MMB a warrant to purchase 10,952,775 shares of the Company’s common stock at a price of $0.40 per share. The warrant was immediately exercisable and expires on March 31, 2017. The Company valued the warrant at approximately $1.6 million at the date of grant.
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A summary of the status of the Company’s outstanding warrants as of June 30, 2012 and changes during the period then ended are presented below:
Number of Warrants | Weighted- Average Exercise Price | |||||||
Outstanding at December 31, 2011 | 1,270,068 | $ | 6.82 | |||||
Granted | 11,317,775 | $ | 0.40 | |||||
Exercised | – | $ | – | |||||
Outstanding at June 30, 2012 | 12,587,843 | $ | 1.05 | |||||
Warrants exercisable at June 30, 2012 | 12,587,843 | $ | 1.05 |
The following table summarizes information about outstanding warrants at June 30, 2012:
Warrants Outstanding | ||||||||||||||
Range of Exercise Prices |
Number Outstanding | Weighted- Remaining Contractual Life |
Weighted- Exercise Price | |||||||||||
$ | 1,704.00 | 2,383 | 1.0 | $ | 1,704.00 | |||||||||
$ | 1,278.00 | 531 | 1.0 | $ | 1,278.00 | |||||||||
$ | 180.00 | 12,777 | 2.2 | $ | 180.00 | |||||||||
$ | 6.00 | 6,818 | 1.0 | $ | 6.00 | |||||||||
$ | 1.96 | 803,355 | 1.6 | $ | 1.96 | |||||||||
$ | 0.50 | 365,000 | 5.0 | $ | 0.50 | |||||||||
$ | 0.40 | 10,952,775 | 4.8 | $ | 0.40 | |||||||||
$ | 0.01 | 444,204 | 2.5 | $ | 0.01 | |||||||||
$0.01 to $1,704.00 | 12,587,843 | 4.5 | $ | 1.05 |
NOTE 12. INTEREST EXPENSE
(Amounts in Thousands) | ||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Interest on various notes | $ | – | $ | – | $ | 27 | $ | – | ||||||||
Interest arising from amortization of debt discount | 116 | – | 155 | – | ||||||||||||
Interest on financing arrangements | 104 | 181 | 168 | 679 | ||||||||||||
Interest expense | $ | 220 | $ | 181 | $ | 350 | $ | 679 |
NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the six months ended June 30, 2012 and 2011 is as follows:
(Amounts in Thousands) | ||||||||
Six Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
Supplemental Data: | ||||||||
Cash paid for interest | $ | 215 | $ | 936 | ||||
Cash paid for income taxes | $ | 2 | $ | 8 | ||||
Supplemental schedule of non-cash investing and financing activities: | ||||||||
Exchange of inventory in partial satisfaction of outstanding obligation | $ | 131 | $ | 1,680 | ||||
Issuance of common stock in partial satisfaction of current liabilities | $ | 1,890 | $ | – | ||||
Issuance of warrant in partial satisfaction of current liability | $ | 202 | $ | – | ||||
Cashless exchange of 572,990 warrants for 570,867 shares of common stock | $ | – | $ | 1 | ||||
Reclassification of acquisition obligation to note payable | $ | – | $ | 620 |
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NOTE 14. DEFINED BENEFIT PENSION PLAN
The Company maintains a defined benefit pension plan for employees from Zoo Publishing, Inc.’s predecessor, Destination Software, Inc. Effective December 31, 2007, the plan was frozen and benefits ceased to accrue; therefore, only participants’ service and earnings prior to that date were used by the actuary to determine the expected employee benefits. The Company’s funding policy is to satisfy the minimum funding requirements of the Employee Retirement Income Security Act (“ERISA”). The assets of the Company-sponsored plan are invested in mutual funds, cash, money market accounts and certificates of deposits. In accordance with the recognition and disclosure provisions of ASC 715-30 “Defined Benefit Plans – Pension,” the Company recognizes the funded status of the Company’s retirement plan on the condensed consolidated balance sheets.
The following table sets forth the retirement trust’s approximate benefit obligations, fair value of the plans assets, and funded status for the defined benefit pension plan for the six months ended June 30, 2012.
Change in benefit obligation | |||||
Benefit obligation at January 1, 2012 | $ | 1,148,107 | |||
Service cost | – | ||||
Interest cost | 28,703 | ||||
Actuarial gain | (1,142 | ) | |||
Disbursements | (6,652 | ) | |||
Benefit obligation at June 30, 2012 | $ | 1,169,016 | |||
Change in plan assets | |||||
Fair value of plan assets at January 1, 2012 | $ | 899,328 | |||
Employer contributions | – | ||||
Benefit payments | (6,652 | ) | |||
Actual return on assets | 35,805 | ||||
Fair value of plan of assets at June 30, 2012 | $ | 928,481 | |||
Funded status | $ | (240,535 | ) | ||
The amount unfunded as of December 31, 2011 was approximately $249,000. | |||||
Net periodic pension cost for the period January 1, 2012 through June 30, 2012 consists of the following: | |||||
Service costs | $ | – | |||
Interest costs | 28,703 | ||||
Expected return on assets | (26,990 | ) | |||
Amortization costs | 5,526 | ||||
Net periodic pension cost | $ | 7,239 | |||
Actuarial assumptions are described below: | |||||
Discount rate | 5.00 | % | |||
Expected long-term rate of return on plan assets | 6.00 | % | |||
Rate of compensation increase | 0.00 | % | |||
Amounts recognized in the condensed consolidated balance sheets as of June 30, 2012 and December 31, 2011: |
June 30, 2012 | December 31, 2011 | |||||||
Non-current liabilities | $ | 240,535 | $ | 248,779 |
Amounts recognized in accumulated other comprehensive income for the six months ended June 30, 2012:
Minimum pension liability | $ | 23,621 | ||
Accrued pension expense as of June 30, 2012 | $ | 7,239 |
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The following table sets forth, by level, within the fair value hierarchy, the plan’s assets measured at fair value as of June 30, 2012:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash/Money Market/CDs | $ | 15,615 | $ | – | $ | – | $ | 15,615 | ||||||||
Mutual Funds | 912,866 | – | – | 912,866 | ||||||||||||
Total Investments at Fair Value | $ | 928,481 | $ | – | $ | – | $ | 928,481 |
The following table sets forth, by level, within the fair value hierarchy, the plan’s assets measured at fair value as of December 31, 2011:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash/Money Market/CDs | $ | 25,924 | $ | – | $ | – | $ | 25,924 | ||||||||
Mutual Funds | 873,404 | – | – | 873,404 | ||||||||||||
Total Investments at Fair Value | $ | 899,328 | $ | – | $ | – | $ | 899,328 |
The estimated net loss that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the remaining 2012 year is approximately $7,000.
NOTE 15. LITIGATION
On July 22, 2011, Bruce E. Ricker, individually and on behalf of all purchasers of the common stock of the Company from July 7, 2010 through April 15, 2011, filed a putative class action complaint in the United States District Court for the Southern District of Ohio. Mr. Ricker was appointed lead plaintiff on October 19, 2011, and he filed an amended complaint on December 12, 2011. The amended complaint alleges that the Company, Mark Seremet, the Company's Chief Executive Officer, and David Fremed, the Company's former Chief Financial Officer, knowingly or recklessly violated the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by making false material statements in connection with certain financial statements of the Company or by failing to disclose material information in order to make the financial statements not misleading. Specifically, the amended complaint relies upon the Company's April 15, 2011 restatement of its unaudited consolidated financial statements for the three months ended March 31, 2010, the three and six months ended June 30, 2010, and the three and nine months ended September 30, 2010, as the basis for its allegations that the Company's financial statements filed for those periods contained materially false statements. Defendants filed a motion to dismiss the amended complaint, which was then fully briefed and argued to the court on May 10, 2012. On July 30, 2012, the court issued an opinion and order granting the motion to dismiss in its entirety, dismissing all claims and closing the case. On August 2, 2012, the plaintiffs filed a notice of appeal as to the dismissal.
From time to time, the Company is also involved in various legal proceedings and claims incidental to the normal conduct of its business. Although it is impossible to predict the outcome of any legal proceeding and there can be no assurances, the Company believes that these legal proceedings and claims, individually and in the aggregate, are not likely to have a material adverse effect on its consolidated financial condition, results of operations or cash flows.
NOTE 16. SUBSEQUENT EVENT
On July 30, 2012, the Company entered into the First Amendment to Loan and Security Agreement (the “First Amendment”) with MMB, pursuant to which the parties agreed to amend that certain Loan and Security Agreement dated as of March 9, 2012, by and between the Company and MMB. Pursuant to the First Amendment, MMB agreed to provide up to $1,600,000 in additional funding to the Company under the Loan and Security Agreement under the same terms and conditions. In connection with the First Amendment, the Company issued MMB an immediately exercisable warrant to purchase up to 4,000,000 shares of its common stock at $0.40 per share, which warrant is exercisable through July 30, 2017. In addition, MMB notified the Company that it was exercising its right to convert all accrued and unpaid interest outstanding under the Loan and Security Agreement through June 30, 2012, which amount was approximately $114,480, into the outstanding loan balance.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with, and is qualified in its entirety by, the financial statements and the notes thereto included in this report. In this discussion, the words “Company,” “we,” “our,” and “us” refer to the Company and its operating subsidiaries, Zoo Games, Zoo Publishing, and indiePub, Inc. This discussion contains certain forward-looking statements that involve substantial risks, assumptions and uncertainties. When used in this report, the words “anticipates,” “believes,” “estimates,” “projects,” “plans,” “seeks,”“expects,” “may,” “should,” “will” and similar expressions, or the negative versions thereof, are intended to identify such forward-looking statements. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements as a result of various factors, including, but not limited to, those presented under “Risk Factors” disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, other reports we file with the Securities and Exchange Commission and elsewhere herein. Historical operating results are not necessarily indicative of the trends in operating results for any future period.
We are a developer and publisher of downloadable games for “connected services” including mobile devices, Microsoft’s Xbox Live Arcade (“XBLA”), Sony’s PlayStation Network (“PSN”), Nintendo’s DsiWare, Facebook, and Steam, a platform for hosting and selling downloadable PC/Mac software.
Our current overall business strategy has shifted with the changes we are seeing within the industry. In 2011, we began phasing out our retail business and focusing on the digital market. Our digital business strategy centers on bringing fresh, innovative content to digital distribution channels and mobile devices. We utilize our indiePub website (www.indiePub.com), as an innovative content creation site that is designed to unearth content for future development and eventual publication. indiePub intends to release a unique distribution platform that will allow anyone to sell and monetize apps. In May 2012, we changed our name from Zoo Entertainment, Inc. to indiePub Entertainment, Inc. to reflect our change in focus to a digital business.
Currently, we have determined that we operate in one segment in the United States.
Results of Operations
For the Three Months Ended June 30, 2012 as Compared to the Three Months Ended June 30, 2011
The following table sets forth, for the period indicated, the amount and percentage of net revenue for significant line items in our consolidated condensed statements of operations and comprehensive income (loss):
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(Amounts in Thousands Except Per Share Data) For the Three Months Ended June 30, | ||||||||||||||||
2012 | 2011 | |||||||||||||||
Revenue | $ | 69 | 100 | % | $ | 3,651 | 100 | % | ||||||||
Cost of goods sold | 579 | 839 | 6,100 | 167 | ||||||||||||
Gross loss | (510 | ) | (739 | ) | (2,449 | ) | (67 | ) | ||||||||
Operating expenses: | ||||||||||||||||
General and administrative | 836 | 1,212 | 2,739 | 75 | ||||||||||||
Selling and marketing | 104 | 150 | 715 | 20 | ||||||||||||
Research and development | – | – | 1,802 | 49 | ||||||||||||
Impairment of intangible assets | – | – | 1,749 | 48 | ||||||||||||
Depreciation and amortization | 24 | 35 | 453 | 12 | ||||||||||||
Total operating expenses | 964 | 1,397 | 7,458 | 204 | ||||||||||||
Loss from operations | (1,474 | ) | (2,136 | ) | (9,907 | ) | (271 | ) | ||||||||
Gain on extinguishment of liabilities | 2,392 | 3,466 | – | – | ||||||||||||
Other expense | (47 | ) | (68 | ) | – | – | ||||||||||
Interest expense | (220 | ) | (319 | ) | (181 | ) | (5 | ) | ||||||||
Income (loss) from operations before income taxes | 651 | 943 | (10,088 | ) | (276 | ) | ||||||||||
Income taxes | – | – | – | – | ||||||||||||
Net income (loss) | $ | 651 | 943 | % | $ | (10,088 | ) | (276 | )% | |||||||
Income (loss) per common share – basic | $ | 0.07 | $ | (1.54 | ) | |||||||||||
Income (loss) per common share – diluted | $ | 0.04 | $ | (1.54 | ) |
Net Revenues. Net revenues for the three months ended June 30, 2012 were approximately $69,000, compared to approximately $3.7 million for the comparable 2011 period. Our revenue for the quarter was provided primarily from our digital sales. Consistent with our shift to a digital strategy, in July 2011, we entered into a distribution agreement for the sale of our legacy console product. Under the distribution agreement, we sold our legacy games at prices at or slightly above the value of the inventory, plus a per-unit tech fee, which represented an unearned advance against future profit sharing with our distributor on such sales. All unearned advances invoiced are deferred until such time when we receive information from our distributor that allows us to conclude that all components of the earnings process have been completed. During the second quarter of 2012, we did not recognize any revenue related to the distribution agreement.
During the second quarter of 2011, our sales consisted primarily of casual game sales in North America. The breakdown of gross sales by platform for the second quarter of 2011 was approximately 74% for the Nintendo Wii platform and approximately 26% for the Nintendo DS platform. The 2011 period consisted of approximately 377,000 units sold in North America at an average gross price of $10.15 per unit.
Gross Loss. Gross loss for the three months ended June 30, 2012 was approximately $(510,000), or (739)% of net revenue, while gross loss for the three months ended June 30, 2011 was approximately $(2.4) million, or (67)% of net revenue. The costs included in cost of goods sold consist of manufacturing and packaging costs, royalties due to licensors relating to the current period’s revenues and the amortization of product development costs relating to the current period’s revenues. During the second quarter of 2012, net revenues were derived primarily from sales of our digital games. Certain digital games released during 2011 and 2012 experienced sales below expectations during the 2012 period. In addition, during the second quarter of 2012, we downwardly revised sales expectations for several products currently in production, as well as two games currently being sold, which resulted in an additional $403,000 of product development cost during the period. The 2011 sales were primarily catalogue product sold at a price slightly above the value of the inventory at that date, therefore generating minimal gross profit. The gross margin was further adversely affected by the accelerated amortization of approximately $1.2 million of product development costs on our catalogue products due to reforecasting of projected future sales of each game in conjunction with the Company’s move towards its digital strategy. In addition, during the second quarter of 2011, we downwardly revised sales expectations for two products that we intended to release late in 2011, which resulted in an additional $272,000 of product development costs. Increased inventory reserves for product sold below cost or that we could be unable to sell accounted for approximately $683,000 of additional expense during the quarter, and approximately $200,000 of additional royalty expense was recorded as a result of changes in estimated unit sales for certain products.
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General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 2012 were approximately $836,000 as compared to approximately $2.7 million for the comparable period in 2011. Non-cash stock-based compensation included in general and administrative expenses for the three months ended June 30, 2012 was approximately $55,000. For the three months ended June 30, 2011, non-cash stock-based compensation was approximately $647,000, and included approximately $534,000 of expense related to the modification of stock option awards granted primarily to our Chief Executive Officer and our former Zoo Publishing President. The departmental costs included in general and administrative expenses include executive, finance, legal, information technology, product development, administration, warehouse operations and digital/indiePub initiatives. The decrease in general and administrative expenses was due primarily to savings in salaries and associated benefits and payroll taxes of approximately $505,000. The decrease was due to a reduction in headcount in the 2012 period compared to the 2011 period, combined with cost savings from benefit plan changes that took effect in the third quarter of 2011. The expiration of fee agreements with certain of our current and former executives for their guarantees of our previous accounts receivable factoring facility accounted for an additional savings of approximately $101,000 during the quarter. In addition, rent expense was reduced by approximately $122,000 due to the relocation of our corporate office to a location more compatible with our anticipated space requirements. These savings were partially offset by increased consulting fees during the period. The 2011 period also included approximately $465,000 of expenses related to the early retirement and commitment fees paid to terminate the WCS and Wells Fargo financing facilities and related professional fees. The indiePub and digital initiative costs included in general and administrative expenses for the 2012 period were approximately $74,000, compared to approximately $192,000 for the comparable 2011 period. The savings was due to reduced head count in the 2012 period, the capitalization of certain costs in 2012 related to the development of the indiePub website, and the elimination of office space leased in the 2011 period for indiePub employees.
Selling and Marketing Expenses. Selling and marketing expenses decreased from approximately $715,000 for the three months ended June 30, 2011 to approximately $104,000 for the three months ended June 30, 2012. Beginning in April 2011, we began eliminating the majority of our sales force associated with our retail boxed games. In July 2011, this elimination was completed when we entered into a distribution agreement for the sale of our legacy console products.
Research and Development Expenses. We incurred research and development expenses of approximately $1.8 million during the second quarter of 2011 to expense costs relating to the development of games that were abandoned during the period. There were no write-offs in the comparable 2012 period.
Impairment of Intangible Assets. During the first six months of 2011, we continued to incur significant losses due primarily to a decline in the retail market for our products. In July 2011, our wholly-owned subsidiary, Zoo Publishing, entered into a distribution agreement with a developer and distributor of interactive entertainment software to distribute Zoo’s legacy console assets. The losses, coupled with a substantially revised reduction in projected unit sales, and an acceleration of our shift from the retail boxed product, triggered us to test our definite-lived intangible assets for potential impairment. As a result, we recorded an impairment loss of approximately $1.7 million related to our acquisition of Zoo Publishing in 2007, in accordance with the provisions of ASC 360-10-35-47. Of the $1.7 million of impairment, approximately $0.7 million was related to trademarks and the remaining $1.0 million was related to content.
Depreciation and Amortization Expenses. Depreciation expense for the three months ended June 30, 2012 was approximately $24,000 compared to depreciation expense of approximately $453,000 for the comparable 2011 period. The amortization of intangible assets was approximately $420,000 for the three months ended June 30, 2011. The Company’s intangible assets were fully amortized as of December 31, 2011, resulting in no further amortization expense.
Interest Expense. Interest expense for the three months ended June 30, 2012 was approximately $220,000, compared to approximately $181,000 for the three months ended June 30, 2011. The 2012 period interest expense includes approximately $8,000 of default interest related to our Panta agreement (as described below under Limited Recourse Agreement), approximately $96,000 related to our new MMB Loan (as described below under Loan Agreement), and approximately $116,000 of interest related to the amortization of the deferred debt discount associated with a warrant issued during the period. The 2011 period includes approximately $124,000 of interest for the receivable factoring facility, approximately $17,000 of interest for the purchase order financing facility, and approximately $40,000 for the Panta note.
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Gain on Extinguishment of Liabilities. During the first half of 2012, we entered into agreements with multiple unsecured creditors for the settlement of amounts due to them. During the second quarter of 2012, we recorded a gain on completed settlements of approximately $2.4 million. We settled these liabilities with a combination of cash, inventory, shares of our common stock, and warrants to purchase our common stock.
Income Taxes. For the three months ended June 30, 2012, we recorded pre-tax income of approximately $651,000 due to the gain recognized on the settlement of certain liabilities with our unsecured creditors. Income tax expense was recorded at a rate of 0% for the period. This rate includes federal tax expense at a 34.0% rate, state tax expense, net of federal benefit, of 2.3%, and miscellaneous adjustments of 5.3%. This income tax expense was offset entirely by a decrease in our valuation allowance of 41.6%. For the three months ended June 30, 2011, we recorded a pre-tax loss of approximately $(10.0) million. All income tax benefits related to this loss were fully offset by an increase in the valuation allowance against our deferred tax assets, as we could not conclude that it was more likely than not that the benefit would be realized.
Income (Loss) Per Common Share. Basic income per share for the three months ended June 30, 2012 was approximately $0.07 based on weighted average shares outstanding for the period of approximately 9.9 million shares. Diluted income per share for the three months ended June 30, 2012 was approximately $0.04 based on weighted average shares outstanding for the period of approximately 24.6 million shares. The basic and diluted loss per share for the three months ended June 30, 2011 was $(1.54) based on weighted average shares outstanding for the period of approximately 6.6 million shares.
For the Six Months Ended June 30, 2012 as Compared to the Six Months Ended June 30, 2011
The following table sets forth, for the period indicated, the amount and percentage of net revenue for significant line items in our condensed consolidated statements of operations and comprehensive income (loss):
(Amounts in Thousands Except Per Share Data) For the Six Months Ended June 30, | ||||||||||||||||
2012 | 2011 | |||||||||||||||
Revenue | $ | 474 | 100 | % | $ | 7,432 | 100 | % | ||||||||
Cost of goods sold | 750 | 158 | 10,791 | 145 | ||||||||||||
Gross loss | (276 | ) | (58 | ) | (3,359 | ) | (45 | ) | ||||||||
Operating expenses: | ||||||||||||||||
General and administrative | 2,615 | 552 | 4,938 | 67 | ||||||||||||
Selling and marketing | 173 | 36 | 1,760 | 24 | ||||||||||||
Research and development | – | – | 2,263 | 30 | ||||||||||||
Impairment of intangible assets | – | – | 1,749 | 24 | ||||||||||||
Depreciation and amortization | 55 | 12 | 906 | 12 | ||||||||||||
Total operating expenses | 2,843 | 600 | 11,616 | 157 | ||||||||||||
Loss from operations | (3,119 | ) | (658 | ) | (14,975 | ) | (202 | ) | ||||||||
Gain on extinguishment of liabilities | 6,561 | 1,384 | – | – | ||||||||||||
Other expense | (65 | ) | (13 | ) | – | – | ||||||||||
Interest expense | (350 | ) | (74 | ) | (679 | ) | (9 | ) | ||||||||
Income (loss) from operations before income taxes | 3,027 | 639 | (15,654 | ) | (211 | ) | ||||||||||
Income taxes | – | – | – | – | ||||||||||||
Net income (loss) | $ | 3,027 | 639 | % | $ | (15,654 | ) | (211 | )% | |||||||
Income (loss) per common share – basic | $ | 0.34 | $ | (2.47 | ) | |||||||||||
Income (loss) per common share – diluted | $ | 0.17 | $ | (2.47 | ) |
Net Revenues. Net revenues for the six months ended June 30, 2012 were approximately $474,000, compared to approximately $7.4 million for the comparable 2011 period. Consistent with our shift to a digital strategy, in July 2011, we entered into a distribution agreement for the sale of our legacy console product. Under the distribution agreement, we sold our legacy games at prices at or slightly above the value of the inventory, plus a per-unit tech fee, which represented an unearned advance against future profit sharing with our distributor on such sales. All unearned advances invoiced are deferred until such time when we receive information from our distributor that allows us to conclude that all components of the earnings process have been completed. During the first six months of 2012, we recognized into revenue approximately $415,000 of royalties under the distribution agreement. The remainder of our revenue was derived from sales of our digital games.
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During the first six months of 2011, our sales consisted primarily of casual game sales in North America. The breakdown of gross sales by platform for the first half of 2011 was approximately 70% for the Nintendo Wii platform, approximately 24% for the Nintendo DS platform, approximately 3% for the Sony PS3 platform, and approximately 3% for the Xbox 360 platform. The 2011 period consisted of approximately 654,000 units sold in North America at an average gross price of $13.10 per unit.
Gross Loss. Gross loss for the six months ended June 30, 2012 was approximately $(276,000), or (58)% of net revenue, while gross loss for the six months ended June 30, 2011 was approximately $(3.4) million, or (45)% of net revenue. The costs included in cost of goods sold consist of manufacturing and packaging costs, royalties due to licensors relating to the current period’s revenues and the amortization of product development costs relating to the current period’s revenues. During the first six months of 2012, net revenues were derived primarily from royalties earned under our sales and distribution agreement, for which sales we had previously recorded royalty and product development expense, which positively impacted our gross margin.This positive impact was partially offset by approximately $70,000 of royalty expense for one of our products sold under a distribution agreement, for which we recorded no revenue during the first six months of 2012. Certain digital games released during 2011 and 2012 experienced lagging sales during the second quarter of 2012. In addition, during the second quarter of 2012, we downwardly revised sales expectations for several products currently in production, as well as for two games currently being sold, which resulted in an additional $403,000 of product development costs during the period. The 2011 sales were primarily catalogue product sold at a price slightly above the current value of the inventory, therefore generating minimal gross profit. The gross margin was adversely affected by the acceleration of approximately $2.3 million of product development amortization on our catalogue products due to their shortened expected lives, as the Company moved towards its digital strategy. In addition, during 2011, we downwardly revised sales expectations for two products that we intended to release in late 2011, which resulted in an additional $272,000 of product development costs. Increased inventory reserves for product being sold below cost or that we might be unable to sell accounted for approximately $1.4 million of additional expense during 2011, and approximately $458,000 of additional royalty expense as a result of changes in estimated unit sales for certain of our products.
General and Administrative Expenses. General and administrative expenses for the six months ended June 30, 2012 were approximately $2.6 million as compared to approximately $4.9 million for the comparable period in 2011. Non-cash stock-based compensation included in general and administrative expenses was approximately $134,000 and $752,000 for the six months ended June 30, 2012 and 2011, respectively. Non-cash stock-based compensation included in general and administrative expenses for the six months ended June 30, 2012 included approximately $13,000 of expense related to the modification of stock option awards previously granted to our former Chief Financial Officer. Non-cash stock-based compensation included in general and administrative expenses for the six months ended June 30, 2011 included approximately $534,000 of expense related to the modification of stock option awards granted primarily to our Chief Executive Officer and our former Zoo Publishing President. The 2011 period includes $465,000 of expenses related to early retirement and commitment fees paid to terminate the WCS and Wells Fargo financing facilities and related professional fees. The department costs included in general and administrative expenses include executive, finance, legal, information technology, product development, administration, warehouse operations and digital/indiePub initiatives. The decrease in general and administrative expenses was due primarily to savings in salaries and associated benefits and payroll taxes of approximately $977,000 as a result of a reduction in headcount in the 2012 period compared to the 2011 period, combined with cost savings from benefit plan changes that took effect in the third quarter of 2011. The expiration of fee agreements with certain of our current and former executives for their guarantees of our previous accounts receivable factoring facility accounted for an additional savings of approximately $203,000 during the six-month period. In addition, cost-saving measures implemented in late 2011 accounted for a reduction in office expense of approximately $136,000. These savings were partially offset by increased net rent expense of approximately $260,000. During the first quarter of 2012, we relocated our corporate office to a location more compatible with our expected future space requirements, which also provides significant cost savings. In conjunction with our relocation, we recorded approximately $466,000 of rent expense for the remaining lease term of the office location we were no longer using. During the second quarter of 2012, we negotiated a settlement with our former landlord and eliminated the majority of the liability for the unsatisfied lease term, which settlement was included in Gain on Extinguishment of Debt in our condensed consolidated statements of operations and comprehensive income (loss). The indiePub and digital initiative costs included in general and administrative expenses for the 2012 period were approximately $211,000, compared to approximately $354,000 for the comparable 2011 period. The savings was due to reduced head count in the 2012 period, the capitalization of certain costs in 2012 related to the development of the indiePub website, and the elimination of office space leased in the 2011 period for indiePub employees.
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Selling and Marketing Expenses. Selling and marketing expenses decreased from approximately $1.8 million for the six months ended June 30, 2011 to approximately $173,000 for the six months ended June 30, 2012. Beginning in April 2011, we began eliminating the majority of our sales force associated with our retail boxed games. In July 2011, this elimination was completed when we entered into a distribution agreement for the sale of our legacy console products.
Research and Development. We incurred research and development expenses of approximately $2.3 million during the first six months of 2011 to expense costs relating to the development of games that were abandoned during the period. There were no write-offs during the comparable 2012 period.
Impairment of Intangible Assets. During the first six months of 2011, we continued to incur significant losses due primarily to a decline in the retail market for our products. In July 2011, our wholly-owned subsidiary, Zoo Publishing, entered into a distribution agreement with a developer and distributor of interactive entertainment software to distribute our legacy console assets. The losses, coupled with a substantially revised reduction in projected unit sales, and acceleration of our shift from the retail boxed product triggered us to test our definite-lived intangible assets for potential impairment. As a result, we recorded an impairment loss of approximately $1.7 million related to our acquisition of Zoo Publishing in 2007 in accordance with the provisions of ASC 360-10-35-47. Of the $1.7 million of impairment, approximately $0.7 million was related to trademarks and the remaining $1.0 million was related to content.
Depreciation and Amortization Expenses. Depreciation and amortization costs for the six months ended June 30, 2012 were approximately $55,000 compared to approximately $906,000 in the 2011 period. The amortization of intangible assets was approximately $839,000 for the six months ended June 30, 2011. The Company’s intangible assets were fully amortized as of December 31, 2011, resulting in no further amortization expense.
Interest Expense. Interest expense for the six months ended June 30, 2012 was approximately $350,000 as compared to approximately $679,000 for the six months ended June 30, 2011. The 2012 period includes approximately $27,000 of interest related to various notes that were outstanding during the period, approximately $54,000 of default interest related to our MMB and Panta agreements (as described below under Limited Recourse Agreement), approximately $114,000 related to our new MMB Loan (as described below under Loan Agreement), and approximately $155,000 of interest related to the amortization of the deferred debt discount associated with a warrant issued during the period. The 2011 period includes approximately $574,000 of interest for the receivable factoring facility, approximately $65,000 of interest for the purchase order financing facility, and approximately $40,000 for the Panta note payable.
Gain on Extinguishment of Liabilities. During the first half of 2012, we entered into agreements with multiple unsecured creditors for the settlement of amounts due to them. During the first six months of 2012, we recorded a gain on completed settlements of approximately $6.6 million. We settled these liabilities with a combination of cash, inventory, shares of our common stock, and warrants to purchase our common stock.
Income Taxes. For the six months ended June 30, 2012, we recorded pre-tax income of approximately $3.0 million due to the gain recognized on the settlement of certain liabilities with our unsecured creditors. Income tax expense was recorded at a rate of 0% for the period. This rate includes federal tax expense at a 34.0% rate, state tax expense, net of federal benefit, of 2.1%, and miscellaneous adjustments of 1.8%. This income tax expense was offset entirely by a decrease in our valuation allowance of 37.9%. We recorded no income tax benefit for the six months ended June 30, 2011 against our pre-tax loss of approximately $15.7 million. A federal income tax benefit calculated at a 34% rate was fully offset by an increase in our valuation allowance against our deferred tax assets, as we could not conclude that it was more likely than not that the deferred tax assets would be realized.
Income (Loss) Per Common Share. Basic income per share for the six months ended June 30, 2012 was approximately $0.34 based on weighted average shares outstanding for the period of approximately 9.0 million shares. Diluted income per share for the six months ended June 30, 2012 was approximately $0.17 based on weighted average shares outstanding for the period of approximately 18.9 million shares. The basic and diluted loss per share for the six months ended June 30, 2011 was $(2.47) based on weighted average shares outstanding for the period of approximately 6.3 million shares.
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Liquidity and Capital Resources
We had net income of approximately $3.0 million for the six months ended June 30, 2012. Our principal sources of cash during 2012 were borrowings under our current and previous financing arrangements. During 2011, our principal sources of cash were the use of our purchase order and receivable financing arrangements and cash generated from operations throughout the period.
Net cash used in operating activities for the six months ended June 30, 2012 was approximately $3.2 million due primarily to cash utilized for operations during the quarter, including approximately $497,000 for the development of new products and cash used to settle certain liabilities with our unsecured creditors during the period. During the comparable 2011 period, net cash provided by operating activities was approximately $7.6 million, due primarily to a decrease in receivables and due from factor resulting from the collection of the December 31, 2010 receivables, as well as a decrease in inventory as we sold a significant amount of the December 31, 2010 inventory during the first six months of 2011.
Net cash used in investing activities was approximately $2,000 and $65,000 for the six months ended June 30, 2012 and 2011, respectively. In each period, the amount used was for the purchase of fixed assets.
Net cash provided by financing activities for the six months ended June 30, 2012 was approximately $3.3 million, and consisted primarily of borrowings under our Limited Recourse Agreement and Loan Agreement (as described more fully below). These borrowings were offset by the repayment of a portion of the Limited Recourse Agreement with proceeds from our new Loan Agreement. Net cash used in financing activities for the six months ended June 30, 2011 was approximately $7.8 million, consisting primarily of net repayments of approximately $9.6 million on our receivable factoring facility and our purchase order financing facilities, and net borrowings of approximately $1.6 million on our Limited Recourse Agreement (see below).
Factoring Facility
We previously utilized a factoring agreement, as amended (the “Original Factoring Agreement”) with Working Capital Solutions, Inc. (“WCS”) for the approval of credit and the collection of proceeds from a portion of our sales. Under the terms of the Original Factoring Agreement, we sold our receivables to WCS, with recourse. WCS, in its sole discretion, determined whether or not it would accept each receivable based upon the credit risk factor of each individual receivable or account. Once a receivable was accepted by WCS, WCS provided funding subject to the terms and conditions of the Original Factoring Agreement. The amount remitted to us by WCS equaled the invoice amount of the receivable adjusted for any discounts or allowances provided to the account, less a reserve percentage (which amount was 30% at the termination of the agreement) which was deposited into a reserve account established pursuant to the Original Factoring Agreement, less allowances and fees. The amounts to be paid by us to WCS for any accepted receivable included a factoring fee for each ten (10) day period the account was open (which fee was 0.56% at the termination of the agreement). Since WCS acquired the receivables with recourse, we recorded the gross receivables including amounts due from our customers to WCS and recorded a liability to WCS for funds advanced to us from WCS. On June 24, 2011, we terminated our agreement with WCS (the “WCS Termination Agreement”).
During the six months ended June 30, 2012 and 2011, we sold $0 and approximately $11.6 million, respectively, of receivables to WCS with recourse. At June 30, 2012 and December 31, 2011, accounts receivable and due from factor were $0 and there were no advances outstanding to us as of June 30, 2012 or December 31, 2011. The interest expense on the advances are included in interest expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss) and were $0 and approximately $124,000 for three months ended June 30, 2012 and 2011, respectively, and were $0 and approximately $574,000 for the six-month periods ended June 30, 2012 and 2011, respectively.
Purchase Order Facility
We previously utilized purchase order financing with Wells Fargo Bank, National Association (“Wells Fargo”) to fund the manufacture of video game products. Under the terms of our agreement (the “Assignment Agreement”), we assigned purchase orders received from customers to Wells Fargo, and requested that Wells Fargo purchase the required materials to fulfill such purchase orders. Wells Fargo, which could accept or decline the assignment of specific purchase orders, retained us to manufacture, process and ship ordered goods, and paid us for our services upon Wells Fargo’s receipt of payment from the customers for such ordered goods. Upon payment in full of the purchase order invoice by the applicable customer to Wells Fargo, Wells Fargo re-assigned the applicable purchase order to us. On June 24, 2011, Zoo Publishing, the Company and Wells Fargo entered into a Termination Agreement. Pursuant to the Termination Agreement, we paid off the balance due of approximately $148,000 and paid $50,000 in full satisfaction of the commitment fee required under the agreement. The commitment fee was included in general and administrative expenses at that date in the condensed consolidated statements of operations and comprehensive income (loss). Wells Fargo released all security interests that they and their predecessors held in the Company’s assets.
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There were no amounts outstanding as of June 30, 2012 and December 31, 2011. The effective interest rate on advances was 5.25% as of the termination date. The charges and interest expense on the advances are included in interest expense in the accompanying condensed consolidated statements of operations and comprehensive income (loss) and were $0 and approximately $17,000 for the three months ended June 30, 2012 and 2011, respectively, and $0 and approximately $65,000 for the six months ended June 30, 2012 and 2011, respectively.
Limited Recourse Agreement
On June 24, 2011, in connection with the WCS Termination Agreement, WCS agreed to assign all of its rights, title and interest in and to the Original Factoring Agreement and all Collateral to Panta Distribution, LLC (“Panta”) pursuant to a Limited Recourse Agreement, dated as of June 24, 2011 (the “Limited Recourse Agreement”). On June 24, 2011, we and Panta also entered into an Amended and Restated Factoring and Security Agreement (the “New Factoring Agreement”), pursuant to which we agreed to pay Panta all outstanding indebtedness under the Limited Recourse Agreement and to sell to Panta our accounts receivable with recourse. Under the terms of the agreement and subsequent amendment, total actual borrowings of approximately $2.6 million and accrued interest due of approximately $1.2 million were required to be repaid by December 4, 2011. On October 7, 2011, we were notified by Panta that we were in default under the terms of the agreements; accordingly, we accelerated all amounts owed to Panta at that date to currently due and payable and began accruing interest at the default rate of fifteen percent (15%) per annum.
On October 28, 2011, Zoo Publishing entered into the Second Amended and Restated Factoring and Security Agreement (the “Second New Factoring Agreement”) with Panta and MMB, pursuant to which the parties agreed to amend the New Factoring Agreement, to reflect the assignment by Panta to MMB of documents and accounts, including related collateral security, under the New Factoring Agreement, and to amend certain other terms and conditions of the New Factoring Agreement. In connection with the Second New Factoring Agreement, Panta agreed to assign all of its rights, title and interest in and to the New Factoring Agreement to MMB, as agent for itself and Panta, pursuant to a Limited Recourse Assignment, dated as of October 28, 2011 (the “Limited Recourse Assignment”), for a purchase price of $850,000. Panta retained an interest in the principal amount of approximately $186,000 (together with interest and fees accruing thereon), owed by Zoo Publishing under the New Factoring Agreement. Under the Second New Factoring Agreement, MMB, as agent for itself and Panta, agreed to temporarily forbear from exercising certain of its rights under default provisions therein until the earlier of November 11, 2011, or the occurrence of an additional default or breach by us, unless otherwise waived by MMB. All default interest accrued at the default interest rate of 15% per annum on amounts outstanding to MMB and Panta. Pursuant to the Second New Factoring Agreement, we agreed to make scheduled repayments to MMB, as agent for itself and Panta, with respect to obligations owed by us beginning November 4, 2011 and through December 4, 2011 in the cumulative principal amount owed of approximately $1,036,000. The Second New Factoring Agreement terminates upon the later of: (i) the collection by MMB of all of the Purchased Accounts (as defined in the Second New Factoring Agreement); and (ii) the collection by Panta of approximately $1,036,000 net of all Incurred Expenses (as defined in the Second New Factoring Agreement). Zoo Publishing granted MMB a first priority security interest in certain of its assets as set forth in the Second New Factoring Agreement. MMB is controlled by David E. Smith, a former director of the Company, Jay A. Wolf, Executive Chairman of the Board of Directors of the Company, and certain other parties.
On January 5, 2012, January 30, 2012, February 14, 2012, and February 29, 2012, we entered into the First, Second, Third and Fourth, respectively, Amendments to the Second Amended and Restated Factoring and Security Agreement with Panta and MMB, pursuant to which the parties agreed to amend that certain Second Amended and Restated Factoring and Security Agreement dated as of October 28, 2011, by and between Zoo Publishing, Panta and MMB. Pursuant to the amendments, MMB agreed to provide $250,000 (less legal fees of $75,000), $175,000, $232,000, and $200,000, respectively, in additional funding to us under the Factoring Agreement. The additional funding bore interest at the lesser of 15% per annum, or the maximum rate permitted by law.
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On March 9, 2012, the amounts due to MMB were repaid utilizing borrowings under the Loan Agreement. Borrowings and accrued interest owed to Panta in the amount of approximately $210,000 remained outstanding as of June 30, 2012.
Loan Agreement
On March 9, 2012, Zoo and MMB entered into a loan agreement (the “Loan Agreement”) pursuant to which MMB agreed to provide us with loans totaling approximately $4,381,110. These loans were granted: (i) to repay and satisfy all of our obligations to MMB under the Second Amended and Restated Factoring and Security Agreement, dated as of October 28, 2011, as amended through February 29, 2012, and totaling approximately $1,831,000; (ii) for purposes of settling, at a discount, certain obligations to our unsecured creditors (the “Existing Unsecured Claims”); and (iii) for working capital and other purposes permitted under the Loan Agreement. As of June 30, 2012, we had borrowed the entire $4,381,110 available under the Loan Agreement. The interest rate under the Loan Agreement is ten percent (10%) per annum, or eighteen percent (18%) per annum upon the occurrence of an event of default. The maturity date of the loans is March 31, 2014. The amounts under the Loan Agreement are secured by a first priority security interest (except to the extent subordinated by the Factoring Agreement) on all of the assets of the Company. At any time during the term of the Loan Agreement, MMB may convert all of the loan balance into shares of our common stock at a conversion price of $0.40 per share. In connection with the Loan Agreement, we also issued MMB immediately exercisable warrants to purchase up to 10,952,775 shares of our common stock at $0.40 per share, which warrants are exercisable through March 31, 2017. We have agreed to provide MMB with certain registration rights with respect to our common stock issued in connection with the Loan Agreement and the warrants. The Loan Agreement contains representations and warranties and affirmative and negative covenants, as negotiated by the parties to the agreement. The fair value of the warrants resulted in us recording a deferred debt discount, which reduced the face amount of indebtedness to $1.4 million at the date of issuance. The deferred debt discount is amortized into interest expense over the term the borrowings are outstanding using the effective interest method.
On July 30, 2012, we entered into the First Amendment to Loan and Security Agreement (the “First Amendment”) with MMB, pursuant to which the parties agreed to amend that certain Loan and Security Agreement dated as of March 9, 2012, by and between the Company and MMB. Pursuant to the First Amendment, MMB agreed to provide up to $1,600,000 in additional funding to us under the Loan and Security Agreement with the same terms and conditions. In connection with the First Amendment, we issued MMB an immediately exercisable warrant to purchase up to 4,000,000 shares of our common stock at $0.40 per share, which warrant is exercisable through July 30, 2017. In addition, MMB notified us that it was exercising its right to convert all accrued and unpaid interest outstanding under the Loan and Security Agreement through June 30, 2012, which amount was approximately $114,480, into the outstanding loan balance.
Debt Settlements
As of June 30, 2012, we entered into agreements providing for the settlement of approximately $10.8 million of liabilities due to unsecured creditors for approximately $986,000 in cash, approximately 2.6 million shares of our common stock, approximately $131,000 in inventory, and warrants to purchase 365,000 shares of our common stock at an exercise price of $0.50 per share. Of the approximate $10.8 million in settlement agreements entered into, approximately $9.7 million were completed through June 30, 2012, resulting in the payment of cash of approximately $914,000, the relinquishment of approximately $131,000 in inventory, the issuance of approximately 2.1 million shares of our common stock valued at approximately $1.9 million, the issuance of warrants to purchase 365,000 shares of our common stock at an exercise price of $0.50 per share, valued at approximately $202,000, and a gain recorded during the period of approximately $6.6 million. Of the settlements not yet completed, we have paid cash to the unsecured creditors of approximately $72,000 and will issue approximately 437,000 shares of our common stock. We anticipate these settlements will be finalized during the third quarter of 2012, although no assurances can be given in this regard.
Distribution Agreements
On July 12, 2011, we entered into a distribution agreement with a developer and distributor of interactive entertainment software to distribute our legacy console assets. The agreement grants the distributor the exclusive right to purchase video games from us and sell and distribute such video games to wholesalers and retailers in the United States, South America and Europe for a term of three years. Under the terms of the agreement, the distributor must pay us the cost for each unit sold, plus an unearned advance against future royalties on the distributor’s net receipts from sales, which unearned advance was paid to us in the form of a per-unit fee for each unit manufactured. As of December 31, 2011, we had deferred recognition of approximately $383,000 of unearned advances from the per-unit tech fee, as we were unable to conclude at that date that all components of the earnings process had been completed. The unearned advances were recorded in the caption accrued expenses and other current liabilities on our condensed consolidated balance sheets at December 31, 2011. Through June 2012, based upon royalty reports we received from our distributor, we were able to conclude that the advances from the per-unit tech fee and royalties in the amount of approximately $415,000 were earned, which amount we recorded as revenue.
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On July 12, 2011, we entered into a sub-publishing and distribution agreement with a developer and distributor of interactive entertainment software to sub-publish, manufacture and distribute our Minute to Win It game on the Microsoft gaming platforms. The agreement grants the sub-publisher the exclusive right to sub-publish, manufacture and distribute the product in the United States and Latin America for a term of five years, or until the date that Zoo’s rights to the product terminate, whichever is earlier. Under the terms of the agreement, we earn royalties based upon the distributor’s net receipts from the sale of the game. Prior to earning such royalties, we are entitled to receive certain advance payments from the distributor, including: (i) an advance payment at the date of the signing of the agreement; (ii) a per-unit recoupable advance due within five days of Microsoft certification; (iii) a per-unit recoupable advance due within five business days of shipments to customers of the product; and (iv) a per-unit recoupable advance due upon the sell-through of the product by the end retailer. In October 2011, we received certification for Minute to Win It on the Microsoft gaming platforms and sales of the product commenced. All advance payments related to the agreement have been deferred until such time when we receive information from our distributor that allows us to conclude that all components of the earnings process have been completed. Accordingly, we recorded no revenue for sales related to this distribution deal in 2012 or 2011. Unearned advances of approximately $408,000 have been deferred and are recorded in the caption accrued expenses and other current liabilities on the condensed consolidated balance sheets as of June 30, 2012 and December 31, 2011.
Conclusion
Due to the losses we have incurred since inception, we are unable to predict whether we will have sufficient cash from operations to meet our financial obligations for the twelve month period beginning July 1, 2012. Accordingly, the report of our independent registered public accounting firm on our consolidated financial statements for the fiscal years ended December 31, 2011 and 2010 includes an explanatory paragraph raising substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on, among other factors, the following significant short-term actions: (i) management’s ability to generate cash flows from operations sufficient to maintain our daily business activities; (ii) our ability to reduce expenses and overhead; (iii) our ongoing ability to renegotiate certain obligations; and (iv) our ability to raise additional capital. Management’s active efforts in this regard include negotiations with certain vendors to satisfy cash obligations with non-cash assets or equity, reductions of headcount and overhead obligations, and the development of strategies to convert other non-cash assets into cash. There can be no assurance that all or any of these actions will meet with success. We may be required to seek alternative or additional financing to maintain or expand our existing operations through the sale of our securities, an increase in our credit facilities, or otherwise, and there can be no assurance that we will secure financing, and if we are able to, that such financing will be on favorable terms to us or our stockholders. Our failure to obtain financing, if needed, could have a material adverse effect upon our business, financial condition and results of operations.
Critical Accounting Policies and Estimates
There were no changes to our critical accounting policies and estimates since the year ended December 31, 2011. A complete description of our critical accounting policies and estimates can be found in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission on April 16, 2012 and also in Note 3 to the unaudited condensed consolidated financial statements included in this quarterly report for the period ended June 30, 2012.
Accounting Standards Updates Not Yet Effective
In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU No. 2011-11”). This ASU requires companies to disclose both net and gross information about assets and liabilities that have been offset, if any, and the related arrangements. The disclosures under this new guidance are required to be provided retrospectively for all comparative periods presented. We are required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. We do not anticipate that adoption of this ASU will have a material impact on our financial condition, results of operations or cash flows.
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Off-Balance Sheet Arrangements
As of June 30, 2012, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we did not have any undisclosed borrowings or debt, and we have not entered into any synthetic leases.
Fluctuations in Operating Results and Seasonality
We experience fluctuations in quarterly and annual operating results as a result of: the timing of the introduction of new titles; variations in sales of titles developed for particular platforms; market acceptance of our titles; development and promotional expenses relating to the introduction of new titles, sequels or enhancements of existing titles; projected and actual changes in platforms; the timing and success of title introductions by our competitors; product returns; changes in pricing policies by us and our competitors; the size and timing of acquisitions; the timing of orders from major customers; order cancellations, and; delays in product shipments or releases. Sales of our products are also seasonal. Historically, peak shipments for our retail products typically occurred in the fourth calendar quarter as a result of increased demand for titles during the holiday season. While the digital market is relatively new, anecdotal information indicates the peak selling months have been January and August. Quarterly and annual comparisons of operating results are not necessarily indicative of future operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this report.
In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
No system of controls can prevent errors and fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of 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. Controls can also be circumvented by individual acts of some people, by collusion of two or more people, or by management override of the controls. The design of any system of controls 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. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Based on the evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, our Chief Executive Officer and interim acting principal financial officer concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were not effective at a reasonable assurance level.
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Our management has determined that we have material weaknesses in our internal control over financial reporting related to: (i) not having a sufficient number of personnel with the appropriate level of experience and technical expertise to appropriately resolve non-routine and complex accounting matters or to evaluate the impact of new and existing accounting pronouncements on our consolidated financial statements while completing the financial statement close process; (ii) an insufficient level of monitoring and oversight; (iii) ineffective controls over accounting for revenue recognition; and (iv) ineffective controls over the timely recognition of changes within the Company’s business plan and the related impact on the financial statements.
Our management has determined that we have a material weakness in our internal control over financial reporting related to not having a sufficient number of personnel with the appropriate level of experience and technical expertise to appropriately resolve non-routine and complex accounting matters or to evaluate the impact of new and existing accounting pronouncements on our consolidated financial statements while completing the financial statement close process.
Until these material weaknesses in our internal control over financial reporting are remediated, there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements could occur and not be prevented or detected by our internal controls in a timely manner.
Due to resource constraints in 2011 and 2012, both monetary and time, we were not able to appropriately address these matters and we were unable to get to a level to fully remediate these material weaknesses. We will continue to assess our accounting and finance staffing levels to determine and seek the appropriate accounting resources to be added to our staff to handle the existing workload, provide for a sufficient level of monitoring and oversight, implement effective controls over accounting for revenue recognition, and allow for the timely evaluation and recognition of impacts on the financial statements associated with changes to the Company’s business plan.
Changes in Controls and Procedures
There were no changes in our internal controls over financial reporting identified in connection with the evaluation of such internal control that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On July 22, 2011, Bruce E. Ricker, individually and on behalf of all purchasers of the common stock of the Company from July 7, 2010 through April 15, 2011, filed a putative class action complaint in the United States District Court for the Southern District of Ohio. Mr. Ricker was appointed lead plaintiff on October 19, 2011, and he filed an amended complaint on December 12, 2011. The amended complaint alleges that the Company, Mark Seremet, the Company's Chief Executive Officer, and David Fremed, the Company's former Chief Financial Officer, knowingly or recklessly violated the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, by making false material statements in connection with certain financial statements of the Company or by failing to disclose material information in order to make the financial statements not misleading. Specifically, the amended complaint relies upon the Company's April 15, 2011 restatement of its unaudited consolidated financial statements for the three months ended March 31, 2010, the three and six months ended June 30, 2010, and the three and nine months ended September 30, 2010, as the basis for its allegations that the Company's financial statements filed for those periods contained materially false statements. Defendants filed a motion to dismiss the amended complaint, which was then fully briefed and argued to the court on May 10, 2012. On July 30, 2012, the court issued an opinion and order granting the motion to dismiss in its entirety, dismissing all claims and closing the case. On August 2, 2012, the plaintiffs filed a notice of appeal as to the dismissal.
We are involved, from time to time, in various legal proceedings and claims incidental to the normal conduct of our business. Although it is impossible to predict the outcome of any legal proceeding and there can be no assurances, we believe that such legal proceedings and claims, individually and in the aggregate, are not likely to have a material adverse effect on our financial condition, results of operations or cash flows.
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ITEM 1A. RISK FACTORS.
There have been no material changes in our risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On April 4, 2012, the Company issued 268,551 shares of restricted common stock for an aggregate purchase price equaling $276,608. The shares were issued to partially satisfy an outstanding liability owed by the Company.
On April 12, 2012, the Company issued 175,323 shares of restricted common stock for an aggregate purchase price equaling $166,557. The shares were issued to partially satisfy an outstanding liability owed by the Company.
On May 15, 2012, the Company issued 71,120 shares of restricted common stock for an aggregate purchase price equaling $44,094. The shares were issued to partially satisfy an outstanding liability owed by the Company.
On May 29, 2012, the Company issued 156,257 shares of restricted common stock for an aggregate purchase price equaling $87,504. The shares were issued to partially satisfy an outstanding liability owed by the Company.
On June 26, 2012, the Company issued 13,757 shares of restricted common stock for an aggregate purchase price equaling $9,630. The shares were issued to partially satisfy an outstanding liability owed by the Company.
On June 28, 2012, the Company issued 6,313 shares of restricted common stock for an aggregate purchase price equaling $4,419. The shares were issued to partially satisfy an outstanding liability owed by the Company.
The offer and sale of these shares was made in reliance upon exemptions from the registration provisions of the Securities Act of 1933, as amended, set forth in Section 4(2) and Rule 506 of Regulation D thereof.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
4.1 | Warrant issued to Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. | |
10.1 | First Amendment to Loan and Security Agreement by and between indiePub Entertainment, Inc., Zoo Games, Inc., Zoo Publishing, Inc., indiePub, Inc. and MMB Holdings LLC, dated July 30, 2012. | |
10.2 | Secured Promissory Note Agreement by and between indiePub Entertainment, Inc., Zoo Games, Inc., Zoo Publishing, Inc., indiePub, Inc. and MMB Holdings LLC, dated July 30, 2012. | |
10.3 | Form of Warrant issued to MMB Holdings LLC. | |
31.1 | Certification of Chief Executive Officer and Interim Acting Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 | Certification by Chief Executive Officer and Interim Acting Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002. |
101* | The following materials from Zoo Entertainment, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statement of Stockholders’ Deficit and (v) Notes to Condensed Consolidated Financial Statements. | |
* | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
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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.
Dated: August 14, 2012 | |
INDIEPUB ENTERTAINMENT, INC | |
/s/ Mark Seremet | |
Mark Seremet | |
President and Chief Executive Officer | |
(Principal Executive Officer) |
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EXHIBIT INDEX
4.1 | Warrant issued to Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. | |
10.1 | First Amendment to Loan and Security Agreement by and between indiePub Entertainment, Inc., Zoo Games, Inc., Zoo Publishing, Inc., indiePub, Inc. and MMB Holdings LLC, dated July 30, 2012. | |
10.2 | Secured Promissory Note Agreement by and between indiePub Entertainment, Inc., Zoo Games, Inc., Zoo Publishing, Inc., indiePub, Inc. and MMB Holdings LLC, dated July 30, 2012. | |
10.3 | Form of Warrant issued to MMB Holdings LLC. | |
31.1 | Certification of Chief Executive Officer and Interim Acting Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification by Chief Executive Officer and Interim Acting Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002. |
101* | The following materials from indiePub Entertainment, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) the Condensed Consolidated Statements of Cash Flows, (iv) Condensed Consolidated Statement of Stockholders’ Deficit and (v) Notes to Condensed Consolidated Financial Statements. | |
* | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
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Exhibit 4.1
THIS WARRANT AND THE SECURITIES SUBJECT HERETO HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THIS WARRANT AND THE SECURITIES SUBJECT HERETO MAY NOT BE PLEDGED, HYPOTHECATED, SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, UNLESS REGISTRATION IS NOT REQUIRED UNDER THE ACT.
INDIEPUB ENTERTAINMENT, INC.
Issue Date: June 15, 2012
Common Stock Purchase Warrant
1. | Right to Purchase. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (the “Holder”) is entitled to subscribe for and purchase from indiePub Entertainment, Inc., a Delaware corporation (formerly known as Zoo Entertainment, Inc.) (the “Company”), Three Hundred Sixty-Five Thousand (365,000) shares, subject to adjustment as provided herein (the “Shares”), of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at a purchase price equal to the Applicable Exercise Price (as defined below) per share (subject to adjustment as provided herein) payable in cash or check or by wire transfer of immediately available funds, unless converted pursuant to Section 3(b) hereof, at any time or from time to time during the term of this Warrant as set forth in Section 4 hereof. The “Applicable Exercise Price” shall mean fifty cents ($0.50) (subject to adjustment, if any, as provided herein). |
2. | Fully Paid Shares. Upon payment to the Company of the Applicable Exercise Price of the Shares being purchased, the Holder of this Warrant shall be entitled to receive a certificate or certificates for the Shares so purchased, or if requested by Holder, to have the Shares issued electronically to an account designated by the Holder. All Shares which may be issued upon the exercise of this Warrant will, upon issuance, be fully paid and non-assessable and free from all liens and charges with respect thereto. |
3. | Exercise of Warrant. |
(a) Manner of Exercise; Payment in Cash. The Holder may exercise this Warrant in whole or in part by (i) surrendering it to the Company at the Company’s principal office accompanied by a duly completed Subscription Form in the form attached hereto as Exhibit A (the “Subscription Form”), and (ii) unless the Warrant is converted pursuant to Section 3(b) hereof, paying the amount determined by multiplying the number of Shares to be received on such exercise by the Applicable Exercise Price then in effect. A new Warrant of like tenor representing the number (based on the number of Shares purchasable with this Warrant without regard to any adjustments) of Shares, if any, as to which this Warrant shall not have been exercised shall be issued to the Holder. The Shares purchased shall be deemed issued as of the close of business on the exercise date indicated on the Subscription Form. Certificates for Warrants, the purchased Shares and any substitute or additional property receivable by the Holder shall be delivered to the Holder not later than five (5) business days after the exercise date. The Company will pay all expenses in connection with the issue of the Shares and any substitute or additional property receivable by the Holder.
(b) Right to Convert Warrant into Stock: Net Issuance.
(i) Right to Convert. In addition to and without limiting the rights of the Holder under the terms of this Warrant, the Holder shall have the right to convert this Warrant or any portion thereof (the “Conversion Right”) into Shares as provided in this Section 3(b) at any time or from time to time during the term of this Warrant. If the Holder elects to exercise the Conversion Right, then, subject to Section 3(b)(ii) , the Company shall issue and deliver to the Holder (without payment by the Holder of any Applicable Exercise Price or any cash or other consideration) that number of Shares of fully paid and nonassessable Common Stock computed in accordance with the following formula:
X = Y (A-B) | ||
A |
Where | X = the number of Shares of Common Stock to be issued to the Holder | |
Y =the number of Shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the number of Shares of Common Stock being subscribed for (at the date of such exercise) | ||
A =the fair market value of one Share of the Company’s Common Stock (at the date of such exercise) | ||
B =the Applicable Exercise Price (as adjusted to the date of such exercise). |
The “date of such exercise” shall be the date indicated on the Subscription Form. Any fractional Shares issuable upon exercise of the Conversion Right shall be subject to Section 10 hereof.
(ii) Method of Exercise. The Conversion Right may be exercised by the Holder by the surrender of this Warrant at the principal office of the Company together with the Subscription Form duly completed and executed and indicating the number of Shares subject to this Warrant which are being surrendered in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the “Conversion Date”), and, at the election of the Holder hereof, may be made contingent upon the occurrence of any of the events specified in Section 11. Certificates for the Shares issuable upon exercise of the Conversion Right and, if applicable, a new Warrant evidencing the balance of the Shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the Holder within five (5) days following the Conversion Date. The Company will pay all expenses in connection with the issue of the Shares and any substitute or additional property receivable by the Holder.
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(iii) Determination of Fair Market Value. For purposes of this Section 3, “fair market value” of a share of Common Stock as of a particular date (the “Determination Date”) shall mean:
(A) If the Conversion Right is exercised in connection with and contingent upon a public offering, and if the Company’s Registration Statement relating to such public offering (“Registration Statement”) has been declared effective by the Securities and Exchange Commission (“SEC”), then the initial “price to the public” specified in the final prospectus with respect to such offering. If the Conversion Right is exercised in connection with and contingent upon a merger, consolidation, reorganization, sale of all or substantially all of the Company’s assets or other change of control transaction (an “M&A Transaction”), then the price per Share in such transaction.
(B) If the Conversion Right is not exercised in connection with and contingent upon a public offering or an M&A Transaction, then as follows:
(1) | If traded on a securities exchange, the fair market value of the Common Stock shall be deemed to be the average of the closing prices of the Common Stock on such exchange over the five-day period ending one business day prior to the Determination Date or, if less, such number of days as the Common Stock has been traded on such exchange; |
(2) | If traded over-the-counter, the fair market value of the Common Stock shall be deemed to be the average of the closing bid prices of the Common Stock over the five-day period ending one business day prior to the Determination Date or, if less, such number of days as the Common Stock has been traded over-the-counter; and |
(3) | If there is no public market for the Common Stock, then fair market value shall be determined in good faith by the Board of Directors of the Company upon review of all relevant factors. |
(C) In the event that the Determination Date is the date of a liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up of the Company under the Company’s Certificate of Incorporation as then in effect, then the fair market value per share of the Common Stock shall be determined by aggregating all amounts to be payable per share to holders of the Common Stock in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Common Stock in liquidation, assuming for the purposes of this Subsection that all of the Shares of Common Stock issuable upon exercise of all of the Warrants are outstanding at the Determination Date; or
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(D) In all other cases, the fair market value per Share of the Common Stock shall be determined in good faith by the Company’s Board of Directors upon review of all relevant factors.
4. | Term of Warrant. This Warrant shall expire and no longer be exercisable on the fifth (5th) anniversary of the Issue Date. |
5. | Rule 144 Information. The Company shall make publicly available such information as is necessary to enable the Holder to make sales of Shares issued or issuable upon exercise of the Warrant pursuant to Rule 144 promulgated under the Securities Act of 1933. |
6. | Adjustments for Stock Splits and Stock Dividends. Upon any subdivision or combination of outstanding shares of Common Stock, the number of Shares subject to purchase hereunder shall be adjusted by multiplying the number of Shares subject to purchase hereunder immediately prior to such event by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately subsequent to such event and the denominator of which is the number of shares of Common Stock outstanding immediately prior to such event, and the Applicable Exercise Price shall thereupon be proportionately decreased or increased so that the total consideration payable upon full exercise of this Warrant shall be unchanged, except that in no event shall the Applicable Exercise Price be reduced below the par value per share of the Common Stock. |
7. | [Removed and Reserved]. |
8. | Adjustment for Reclassifications, Merger, Sale of Substantially All Assets, etc. If there occurs any capital reorganization or any reclassification of the Company’s capital stock, any consolidation or merger of the Company with or into another company, the sale or conveyance of all or substantially all of the assets of the Company to another entity, or the liquidation, dissolution or winding up of the Company, this Warrant shall thereafter entitle the Holder to purchase the same kind and amounts of securities and other assets which the Holder would have received as a holder of shares of Common Stock if this Warrant had been fully exercised immediately prior to such transaction or any applicable record date for such transaction; provided that, in the event of any such consolidation, merger or sale transaction with or into another company, the Company shall either, at the option of the Holder (i) automatically convert this Warrant into that number of shares of stock or other securities or property of the Company, or of the successor corporation resulting from the merger, consolidation or sale, to which the Holder would have been entitled if the Holder had exercised its rights pursuant to Section 3(b) of this Warrant immediately prior thereto, or (ii) require the successor company (if other than the Company) resulting from such consolidation or merger or the entity purchasing such assets to assume the foregoing obligations by written instrument in form and substance reasonably satisfactory to the Holder and delivered to the Holder. Appropriate adjustments shall be made with respect to the rights and interests of the Holder under this Warrant to the end that the provisions hereof shall thereafter apply as reasonably as they may to the securities or assets thereafter deliverable upon the exercise hereof. |
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9. | No Impairment. The Company shall not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Warrant and in taking all such action as may be necessary or appropriate to protect Holder’s rights under this Warrant against impairment. |
10. | Fractional Shares. No fractional Shares shall be issuable upon exercise or conversion of this Warrant. If a fractional Share would otherwise arise upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional Share by paying Holder in cash the amount computed by multiplying the fractional interest by the fair market value of a full share of Common Stock determined in accordance with Section 3(b)(iii) hereof. |
11. | Notice of Certain Events. If the Company proposes at any time (a) to declare any dividend or distribution upon any of its Common Stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for sale any Shares of Common Stock (or other securities convertible into Common Stock), other than (i) pursuant to the Company’s stock option or other compensatory plans, (ii) in connection with commercial credit arrangements or equipment financings, or (iii) in connection with strategic transactions for purposes other than capital raising; (c) to effect any reclassification or recapitalization of any of its Common Stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the Company’s securities for cash, then, in connection with each such event, the Company shall give Holder: (i) at least ten (10) days’ prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of Common Stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (a) and (b) above; (ii) in the case of the matters referred to in (c) and (d) above at least ten (10) days prior written notice of the date when the same will take place (and specifying the date on which the holders of Common Stock will be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event); and (iii) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights. Company will also provide information requested by Holder reasonably necessary to enable Holder to comply with Holder’s accounting or reporting requirements. |
12. | Notices, etc. All notices and other communications under this Warrant shall be in writing and delivered in person or via overnight courier or mailed by first class registered or certified mail, postage prepaid and return receipt requested, to the attention of the Company’s Chief Financial Officer at the Company’s principal office, and to the Holder at the last address of the Holder furnished to the Company. |
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13. | Specific Performance. The Company acknowledges and admits that there is no adequate remedy at law for its failure to perform its obligations hereunder with respect to the exercise of this Warrant by the Holder and agrees that in the event of such failure, the Holder shall be entitled to equitable relief by way of specific performance and such other relief as any court with jurisdiction may deem just and proper. |
14. | Miscellaneous. |
(a) Authorized Shares. The Company covenants that it will at all times reserve and keep available, solely for the purpose of issuance upon the exercise hereof, a sufficient number of Shares of Common Stock to permit the exercise hereof in full.
(b) No Rights as Stockholder. The Holder of this Warrant, as such, shall not be entitled to vote or receive dividends or be deemed a holder of Common Stock, nor shall anything contained herein be construed to confer upon the Holder of this Warrant, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the Shares shall have become deliverable as provided herein.
(c) Modification and Waiver. This Warrant and any provision hereof may be amended, waived, discharged or terminated only with the written consent of the Company and the Holder.
(d) Successors and Assigns. The rights and obligations set forth in this Warrant shall be binding upon the successors and assigns of the Company and the Holder and the holder of any Shares of Common Stock issued or issuable upon the exercise hereof.
(e) Acceptance. Receipt of this Warrant by the Holder shall constitute acceptance of and agreement to the foregoing terms and conditions.
(f) Replacement. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new warrant of like date and tenor.
(g) Governing Law. This Warrant shall be governed in all respects by the laws of the State of Delaware.
(h) Severability. If any term, provision, covenant or restriction of this Warrant is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Warrant shall remain in full force and effect and shall in no way be affected, impaired or invalidated and each such term, provision, covenant, or restriction that is held unenforceable shall be construed by limiting it so as to be valid and enforceable to the maximum extent permitted by applicable law.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer.
indiePub Entertainment, Inc. | ||
By: | /s/ Mark E. Seremet | |
Name: Mark E. Seremet | ||
Title: CEO |
Dated: June 15, 2012
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EXHIBIT A
SUBSCRIPTION FORM
To: indiePub Entertainment, Inc.
The undersigned, pursuant to the provisions set forth in the attached Warrant, hereby irrevocably elects to (check one):
_____ | (A) purchase _____________ shares of the Common Stock, par value $0.001 per share, of indiePub Entertainment, Inc. (the “Common Stock”), covered by such Warrant and herewith makes payment of $________, representing the full purchase price for such shares at the price per share provided for in such Warrant; or | ||
_____ | (B) convert _____________ shares of Common Stock covered by such Warrant into that number of shares of fully paid and nonassessable shares of Common Stock determined in accordance with the provisions of Section 3(b) |
of the Warrant, and requests that the certificates for such shares be issued in the name of, and delivered to the Holder at the following address or be issued electronically to the Holder at the account indicated below:
_____ | Issue certificates and deliver to: | ||
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. | |||
ATTN: Director of Finance | |||
One Financial Center | |||
Boston, MA 02111 |
_____ | Issue shares electronically to: | |||
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. | ||
By: | ||
Name: | ||
Title: | ||
Dated: | ___________________, ______ |
Exhibit 10.1
FIRST AMENDMENT TO
LOAN AND SECURITY AGREEMENT
This First Amendment to Loan and Security Agreement (this “Amendment”) is made as of July 30, 2012 (the “Amendment Date”), among indiePub Entertainment, Inc., a Delaware corporation (formerly known as Zoo Entertainment, Inc.) (“indiePub Entertainment”), Zoo Games, Inc., a Delaware corporation (“Zoo Games”), Zoo Publishing, Inc., a New Jersey corporation (“Zoo Publishing”), and indiePub, Inc., a Delaware corporation (“indiePub,” and, together with indiePub Entertainment, Zoo Games and Zoo Publishing, the “Borrowers”), and MMB Holdings LLC, a Delaware limited liability company (the “Lender”).
Recitals
Whereas, the Borrowers have borrowed from Lender and Lender has lent to Borrower the original principal sum of Four Million Three Hundred Eighty One Thousand One Hundred and Ten Dollars ($4,381,110) (plus capitalized interest as provided herein) pursuant to that certain Loan and Security Agreement, dated as of March 9, 2012 (as amended, restated, modified or supplemented from time to time, including by this Amendment, the “Loan Agreement”), and evidenced by that certain Secured Promissory Note, made as of March 9, 2012 by the Borrowers in favor of Lender (the “Initial Promissory Note”);
Whereas, the Borrowers desire to borrow from Lender additional sums up to an aggregate amount not to exceed One Million Six Hundred Thousand Dollars ($1,600,000) for the purposes permitted under the Loan Agreement;
Whereas, Lender is willing to make such additional loans up to an aggregate amount not to exceed One Million Six Hundred Thousand Dollars ($1,600,000) as Drawdowns and upon the terms and conditions set forth herein (collectively, the “Additional Loans”);
Now, Therefore, in consideration of the covenants and agreements set forth herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby covenant and agree as follows:
1. Defined Terms. Capitalized terms used but not defined in this Amendment shall have the meanings assigned to them in the Loan Agreement.
2. Amendments to Loan Agreement.
(a) The Loans. All references to the “Loans” in the Loan Agreement and herein shall include both (x) the original loans from the Lender to the Borrowers pursuant to the Loan Agreement and evidenced by the Original Promissory Note in an aggregate principal amount as of the Amendment Date of Four Million Three Hundred Eighty One Thousand One Hundred and Ten Dollars ($4,381,110), plus capitalized interest as provided herein (the “Original Loans”) and (y) the Additional Loans. Subject to, and upon all of the terms and conditions set forth in the Loan Agreement and herein and in reliance on the representations and warranties set forth herein and therein, the Lender agrees to make the Additional Loans to the Borrowers as Drawdowns.
(b) Other Amendments to the Loan Agreement.
(i) The following definition set forth in Section 1.1 of the Loan Agreement is hereby amended and restated in its entirety as follows:
Remaining Drawdown Amount: as of any date of determination, the excess of (x) Five Million Nine Hundred Eighty One Thousand One Hundred and Ten Dollars ($5,981,110) over (y) the sum of (i) the Factoring Agreement Rollover Advance, (ii) the Initial Advance and (iii) all Drawdowns.
(ii) Section 2.1(a)(iii) of the Loan Agreement is hereby amended and restated in its entirety as follows:
(iii) subject to the satisfaction of the conditions set forth in Section 3.2, the Lender shall make additional Loans to the Borrower from time to time (each such additional Loan, a “Drawdown”), up to an aggregate amount not to exceed Three Million Five Hundred Sixty-Six Thousand Nine Hundred Fifty-Two Dollars ($3,566,952) (the “Maximum Drawdown Amount”), which the Borrowers shall use solely for purposes approved by the Lender in its sole discretion.
(iii) Section 3.2(d)) of the Loan Agreement is hereby amended and restated in its entirety as follows:
(d) Consent to Drawdown; Use of Proceeds. The Lender, in its sole discretion, shall have (i) elected to fund the Drawdown, and (ii) approved the manner in which the Borrower will use the proceeds of such Drawdown.
3. Conditions Precedent to Additional Loan. The obligation of the Lender to make the Additional Loans as Drawdowns shall be subject to the satisfaction (or waiver in accordance with Section 9.2 of the Loan Agreement) on and as of the date of such Drawdown of (x) all of the conditions precedent set forth in Section 3.2 of the Loan Agreement with respect thereto, and (y) the receipt by the Lender of each of the following, each of which shall be (i) originals or facsimiles (followed promptly by originals) unless otherwise specified, (ii) properly and duly authorized, executed and delivered by the signing Borrower and each other party thereto, (iii) in form and substance satisfactory to the Lender (in its sole discretion), and (iv) “Loan Documents” as such term is defined the Loan Agreement:
(a) a promissory note, dated as of the Amendment Date substantially in the form of Exhibit A hereto, which shall evidence the Borrowers’ obligation to pay the principal of, interest on, and other amounts owing under the Additional Loans (the “Additional Promissory Note”); and
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(b) a Warrant, dated as of the Amendment Date, substantially in the form attached hereto as Exhibit B, pursuant to which indiePub Entertainment shall grant to the Lenders the right to purchase Four Million (4,000,000) shares of the Common Stock at the exercise price of $0.40 per share (the “Additional Warrant”).
4. Representations and Warranties. Each of the Borrowers hereby jointly and severally represents, warrants and covenants to the Lender as of the Amendment Date and each Drawdown Date occurring after the Amendment Date that:
(a) all of the conditions specified in Section 3.2 of the Loan Agreement have been satisfied in respect of any Drawdown to be funded on such date;
(b) each of the Borrowers is Solvent, both before and after giving effect to each advance of the Loans (including any Additional Loans);
(c) no Material Adverse Effect has occurred since the Closing Date;
(d) no Default or Event of Default has occurred and is continuing; and
(e) (i) the aggregate gross assets of Zoo Europe are not in excess of €1,500, (ii) notwithstanding Section 6.3(a)(v) of the Loan Agreement, the Borrowers will, in the event gross assets of Zoo Europe exceed €1,500, promptly notify the Lender within two Business Days thereafter, (iii) promptly comply with the reasonable instructions of the Lender to ensure perfection of Lender’s security interest in that portion of the Collateral which is held by Zoo Europe, and (iv) within 5 Business Days of Amendment Date, deliver to Lender certificates representing all Capital Stock of Zoo Europe, accompanied by undated stock powers duly executed in blank.
5. Capitalization of Interest. As of the Payment Date of June 30, 2012, aggregate accrued and unpaid interest on the Original Loan equaled $114,479.68 (the “First Payment Date Interest”). Pursuant to Section 2.3(b) of the Loan Agreement and effective as of June 30, 2012, the Lender hereby elects for all of the First Payment Date Interest to be capitalized into the Loan Balance as Capitalized Interest.
6. Reaffirmation. Each Borrower hereby (a) reaffirms, ratifies, confirms, and acknowledges its obligations under the Loan Agreement, and all the other Loan Documents, and agrees to continue to be bound thereby and perform thereunder, (b) agrees and acknowledges that all such Loan Documents and all of Borrower’s obligations thereunder are and remain in full force and effect and, except as expressly provided herein, have not been modified. Except as expressly provided herein, nothing in this Amendment shall alter or affect any provision, condition, or covenant contained in the Loan Agreement or other Loan Documents or affect or impair any rights, powers, or remedies of the Lender, it being the intent of the parties hereto that the provisions of the Loan Agreement and other Loan Documents shall continue in full force and effect except as expressly modified hereby. Without limiting the foregoing, each Borrower hereby confirms that the Borrowers’ obligations with respect to the Additional Loan and the Additional Promissory Note constitute Obligations secured by the Collateral.
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7. Miscellaneous.
(a) Controlling Provisions. In the event of any inconsistencies between the provisions of this Amendment and the provisions of any other Loan Document, the provisions of this Amendment shall govern and prevail. Except as expressly modified by this Amendment, the Loan Documents shall not be modified and shall remain in full force and effect.
(b) Counterparts; Integration; Effectiveness. This Amendment may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Amendment and the other Loan Documents constitute the entire agreement among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 3 hereof, this Amendment shall become effective when it shall have been executed by the Borrowers and the Lender. Delivery of an executed counterpart of a signature page of this Agreement by telecopy or by e-mail of a PDF or similar electronic image file shall be effective as delivery of a manually executed counterpart of this Amendment.
(c) Severability. Any provision of this Amendment held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction.
(d) Further Assurances. At Lender’s request, Borrower shall promptly execute any other document or instrument and/or seek any consent or agreement from any third party that Lender reasonably determines is necessary to evidence or further, or is otherwise relevant to, the intent of the parties, as set forth in this Amendment, provided, the same shall not result in a decrease of the rights of Borrower or result in an increase in Borrower’s obligations under the Loan Documents.
(e) GOVERNING LAW. PURSUANT TO SECTION 9.9 OF THE LOAN AGREEMENT, THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE.
(f) No Third Parties Benefited. This Amendment is made and entered into for the sole protection and legal benefit of the Borrowers and Lender and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Amendment or any of the other Loan Documents.
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[The signatures are on the following page.]
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In witness whereof, the parties hereto have executed this Agreement as of the date first written above.
BORROWERS:
indiePub Entertainment, Inc. | ||||
By: | /s/ Mark Seremet | |||
Name: | Mark Seremet | |||
Title: | Chief Executive Officer and President | |||
Zoo Games, Inc. | ||||
By: | /s/ Mark Seremet | |||
Name: | Mark Seremet | |||
Title: | Chief Executive Officer and President | |||
Zoo Publishing, Inc. | ||||
By: | /s/ Mark Seremet | |||
Name: | Mark Seremet | |||
Title: | Chief Executive Officer and President | |||
indiePub, Inc. | ||||
By: | /s/ Mark Seremet | |||
Name: | Mark Seremet | |||
Title: | Chief Executive Officer and President |
In witness whereof, the parties hereto have executed this Agreement as of the date first written above.
Lender:
MMB Holdings LLC | ||||
By: | Mojobear Capital LLC, its managing member | |||
By: | /s/ David Smith | |||
Name: | ||||
Title: |
Exhibit 10.2
SECURED PROMISSORY NOTE
$1,600,000 |
July 30, 2012
Los Angeles, California |
For value received, the each of undersigned, indiePub Entertainment, Inc., a Delaware corporation (formerly known as Zoo Entertainment, Inc.), Zoo Games, Inc., a Delaware corporation, Zoo Publishing, Inc., a New Jersey corporation, and indiePub, Inc., a Delaware corporation (collectively, the “Borrowers”), hereby jointly and severally promise to pay to the order of MMB Holdings LLC, a Delaware limited liability company (the “Lender”), in the lawful currency of the United States of America, and in immediately available funds, the principal amount of (a) One Million Six Hundred Thousand ($1,600,000), or, if different, (b) the aggregate unpaid principal amount of all Additional Loans made by the Lender to the Borrower pursuant to that certain Loan and Security Agreement, dated as of March 9, 2012, among the Borrowers and the Lender, as amended by that certain First Amendment thereto, dated as of July 30, 2012 (as further amended, restated, modified or supplemented from time to time, the “Loan Agreement”), in each case (i) plus interest thereon and all other amounts due to Lender under the Loan Documents in respect of the Additional Loans, and (ii) in the manner and upon the terms and conditions set forth in the Loan Agreement. Unless otherwise defined herein, terms defined in the Loan Agreement and used herein shall have the meanings given to them in the Loan Agreement.
The holder of this Promissory Note is authorized to endorse on Schedule A annexed hereto and made a part hereof, or on a continuation thereof which shall be attached hereto and made a part hereof, the date and the amount of each Loan evidenced by this Promissory Note and of each payment or prepayment of principal or interest with respect thereto and such holder shall so endorse such schedule prior to any transfer of this Promissory Note. Each such endorsement shall be deemed to be conclusive and binding upon the Borrowers except to the extent of manifest error, and the failure to make any such endorsement or any error in any such endorsement shall not affect the obligations of the Borrowers in respect of the Loans evidenced by this Promissory Note. The holder of this Promissory Note may assign all or any portion of this Promissory Note to any Person at any time in accordance with Section 9.4(b) of the Loan Agreement.
This Promissory Note is subject to the provisions of the Loan Agreement and secured as provided in the Loan Documents. Reference is hereby made to the Loan Documents for a description of the properties and assets in which a security interest has been granted, the nature and extent of the security, the terms and conditions upon which the security interests were granted, and the rights of the holder of this Promissory Note in respect thereof. Upon the occurrence of any Event of Default, all principal and all accrued interest then remaining unpaid on this Promissory Note shall become, or may be declared to be, immediately due and payable, all as provided in the Loan Agreement. The Borrower hereby waives presentment, demand, protest and all other notices of any kind to the fullest extent permitted by applicable law.
No amendment, modification or waiver of any provision hereof nor consent to any departure from the terms of this Promissory Note shall be effective unless the same shall be in writing and signed by the Borrowers and the Lender, and any such waiver or consent shall only be effective in the specific instance and for the specific purpose for which given.
THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF DELAWARE.
In witness whereof, the Borrowers have executed this Promissory Note as of the date above first written.
BORROWERS:
indiePub Entertainment, Inc. | ||||
By: | /s/ Mark Seremet | |||
Name: | Mark Seremet | |||
Title: | CEO | |||
Zoo Games, Inc. | ||||
By: | /s/ Mark Seremet | |||
Name: | Mark Seremet | |||
Title: | CEO | |||
Zoo Publishing, Inc. | ||||
By: | /s/ Mark Seremet | |||
Name: | Mark Seremet | |||
Title: | CEO | |||
indiePub, Inc. | ||||
By: | /s/ Mark Seremet | |||
Name: | Mark Seremet | |||
Title: | CEO |
Schedule A to Promissory Note
Date | Amount of Loan Made |
Amount of Principal Repayment | Outstanding Loan Balance | Notation Made By |
Exhibit 10.3
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF HAVE BEEN ISSUED AND SOLD WITHOUT REGISTRATION IN RELIANCE UPON EXEMPTIONS FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 (THE “1933 ACT”) AND APPLICABLE STATE SECURITIES LAWS (THE “STATE ACTS”). SUCH SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, OR TRANSFERRED OTHER THAN PURSUANT TO AN EFFECTIVE REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE 1933 ACT AND THE STATE ACTS.
WARRANT TO PURCHASE COMMON STOCK
OF
INDIEPUB ENTERTAINMENT, INC.
Exercisable Only
upon Conditions Herein Specified
Holder: | MMB Holdings LLC |
Initial Shares: | 4,000,000 |
1. Grant of Warrants. indiePub Entertainment, Inc., a Delaware corporation (formerly known as Zoo Entertainment, Inc.) (the “Corporation”), hereby certifies that the above-named Holder (“holder”), its registered successors and permitted assigns registered on the books of the Corporation maintained for such purposes as the registered holder hereof, for value received, is entitled to purchase from the Corporation Four Million (4,000,000) fully paid and nonassessable shares (the “Shares”) of common stock of the Corporation (the “Common Stock”), at the purchase price of $0.40 per Share (the “Exercise Price”). The Exercise Price and the number of Shares are subject to adjustment (as hereinafter provided) upon the terms and conditions provided in this warrant (the “Warrant” or “Warrant Certificate”).
This Warrant is issued in connection with a Loan and Security Agreement among the Holder, the Corporation and the subsidiaries of the Corporation.
2. Exercise of Warrant.
(a) This Warrant may be exercised in whole or in part at any time prior to July 30, 2017. Upon presentation and surrender of this Warrant Certificate and a Notice of Exercise in the form attached hereto as Exhibit “A” at the principal office of the Corporation at 11258 Cornell Park Drive, Suite 608, Blue Ash, Ohio 45242, or at such other place as the Corporation may designate by notice to the Holder hereof, together with a check payable to the order of the Corporation in the amount of the Exercise Price times the number of Shares being purchased, the Corporation shall deliver to the Holder hereof, as promptly as practicable, certificates representing the Shares being purchased. This Warrant may be exercised in whole or in part in minimum increments of the lesser of 100 Shares or the number of Shares then represented by this Warrant which have not been previously exercised. In case of exercise hereof in part only, the Corporation, upon surrender hereof, will deliver to the Holder a new Warrant Certificate or Warrant Certificates of like tenor entitling the Holder to purchase the number of Shares as to which this Warrant has not been exercised.
(b) All or any part of the Exercise Price per share may be paid by offset against indebtedness owed by the Corporation, or any other corporation of which the Corporation owns at least 50% of the voting stock, to the Holder.
The Exercise Price may also be paid by surrendering the right to a number of shares issuable upon exercise of the Warrant that have a fair market value equal to or greater than the Exercise Price. The fair market value shall be the last reported price on the most recent date of trading in the Common Stock. If the Common Stock is not traded, fair market value shall be as determined by the board of directors of the Corporation.
3. Exchange and Transfer of Warrant. This Warrant Certificate at any time prior to the exercise hereof, upon presentation and surrender to the Corporation and compliance with Section 6 below, may be exchanged, alone or with other Warrant Certificates of like tenor registered in the name of the Holder, for another Warrant Certificate or Warrant Certificates of like tenor in the name of such Holder or its assignee or transferee exercisable for the same aggregate number of Shares as the Warrant Certificate or Warrant Certificates surrendered.
4. Rights and Obligations of Warrant Holder.
(a) The Holder of this Warrant Certificate shall not, by virtue hereof, be entitled to any rights of a shareholder in the Corporation, either at law or in equity; provided, however, that in the event that any certificate representing the Shares is issued to the Holder hereof upon exercise of this Warrant, such Holder shall, for all purposes, be deemed to have become the holder of record of such Shares on the date on which this Warrant Certificate, together with a duly executed purchase form, was surrendered and payment of the Exercise Price was made, irrespective of the date of delivery of such Share certificate. The rights of the Holder of this Warrant are limited to those expressed herein and the Holder of this Warrant, by its acceptance hereof, consents to and agrees to be bound by and to comply with all the provisions of this Warrant Certificate. In addition, the Holder of this Warrant Certificate, by accepting the same, agrees that the Corporation may deem and treat the person in whose name this Warrant Certificate is registered on the books of the Corporation maintained for such purpose as the absolute, true and lawful owner for all purposes whatsoever.
(b) The Holder of this Warrant Certificate, as such, shall not be entitled to vote or receive dividends or to be deemed the holder of Shares for any purpose, nor shall anything contained in this Warrant Certificate be construed to confer upon the Holder of this Warrant Certificate, as such, any of the rights of a shareholder of the Corporation including but not limited to any right to vote, give or withhold consent to any action by the Corporation, whether upon any recapitalization, issue of stock, reclassification of stock, consolidation, merger, share exchange, conveyance or otherwise, receive notice of meetings or other action affecting shareholders (except for the notices provided for herein), or receive subscription rights, until this Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable as provided herein.
5. Shares Underlying Warrant. The Corporation covenants and agrees that all Shares delivered upon exercise of this Warrant shall, upon delivery and payment therefor, be duly and validly authorized and issued, fully paid and nonassessable, and free from all liens, encumbrances and charges with respect to the purchase thereof.
6. Disposition of Warrants or Shares. The Holder of this Warrant Certificate and any transferee hereof or of the Shares issuable upon the exercise of this Warrant, by their acceptance hereof or thereof, hereby understand and agree that this Warrant, and the Shares issuable upon the exercise hereof, have not been registered under either the Securities Act of 1933 (the “1933 Act”) or applicable state securities laws (the “State Acts”) and shall not be sold, pledged, hypothecated, donated or otherwise transferred (whether or not for consideration) except upon the issuance to the Corporation of a favorable opinion of counsel or submission to the Corporation of such evidence as may be reasonably satisfactory to counsel to the Corporation, in each such case, to the effect that any such transfer shall not be in violation of the Act and the State Acts. It shall be a condition to the transfer of this Warrant that any transferee hereof deliver to the Corporation its written agreement to accept and be bound by all of the terms and conditions of this Warrant Certificate.
7. Adjustments. The Exercise Price and the number of Shares for which this Warrant is exercisable as hereinabove provided shall be subject to adjustments as follows:
(a) In case the Corporation shall (i) pay a dividend on its Common Stock in shares of its Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a lesser number of shares, or (iv) issue by reclassification of its shares of Common Stock any shares of its capital stock, the number of Shares purchasable upon the exercise of this Warrant in effect immediately prior thereto and the Exercise Price, in each case, shall be adjusted so that the Holder shall be entitled to receive, upon exercise of this Warrant, the aggregate number of Shares which such Holder would have owned or have been entitled to receive after the happening of such event, at the aggregate Exercise Price that such Holder would have paid, in each case, had such Holder exercised this Warrant immediately prior to the record date in the case of such dividend or the effective date in the case of any such subdivision, combination or reclassification. In addition, in the case (x) the Corporation shall pay a dividend on the Common Stock in assets (other than cash or Common Stock) or (y) the Common Stock is or becomes converted into any other security or asset, then the Shares to which the Holder is entitled shall include such other security or assets that the Holder would have owned or have been entitled to receive after the happening of such event had such Holder exercised this Warrant immediately prior to the record date in the case of such dividend or the effective date in the case of any such conversion. An adjustment made pursuant to this subsection (a) shall be made whenever any such events shall happen, but shall become effective retroactively after such record date or such effective date, as the case may be, as to portion of this Warrant exercised between such record date or effective date and the date of happening of any such event.
(b) All adjustments under this Section 7 shall be made to the nearest cent.
(c) In case at any time conditions arise by reason of action taken by the Corporation which, in the opinion of its board of directors or in the opinion of the Holder, are not adequately covered by the other provisions of this Section 7 and which might materially and adversely affect the rights of the Holder, then the board of directors of the Corporation shall appoint a firm of independent certified public accountants of recognized national standing, who may be the accountants then auditing the books of the Corporation. Such accountant shall determine the adjustment, if any, on a basis consistent with the standards established in the other provisions of this Section 5, necessary with respect to the Exercise Price or adjusted Exercise Price, as so to preserve, without dilution, the exercise rights of the Holder. Upon receipt of such opinion, the board of directors of the Corporation shall forthwith make the adjustments described in such report. In this regard, the Corporation shall be deemed to have undertaken a fiduciary duty with respect to the Holder.
(d) Whenever the Exercise Price or the number of Shares is adjusted as herein provided, the Corporation shall prepare a certificate signed by the chief financial officer of the Corporation setting forth the adjusted Exercise Price and the adjusted number of Shares and showing in reasonable detail the facts upon which such adjustment is based. As promptly as practicable, the Corporation shall cause a copy of the certificate referred to in this subsection (d) to be mailed to the Holder.
8. Merger, Consolidation, Etc. In case the Corporation shall execute any agreement providing for the consolidation of the Corporation with or merger of the Corporation into another corporation or any sale, transfer or lease to another corporation of all or substantially all the property of the Corporation (each of the foregoing are referred to as a “Corporate Transaction”), the Corporation shall mail by first class mail, postage prepaid, to each holder of this Warrant, notice of the execution of such agreement. The holders of this Warrant shall then have ten (10) days to exercise this Warrant and participate as a stockholder of the Corporation in any such Corporate Transaction. Any purported exercise of this Warrant under this Section 8 shall be conditioned on the consummation of such Corporate Transaction.
(a) If such Corporate Transaction is not consummated, the Warrant and the Exercise Price paid by the holders shall be returned to the holders.
(b) After the consummation of any Corporate Transaction, this Warrant (or any portion thereof) that has not been exercised shall terminate and shall thereafter be rendered null and void.
9. Taxes. The Corporation shall pay all taxes that may be payable in respect of the issue or delivery of Common Stock on exercise of this Warrant, but shall not pay any tax which may be payable in respect of any transfer involved in the issue and delivery of the Common Stock in a name other than that in which this Warrant was registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of any such tax, or has established, to the satisfaction of the Corporation, that such tax has been paid.
10. Rule 144 Information. At any time and from time-to-time after the earlier of the close of business on such date as a registration statement filed by the Corporation under the Securities Act of 1933 becomes effective, the Corporation registers a class of securities under Section 12 of the Securities Exchange Act of 1934 or the Corporation issues an offering circular meeting the requirements of Regulation A under the Securities Act of 1933, the Corporation shall undertake to make publicly available and available to holders of the Warrants and the shares of Common Stock issued thereunder, such information as is necessary to enable the holders thereof to make sales of Warrants or Common Stock issued or issuable upon exercise of the Warrants pursuant to Rule 144 promulgated under the Securities Act of 1933.
11. Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. If the exercise of this Warrant results in a fraction, an amount equal to such fraction multiplied by the Exercise Price of the Shares on the day of exercise shall be paid to the Holder in cash by the Corporation.
12. Preservation of Holder’s Rights.
(a) The Corporation covenants and agrees that it shall at all times reserve and keep available, free from preemptive rights, out of its authorized Common Stock, solely for the purpose of effecting the exercise of this Warrant, the full number of shares of Common Stock then deliverable in the event and upon the exercise of this Warrant. All shares of Common Stock which may be issued upon exercise of this Warrant shall be fully paid.
(b) Notwithstanding anything to the contrary elsewhere in this Warrant, the Corporation shall not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against dilution. Without limiting the generality of the foregoing, the Corporation (i) will not increase the par value of any shares of stock receivable on the exercise of this Warrant above the amount payable therefor on such exercise, (ii) will take all such action as may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and non-assessable shares of stock on the exercise of this Warrant from time to time outstanding, and (iii) will not issue any capital stock of any class which is preferred as to dividends or as to the distribution of assets upon voluntary or involuntary dissolution, liquidation or winding up, unless the rights of the holders thereof shall be limited to a fixed sum or percentage of par value in respect of participation in dividends and in any such distribution of assets.
13. Loss or Destruction. Upon receipt of evidence satisfactory to the Corporation of the loss, theft, destruction or mutilation of this Warrant Certificate and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement or bond satisfactory in form, substance and amount to the Corporation or, in the case of any such mutilation, upon surrender and cancellation of this Warrant Certificate, the Corporation at its expense will execute and deliver, in lieu thereof, a new Warrant Certificate of like tenor.
14. Survival/Permitted Assigns. The various rights and obligations of the Holder hereof as set forth herein shall survive the exercise of this Warrant at any time or from time to time and the surrender of this Warrant Certificate. The permitted assigns of the Holder shall consist of the equityholders from time to time of the Holder.
15. Notices. Whenever any notice, payment of any purchase price or other communication is required to be given or delivered under the terms of this Warrant, it shall be in writing and delivered by hand delivery or registered or certified United States mail, postage prepaid, and will be deemed to have been given or delivered on the date such notice, purchase price or other communication is so delivered, and, if to the Corporation, it will be addressed to the address specified in Section 2(a) hereof, and if to the Holder, it will be addressed to the registered Holder at his address as it appears on the books of the Corporation.
16 Governing Law. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of Delaware.
Dated as of the 30 day of July, 2012.
INDIEPUB ENTERTAINMENT, INC. | ||
By: | /s/ Mark Seremet | |
Title: | CEO |
EXHIBIT “A”
NOTICE OF EXERCISE
(To be Executed by the Registered Holder
in order to Exercise the Warrant)
The undersigned hereby irrevocably elects to exercise the Warrant held by the undersigned to acquire shares of common stock (“Common Stock”) of indiePub Entertainment, Inc. (the “Company”) according to the conditions of the Warrant, as of the date written below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. No fee will be charged to the Holder for any exercise, except for transfer taxes, if any. A copy of the Warrant is attached hereto.*
The undersigned acknowledges that all offers and sales by the undersigned of the shares of Common Stock issuable to the undersigned upon exercise of the Warrant must be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the “Act”) or pursuant to an exemption from registration under the Act.
Expiration of Warrant: |
Date of Exercise: |
Applicable Exercise Price: |
Number of Shares of | ||
Common Stock to be Issued: |
Signature: |
Name: |
Address: |
* No Shares of Common Stock will be issued until the Warrant to be exercised and the Notice of Exercise are received by the Company or its Transfer Agent.
Exhibit 31.1
CERTIFICATIONS UNDER SECTION 302
I, Mark Seremet, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of indiePub Entertainment, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
c. | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 14, 2012 | |
/s/ Mark Seremet | |
Mark Seremet | |
(Principal executive officer and interim acting principal financial officer) | |
Exhibit 32.1
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of indiePub Entertainment, Inc., a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:
The Quarterly Report on Form 10-Q for the period ended June 30, 2012 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 14, 2012 | |
/s/ Mark Seremet | |
Mark Seremet | |
President and Chief Executive Officer | |
(Principal executive officer and interim acting principal financial officer) |
PREPAID EXPENSES AND OTHER CURRENT ASSETS (Details) (USD $)
In Thousands, unless otherwise specified |
Jun. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Prepaid royalties | $ 76 | $ 76 |
Other | 107 | 107 |
Totals | $ 183 | $ 183 |
INTEREST EXPENSE (Details) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2012
|
Jun. 30, 2011
|
Jun. 30, 2012
|
Jun. 30, 2011
|
|
Interest on various notes | $ 0 | $ 0 | $ 27 | $ 0 |
Interest arising from amortization of debt discount | 116 | 0 | 155 | 0 |
Interest on financing arrangements | 104 | 181 | 168 | 679 |
Interest expense | $ 220 | $ 181 | $ 350 | $ 679 |
STOCKHOLDERS' DEFICIT AND STOCK-BASED COMPENSATION ARRANGEMENTS (Details 1) (USD $)
|
6 Months Ended |
---|---|
Jun. 30, 2012
|
|
Number of Shares, Outstanding at December 31, 2011 | 1,155,883 |
Number of Shares, Granted | 0 |
Number of Shares, Forfeited and expired | (126,803) |
Number of Shares, Outstanding at June 30, 2012 | 1,029,080 |
Number of Shares, Options exercisable at June 30, 2012 | 969,466 |
Weighted Average Exercise Price, Outstanding at December 31, 2011 | $ 3.64 |
Weighted Average Exercise Price, Granted | $ 0 |
Weighted Average Exercise Price, Forfeited and expired | $ 2.54 |
Weighted Average Exercise Price, Outstanding at June 30, 2012 | $ 3.78 |
Weighted Average Exercise Price, Options exercisable at June 30, 2012 | $ 3.86 |
SUPPLEMENTAL CASH FLOW INFORMATION (Details) (USD $)
In Thousands, unless otherwise specified |
6 Months Ended | |
---|---|---|
Jun. 30, 2012
|
Jun. 30, 2011
|
|
Supplemental Data: | ||
Cash paid for interest | $ 215 | $ 936 |
Cash paid for income taxes | 2 | 8 |
Supplemental schedule of non-cash investing and financing activities: | ||
Exchange of inventory in partial satisfaction of outstanding obligation | 131 | 1,680 |
Issuance of common stock in partial satisfaction of current liabilities | 1,890 | 0 |
Issuance of warrant in partial satisfaction of current liability | 202 | 0 |
Cashless exchange of 572,990 warrants for 570,867 shares of common stock | 0 | 1 |
Reclassification of acquisition obligation to note payable | $ 0 | $ 620 |
INCOME TAXES (Details Textual) (USD $)
|
3 Months Ended | 6 Months Ended | |
---|---|---|---|
Jun. 30, 2012
|
Jun. 30, 2012
|
Jun. 30, 2011
|
|
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate | 34.00% | 34.00% | |
Cash Paid for Income Taxes | $ 2,000 | $ 8,000 | |
Deferred Tax Assets, Capital Loss Carryforwards | 1,200,000 | 1,200,000 | |
Capital Loss Carryforwards Expiration Year | 2013 | 2013 | |
Deferred Tax Assets, Valuation Allowance | 416,000 | 416,000 | |
Operating Loss Carryforwards | 25,500,000 | 25,500,000 | |
Operating Loss Carryforwards Limitation On Use | 1,600,000 | 1,600,000 | |
Operating Loss Carryforwards Expiration Year | 2028 | ||
Limitation On Utilization Of Nol and Capital Loss Carryforwards Per Year | 160,000 | ||
State and Local Jurisdiction [Member]
|
|||
Operating Loss Carryforwards | $ 24,000,000 | $ 24,000,000 |
DEFINED BENEFIT PENSION PLAN (Tables)
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6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2012
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Compensation and Retirement Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Defined Benefit Plans Disclosures [Table Text Block] | The following table sets forth the retirement trust’s approximate benefit obligations, fair value of the plans assets, and funded status for the defined benefit pension plan for the six months ended June 30, 2012.
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Schedule of Net Benefit Costs [Table Text Block] | Net periodic pension cost for the period January 1, 2012 through June 30, 2012 consists of the following:
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Schedule of Assumptions Used [Table Text Block] | Actuarial assumptions are described below:
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Schedule Of Non Current Liabilities [Table Text Block] | Amounts recognized in the condensed consolidated balance sheets as of June 30, 2012 and December 31, 2011:
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Defined Benefit Plan Accumulated Other Comprehensive Income [Table Text Block] | Amounts recognized in accumulated other comprehensive income for the six months ended June 30, 2012:
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Accrued Pension Expense [Table Text Block] |
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Schedule Of Plans Assets Measured At Fair Value [Table Text Block] | The following table sets forth, by level, within the fair value hierarchy, the plan’s assets measured at fair value as of June 30, 2012:
The following table sets forth, by level, within the fair value hierarchy, the plan’s assets measured at fair value as of December 31, 2011:
|
DEFINED BENEFIT PENSION PLAN (Details 1) (USD $)
|
6 Months Ended |
---|---|
Jun. 30, 2012
|
|
Service costs | $ 0 |
Interest costs | 28,703 |
Expected return on assets | (26,990) |
Amortization costs | 5,526 |
Net periodic pension cost | $ 7,239 |
INVENTORY, NET (Tables)
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2012
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inventory Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Inventory, Current [Table Text Block] | Inventory consisted of:
|
CREDIT AND FINANCING ARRANGEMENTS AND LONG-TERM DEBT (Details Textual) (USD $)
|
0 Months Ended | 3 Months Ended | 6 Months Ended | 0 Months Ended | 3 Months Ended | 3 Months Ended | 6 Months Ended | 3 Months Ended | 3 Months Ended | 1 Months Ended | 3 Months Ended | 6 Months Ended | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jan. 05, 2012
|
Jun. 30, 2012
|
Jun. 30, 2011
|
Jun. 30, 2012
|
Jun. 30, 2011
|
Oct. 28, 2011
|
Dec. 04, 2011
Panta Distribution, Llc [Member]
|
Oct. 28, 2011
Panta Distribution, Llc [Member]
|
Mar. 09, 2012
Mmb Holdings Llc [Member]
|
Jun. 30, 2012
Mmb Holdings Llc [Member]
|
Jul. 30, 2012
Mmb Holdings Llc [Member]
|
Jun. 30, 2012
Original Factoring Agreement [Member]
|
Jun. 30, 2011
Original Factoring Agreement [Member]
|
Jun. 30, 2012
Original Factoring Agreement [Member]
|
Jun. 30, 2011
Original Factoring Agreement [Member]
|
Jun. 30, 2012
Original Factoring Agreement [Member]
Working Capital Solutions, Inc [Member]
|
Dec. 31, 2011
Original Factoring Agreement [Member]
Working Capital Solutions, Inc [Member]
|
Oct. 07, 2011
New Factoring Agreement [Member]
Panta Distribution, Llc [Member]
|
Jun. 24, 2011
New Factoring Agreement [Member]
Panta Distribution, Llc [Member]
|
Jun. 30, 2012
Second New Factoring Agreement [Member]
|
Oct. 28, 2011
Second New Factoring Agreement [Member]
Mmb Holdings Llc [Member]
|
Jan. 05, 2012
First, Second New Factoring Agreement [Member]
|
Jan. 30, 2012
Second, Second New Factoring Agreement [Member]
|
Feb. 14, 2012
Third, Second New Factoring Agreement [Member]
|
Feb. 29, 2012
Fourth, Second New Factoring Agreement [Member]
|
Mar. 09, 2012
First Second Third and Fourth Second New Factoring Agreement [Member]
|
Jun. 24, 2011
Wells Fargo Bank National Association [Member]
|
Jun. 30, 2012
Wells Fargo Bank National Association [Member]
|
Jun. 30, 2011
Wells Fargo Bank National Association [Member]
|
Jun. 30, 2012
Wells Fargo Bank National Association [Member]
|
Jun. 30, 2011
Wells Fargo Bank National Association [Member]
|
|
Repayments of Related Party Debt | $ 148,000 | ||||||||||||||||||||||||||||||
Payment Of Commitment Fee Under Termination Agreement | 50,000 | ||||||||||||||||||||||||||||||
Purchase Order Financing Interest Rate Effective Percentage | 5.25% | ||||||||||||||||||||||||||||||
Interest expense, net | (220,000) | (181,000) | (350,000) | (679,000) | 0 | 124,000 | 0 | 574,000 | 0 | 17,000 | 0 | 65,000 | |||||||||||||||||||
Factoring Reserve Percentage | 30.00% | 30.00% | |||||||||||||||||||||||||||||
Factoring Fee Percentage | 0.56% | 0.56% | |||||||||||||||||||||||||||||
Proceeds From Sale Of Account Receivable With Recourse | 11,600,000 | 0 | |||||||||||||||||||||||||||||
Account Receivable and Due From Factor | 0 | 0 | |||||||||||||||||||||||||||||
Borrowings Under Factoring | 2,600,000 | ||||||||||||||||||||||||||||||
Interest Payable | 1,200,000 | ||||||||||||||||||||||||||||||
Short-term Debt, Percentage Bearing Fixed Interest Rate | 15.00% | ||||||||||||||||||||||||||||||
Purchase Price Of Limited Recourse Assignment | 850,000 | ||||||||||||||||||||||||||||||
Due To Factor | 1,036,000 | 186,000 | 1,831,000 | ||||||||||||||||||||||||||||
Default Interest Rate On Factoring Finance | 15.00% | ||||||||||||||||||||||||||||||
Additional Fund Under Factoring Agreement | 250,000 | 175,000 | 232,000 | 200,000 | |||||||||||||||||||||||||||
Legal Fees | 75,000 | ||||||||||||||||||||||||||||||
Interest Rate On Factoring Finance | 15.00% | ||||||||||||||||||||||||||||||
Line of Credit Facility, Maximum Borrowing Capacity | 4,381,110 | 4,381,000 | |||||||||||||||||||||||||||||
Line of Credit Facility, Amount Outstanding | 210,000 | 1,831,000 | 4,381,110 | ||||||||||||||||||||||||||||
Line of Credit Facility, Remaining Borrowing Capacity | 0 | ||||||||||||||||||||||||||||||
Line of Credit Facility, Interest Rate During Period | 10.00% | ||||||||||||||||||||||||||||||
Line Of Credit Default Interest Rate | 18.00% | ||||||||||||||||||||||||||||||
Debt Instrument, Maturity Date | Mar. 31, 2014 | ||||||||||||||||||||||||||||||
Debt Instrument, Convertible, Conversion Price | $ 0.40 | $ 0.40 | $ 0.4 | ||||||||||||||||||||||||||||
Class of Warrant or Right, Number of Securities Called by Warrants or Rights | 10,952,775 | 4,000,000 | |||||||||||||||||||||||||||||
Warrants Outstanding, Range of Exercise Prices | $ 0.4 | $ 0.4 | |||||||||||||||||||||||||||||
Date Through Which The Warrant Remains Exercisable | Mar. 31, 2017 | ||||||||||||||||||||||||||||||
Debt Instrument, Face Amount | $ 1,400,000 |
INVENTORY, NET (Details) (USD $)
In Thousands, unless otherwise specified |
Jun. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Finished products | $ 0 | $ 12 |
Parts & supplies | 0 | 119 |
Total | $ 0 | $ 131 |
DEFINED BENEFIT PENSION PLAN (Details 5) (USD $)
|
Jun. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Total Investments at Fair Value | $ 928,481 | $ 899,328 |
Cash and Cash Equivalents [Member]
|
||
Total Investments at Fair Value | 15,615 | 25,924 |
Mutual Fund [Member]
|
||
Total Investments at Fair Value | 912,866 | 873,404 |
Fair Value, Inputs, Level 1 [Member]
|
||
Total Investments at Fair Value | 928,481 | 899,328 |
Fair Value, Inputs, Level 1 [Member] | Cash and Cash Equivalents [Member]
|
||
Total Investments at Fair Value | 15,615 | 25,924 |
Fair Value, Inputs, Level 1 [Member] | Mutual Fund [Member]
|
||
Total Investments at Fair Value | 912,866 | 873,404 |
Fair Value, Inputs, Level 2 [Member]
|
||
Total Investments at Fair Value | 0 | 0 |
Fair Value, Inputs, Level 2 [Member] | Cash and Cash Equivalents [Member]
|
||
Total Investments at Fair Value | 0 | 0 |
Fair Value, Inputs, Level 2 [Member] | Mutual Fund [Member]
|
||
Total Investments at Fair Value | 0 | 0 |
Fair Value, Inputs, Level 3 [Member]
|
||
Total Investments at Fair Value | 0 | 0 |
Fair Value, Inputs, Level 3 [Member] | Cash and Cash Equivalents [Member]
|
||
Total Investments at Fair Value | 0 | 0 |
Fair Value, Inputs, Level 3 [Member] | Mutual Fund [Member]
|
||
Total Investments at Fair Value | $ 0 | $ 0 |
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