- Quarterly Report (10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended June  30, 2010

 

or

 

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

 

For the transition period from __________ to __________

 

Commission File Number 0-24363

 

 

Interplay Entertainment Corp.

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

 

Delaware	33-0102707
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

 

12301 Wilshire Blvd, Los Angeles, California   90025

(Address of principal executive offices)

 

[phone]

(Registrant's telephone number, including area code)

 

 

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

 

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

 

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

 

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

 

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

 

Class	Issued and Outstanding at June  30, 2010
Common Stock, $0.001 par value	122,662,052

 

As of June 30, 2010 122,662,052   shares of Common Stock of the Registrant were issued and outstanding.  

 

 

 

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INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

 

FORM 10-Q

 

JUNE 30, 2010

 

TABLE OF CONTENTS

______________

 

		Page Number
Part I.	Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of   June  30, 2010 (unaudited) and December 31, 2009	3
	Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2010 and 2009 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2010 and 2009 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4T.	Controls and Procedures	14
Part II.	Other Information
Item 1A.	Risk Factors	15
Item 2.	Legal Proceedings	15
Item 4.	Submission of matters to a vote of security holders	15
Item 6.	Exhibits	15
Signatures		16

 

 

2

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PART I - FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		JUNE 30,2010				DECEMBER 31, 2009
		(unaudited)
ASSETS
Current Assets:
Cash		$	119,000			$	1,000
Trade Receivables, net of allowances of $ 0 and   $0, respectively			90,000				88,000
Inventories			22,000				28,000
Deposits			19,000				14,000
Prepaid expenses			5,000				13,000
Other receivables			13,000				12,000
Total current assets			268,000				156,000
Property and equipment, net			43,000				41,000
Total assets		$	311,000			$	197,00 0
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities:
Account payable and accrued expenses		$	1,747,000			$	1,745,000
Note payable to officer and directors			328,000				487,000
Deferred income			590,000				765,000
Total current liabilities			2,665,000				2,997,000
Commitments and contingencies
Stockholders' Deficit:
Preferred stock, $0.001 par value 5,000,000 shares authorized;    no shares issued or outstanding,
Common stock, $0.001 par value 300,000,000 shares authorized;       122,662,052 and 115,695,268 shares issued and outstanding in 2010 and 2009			123,000				116,000
Paid-in capital			124,350,000				123,357,000
Accumulated deficit			(126,931,000	)			(126,356,000	)
Accumulated other comprehensive income (loss)			104,000				83,000
Treasury stock of 0 and 4,658,216 shares in 2010 and 2009			0				0
Total stockholders' (deficit)			(2,354,000	)			(2,800,000	)
Total liabilities and stockholders’ (deficit)		$	311,000			$	197,000

 

See accompanying notes.

 

 

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INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(In thousands, except per share amounts)
Revenue		$	315,000			$	251,000				590,000			$	345,000
Cost of goods sold			54,000				109,000				70,000				136,000
Gross profit			261,000				142,000				520,000				209,000
Operating expenses:
Marketing and sales			46,000				0				104,000				0
General and administrative			315,000				874,000				642,000				1,189,000
Product Development			137,000				52,000				247,000				117,000
Total operating expenses			498,000				926,000				993,000				1,306,000
Operating (loss) income			(237,000	)			(784,000	)			(473,000	)			(1,097,000	)
Other income (expense):
Interest expense			(8,000	)			(11,000	)			(20,000	)			(21,000	)
Other			(57,000	)			24,000				(82,000	)			82,000
Total other income (expense)			(65,000	)			13,000				(102,000	)			61,000
Income before benefit for income taxes			(302,000	)			(771,000	)			(575,000	)			(1,036,000	)
Benefit for income taxes			-								0				0
Net income (loss) available to common stockholders		$	(302,000	)		$	(771,000	)			(575,000	)		$	(1,036,000	)
Net income (loss) per common share:
Basic		$	(0.002	)		$	(0.007	)		$	(.005	)		$	(.01	)
Diluted			(0.002	)		$	(0.007	)			(.005	)		$	(.01	)
Shares used in calculating net income (loss) per common share:
Basic			122,662,000				108,937,000				117,973,000				106,466,000
Diluted			122,662,000				108,937,000				117,973,000				106,466,000

 

See accompanying notes.

 

 

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INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF   CHANGES IN CASH FLOWS

(Unaudited)

 

		SIX MONTHS ENDED JUNE 30,
		2010				2009
Cash flows from operating activities:
Net (loss) income		$	(575,000	)		$	(1,036,000	)
Adjustments to reconcile net (loss) income to cash (used) provided by operating activities:
Depreciation and amortization			8,000				7,000
Additional paid in capital - stock option and warrant expense			9,000				635,000
Changes in operating assets and liabilities:
Trade receivables, net			(2,000	)			(9,000	)
Deposits			(5,000	)			2,000
Prepaid expenses			8,000				6,000
Other current assets, net			(1,000	)			(1,000	)
Inventory			6,000				(13,000	)

Accounts payable and accrued expenses			2,000				197,000
Note payable officers and directors			10,000				12,000
Deferred revenue			(175,000	)			94,000
Accumulated other comprehensive income			21,000				(2,000	)
Net cash provided by (used in) operating activities			(694,000	)			(108,000	)
Cash flows from investing activities:
Purchase of fixed assets			(14,000	)			0
Net cash used in investing activities			(14,000	)			0
Cash flows from (used in) financing activities:
Payment on notes payable officers and directors			(165,000	)			0
Sale of  common stock			991,000				148,000
Net cash provided by (used in) financing activities		$	826,000				148,000
Increase (decrease) in cash			118,000				40,000
Cash, beginning of period		$	1,000				(24,000	)
Cash, end of period		$	119,000			$	16,000
Supplemental cash flow information:
Issuance of common stock for liquidation of Convertible Note Payable		$	0			$	53,000
Acquisition of intellectual property for the exchange of common stock		$	0			$	126,000

 

See accompanying notes.

 

 

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Interplay Entertainment and Subsidiaries

Notes to Consolidated Condensed Financial Statements

Three and Six  Months Ended June 30, 2010

(Unaudited)

 

 

Note 1.   Basis of Presentation  

 

The accompanying unaudited condensed consolidated financial statements of Interplay Entertainment Corp.   (which we refer to as the “Company” in these Notes) and its subsidiaries reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the results for the interim period in accordance with instructions for Form 10-Q and Rule 10-01 of Regulation S-X.   Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements.   The results of operations for the current interim period are not necessarily indicative of results to be expected for the current year or any other period.   The balance sheet at December 31, 2009 has been derived from the audited consolidated financial statements at that date, but does not include all information and footnotes required by GAAP for complete financial statements.  

 

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 as filed with the U.S. Securities and Exchange Commission (“SEC”).  

 

Factors Affecting Future Performance and Going Concern Status

 

The Company’s independent public accountant included a “going concern” explanatory paragraph in his audit report on the December 31, 2009 consolidated financial statements which were prepared assuming that the Company will continue as a going concern.  

 

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

 

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

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.   Significant estimates made in preparing the condensed consolidated financial statements include, among others, sales returns and allowances, channel exposure and long-lived assets, and certain accrued liabilities included amounts related to litigation.

 

Principles of Consolidation

 

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

 

 

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Interplay Entertainment and Subsidiaries

Notes to Consolidated Condensed Financial Statements

Three and Six Months Ended June 30, 2010

(Unaudited)

 

 

Note 2.  Note Payable to Officer and Directors

 

The Company issued on October 2, 2006 to the following officer and directors, Herve Caen, Eric Caen and Michel Welter conditional demand notes which have since become demand notes (due to the change in control resulting from Financial Planning and Development SA’s acquisition of approximately 56% of the Company’s outstanding stock) bearing a 5% annual interest rate. The demand notes were issued for the earned but unpaid directors’ fees to Herve Caen for $50,000, to Eric Caen for $50,000, to Michel Welter for $85,000, and for earned but unpaid salary to Herve Caen in the amount of $500,000.  For the six months ended 2010 Herve Caen was repaid $114,000 . A total of $328,000 in principal and interest remains outstanding under the demand notes as of June  30, 2010.   Interest accrued on the demand notes as of June 30, 2010 was $10,000.

 

Note 3.  Advances from Distributors and Licensee which are Considered Deferred Income  

 

Non-refundable but recoupable advances received by the Company for future distribution and license rights as of June 30, 2010 amounted to $590,000.

 

Note 4.  Segment and Geographical Information      

 

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

 

Net revenues by geographic regions were as follows:

 

	Three months ended June 30,														Six months ended June 30,
	2010							2009							2010							2009
	Amount				Percent			Amount				Percent			Amount				Percent			Amount				Percent
	(Dollars in thousands)
North America		208			66	%			226			90	%			385			65	%		$	285			83	%
International		107			34	%			25			10	%			205			35	%			60			17	%
	$	315			100	%		$	251			100	%		$	590			100	%		$	345			100	%

 

Note 5.  Employee Stock Options

 

Stock-Based Compensation  

 

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

 

At June 30, 2010, the Company has one stock-based employee compensation plan. Stock-based employee compensation cost approximated $9,000 and $18,000  as reflected in the net loss for the quarter and six months ended June 30, 2010.   No employee stock options were granted during the quarter ended June 30, 2010.  

 

Note 6.  Sale of Common Stock

 

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

 

 

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

 

Cautionary Statement  

 

Interplay Entertainment Corp., which we refer to in this Report as "we," "us," or "our," is a developer, publisher and licensor of interactive entertainment software and intellectual properties for both core gamers and the mass market.   The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended December 31, 2009, as amended, and presumes that readers have access to, and will have read, the “Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K, as amended.  

 

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

 

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

 

Management's Discussion of Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including, among others, those related to revenue recognition, prepaid licenses and royalties and software development costs. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Results of Operations

 

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

 

 

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INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

	Three months ended June 30,														Six months ended June 30,
	2010							2009							2010							2009
	(Dollars in thousands)
					% of Net							% of Net							% of Net							% of Net
	Amount				Revenues			Amount				Revenue			Amount				Revenues			Amount				Revenue
Revenues	$	315			100	%		$	251			100	%		$	590			100	%		$	345			100	%
Cost of goods sold		54			18	%			109			43	%			70			12	%			136			39	%
Gross Profit		261			82	%			142			57	%		$	520			88	%			209			61	%
Operating Expenses :
Marketing and sales		46			15	%			-			0	%			104			18	%			-			0	%
Product Development		137			43	%			52			21	%			247			42	%			117			34	%
General and administrative		315			100	%			874			348	%			642			108	%			1,189			345	%
Total operating expenses		498			158	%			926			369	%			993			168	%			1,306			379	%
Operating income (loss)		(237	)		-75	%			(784	)		-312	%		$	(473	)		-80	%			(1,097	)		-318	%
Other income (expenses):
Other income (expenses)		(65	)		-20	%			13			5	%			(102	)		-17	%			61			-18	%
Income taxes		-			-				-			-				-			-				-			-
Net income (loss)		(302	)		-95	%		$	(771	)		-307	%		$	(575	)		-97	%		$	(1,036	)		-300	%
Net revenues by geographic region:
North America		208			66	%			226			90	%			385			65	%			285			83	%
International		107			34	%			25			10	%			205			35	%			60			17	%
	$	315			100	%		$	251			100	%		$	590			100	%		$	345			100	%
Net revenue by platform:
Personal computers	$	176			55	%			225			90	%			334			56	%			285			83	%
Video game console	$	38			12	%			26			10	%			70			12	%			60			17	%
OEM, royalty and licensing		101			33	%			0			0	%			186			32	%			-			0	%
	$	315			100	%		$	251			100	%		$	590			100	%		$	345			100	%

 

 

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

 

        Geographically, our net revenues, for the three and six months ended June 30, 2010 and 2009 break down as follows: (in thousands)

 

Three Months Ended June 30		2010				2009				Change				% Change
North America		$	208			$	226			$	(18	)			(8	%)
International			107				25				82				328	%
Net Revenues		$	315			$	251			$	64				25	%

 

Six Months Ended June 30		2010				2009				Change				% Change
North America		$	385			$	285			$	100				35	%
International			205				60				145				241	%
Net Revenues		$	590			$	345			$	245				72	%

 

Net revenues for the three months ended June 30, 2010 were $315,000, an increase of 25% compared to the same period in 2009.  This resulted from a 8% decrease in North American net revenues, and a 328% increase in International net revenues. 

 

Net revenues for the six months ended June 30, 2010 were $590,000, an increase of 72% compared to the same period in 2009 this increase was driven by retail distribution and electronic distribution of back catalog games.  This increase resulted from a 35% increase in North American net revenues, and a 241% increase in International net revenues.  

 

North American net revenues for the three months ended June 30, 2010 were $208,000.  The decrease in North American net revenues in 2010 was mainly due to a 8% decrease in back catalog sales.

 

North American net revenues for the six months ended June 30, 2010 were $385,000. The increase in North American net revenues in 2010 was mainly due to a 35% increase in retail distribution and electronic distribution of back catalog games.

 

International net revenues for the three months ended June 30, 2010 were $107,000.  The increase in International net revenues for the three months ended June 30, 2010 was mainly due to a 328% increase in electronic distribution of back catalog games.

 

International net revenues for the six months ended June 30, 2010 were $205,000. The increase in International net revenue for the six months ended June 30, 2010 was mainly due to a 241% increase in electronic distribution of back catalog games..

 

Platform Net Revenues

 

Our platform net revenues, for the three and six months ended June 30, 2010 and 2009 break down as follows: (in thousands)

 

Three Months Ended June 30,		2010				2009				Change				% Change
Personal Computer		$	176			$	225			$	(49	)			(22	%)
Video Game Console			38				26				12				45	%
OEM, Royalty & Licensing			101				0				101				100	%
Net Revenues		$	315			$	251			$	64				26	%

 

Six Months Ended June 30,		2010				2009				Change				% Change
Personal Computer		$	334			$	285			$	49				17	%
Video Game Console			70				60				10				16	%
OEM, Royalty & Licensing			186				0				186				100	%
Net Revenues		$	590			$	345			$	245				71	%

 

 

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PC net revenues for the three months ended June 30, 2010 were $176,000, a decrease of 22% compared to the same period in 2009.  The decrease in PC net revenues in 2010 was primarily due to decrease of back catalog sales. 

 

Video game console net revenues were $38,000, an increase of 45% for the three months ended June 30, 2010 compared to the same period in 2009, due to the royalties earned from electronic distribution of back catalog titles.

 

OEM, royalty and licensing net revenues for the three months ended June 30, 2010 were $101,000, an increase of $100% compared to the same period in 2009, due to the royalties earned from electronic distribution of back catalog titles. 

 

PC net revenues for the six months ended June 30, 2010 were $334,000, an increase of 17% compared to the same period in 2009.  The increase in PC net revenues in the six months ended June 30, 2010 was driven by retail distribution and electronic distribution of back catalog games.

 

Video Game console net revenues were $70,000, an increase of 16% for the six months ended June 30, 2010 compared to the same period in 2009, mainly due to the royalties earned from electronic distribution of back catalog titles.

 

OEM, royalty and licensing net revenues for the six months ended June 30, 2010 were $186,000, an increase of $100% compared to the same period in 2009, due to the royalties earned from electronic distribution of back catalog titles. 

 

Cost of Goods Sold Gross Profit Margin

 

Our net revenues, cost of goods sold and gross margin for the three and six months ended June 30, 2010 and 2009 breakdown as follows: (in thousands)

 

Three Months Ended June 30		2010				2009				Change				% Change
Net Revenues		$	315			$	251			$	64				25	%
Cost of Goods Sold			54				109				(55	)			(50	%)
Gross Profit Margin		$	261			$	142			$	119				84	%

 

Six Months Ended June 30		2010				2009				Change				% Change
Net Revenues		$	590			$	345			$	245				71	%
Cost of Goods Sold			70				136				(66	)			(48	%)
Gross Profit Margin		$	520			$	209			$	311				148	%

 

Three Months Ended June 30		2010				2009				% Change
Net Revenues			100	%			100	%			0	%
Cost of Goods Sold			18	%			43	%			(25	%)
Gross Profit Margin			82	%			57	%			25	%

 

Six Months Ended June 30		2010				2009				% Change
Net Revenues			100	%			100	%			0	%
Cost of Goods Sold			12	%			39	%			(27	%)
Gross Profit Margin			88	%			61	%			27	%

 

        Cost of goods sold related to PC and video game console net revenues represents the manufacturing and related costs of interactive entertainment software products, including costs of media, manuals, duplication, packaging materials, assembly, freight and royalties paid to developers, licensors and hardware manufacturers.  Cost of goods sold related to royalty-based net revenues primarily represents third party licensing fees and royalties paid by us.  Typically, cost of goods sold as a percentage of net revenues for video game console products is higher than cost of goods sold as a percentage of net revenues for PC based products due to the relatively higher manufacturing and royalty costs associated with video game console and affiliate label products.  We evaluate the likelihood of future realization of prepaid royalties and license fees quarterly, on a product-by-product basis, and charge the cost of goods sold for any amounts that we deem unlikely to realize through future product sales.

 

 

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Our cost of goods sold decreased 50% to $54,000 in the three months ended June 30, 2010 compared to the same period in 2009.

 

Our cost of goods sold decreased 48% to $70,000 in the six months ended June 30, 2010 compared to the same period in 2009.

 

Our gross margin increased to 82% for the three months ended June 30, 2010 from 57% in the comparable period in 2009.

 

Our gross margin increased to 88% for the six months ended June 30, 2010 period from 61% in the comparable 2009.

 

Marketing and Sales

 

Our marketing and sales expense for the three months and six months ended June 30, 2010 and 2009 breakdown as follows: (in thousands)

 

Marketing and Sales		2010				2009				Change				% Change
Three Months Ended June 30		$	46,000			$	0			$	46,000				100	%
Six Months Ended June 30		$	104,000			$	0			$	104,000				100	%

 

Marketing and sales expenses primarily consist of advertising and retail marketing support, sales commissions, marketing and sales personnel, customer support services and other related operating expenses.

 

Marketing and sales expenses for the three months ended June 30, 2010 were $46,000  a 100% increase compared to the 2009 period. The increase in marketing and sales expenses was primarily due to  sales commissions incurred under various distribution agreements paid in connection with retail and electronic distribution of back catalog games.

 

Marketing and sales expenses for the six months ended June 30, 2010 were $104,000 a 100% increase compared to the 2009 period. The increase in marketing and sales expenses was primarily due to  sales commissions incurred under various distribution agreements paid in connection with retail and electronic distribution of back catalog games.

 

G eneral and Administrative

 

Our general and administrative expense for the three and six months ended June 30, 2010 and 2009 breakdown as follows: (in thousands)

 

General and Administrative		2010				2009				Change				% Change
Three Months Ended June 30		$	315			$	874			$	(559	)			(64	%)
Six Months Ended June 30		$	642			$	1,189			$	(547	)			(46	%)

 

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

 

General and administrative expenses for the three months ended June 30, 2010 were $315,000, a 64% decrease as compared to the same period in 2009. The decrease was a result of the non reaccurence of the issuance of stock options and warrants compensation of $608,000 incurred in 2009.

 

General and administrative expenses for the six months ended June 30, 2010 were $642,000,  a 46% decrease as compared to the same period in 2009. The significant component of the decrease resulted from stock option compensation of $635,000 incurred in 2009.   

 

Our Product Development expense for the three months ended June 30, 2009 and 2008 breakdown as follows: (in thousands)

 

Product Development		2010				2009				Change				% Change
Three Months Ended June 30		$	137			$	52			$	85				163	%
Six Months Ended June 30		$	247			$	117			$	130				111	%

 

Product development expenses for the three months ended June 30, 2010 were $137,000, a 163% increase as compared to the same period in 2009.

 

 

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Product development expenses for the six months ended June 30, 2010 were $247,000, a 111% increase as compared to the same period in 2009.

 

This increase is mainly due to an increase in product development staffing.

 

Other Expense (Income), Net

 

Our other expense (income) for the three months ended June 30, 2010 and 2009 breakdown as follows: (in thousands)

 

Other (Income) Expenses		2010				2009				Change				% Change
Three Months Ended June 30		$	65			$	(13	)		$	78				N/A
Six Months Ended  June 30		$	102			$	(61	)		$	163				N/A

 

Other expenses for the three months ended June 30, 2010 was $65,000 and consists primarily of interest expense on debt in the amount of $8,000, foreign currency exchange transactions gain of $4,000,stock option expenses of $9,000, and other nonrecurring settlement of $15,000, and additional miscellaneous adjustments of  $37,000.

 

Other expenses for the six months ended June 30, 2010 was $102,000 and consists primarily of interest expense on debt in the amount of $20,000, foreign currency exchange transactions  losses of $7,000, stock option expenses of $18,000 and other nonrecurring settlement of $15,000 and additional miscellaneous adjustments of $42,000 .

 

Liquidity and Capital Resources

 

As of June 30, 2010, we had a working capital deficit of approximately $2,397,000, and our cash balance was approximately $119,000.  

 

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

 

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

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

 

We have entered into a Game Production Agreement with Interactive Game Group which provides for the financing of game development under certain conditions.

 

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

 

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

 

Our primary capital needs have historically been working capital requirements necessary to fund our operations. Our operating activities used $694,000 and financing activities generated cash of $826,000 during the six months ended June 30, 2010.

 

We entered into various licensing agreements during the six months ended June 30, 2010 under which we licensed others to exploit games that we have intellectual property rights to. We expect to enter into similar license arrangements to generate cash for the Company’s operations during the remainder of the fiscal year.

 

We sold common stock of the Company to a private investor during the three months ended March 31, 2010.

 

 

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Off Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements under which we have obligations under a guaranteed contract that has any of the characteristics identified in the accounting codification. . We do not have any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets. We also do not have any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument. We have no obligations, including a contingent obligation arising out of a variable interest   in an unconsolidated entity that is held by, and material to, us, where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with us.

 

Contractual Obligations

 

The following table summarizes certain of our contractual obligations under non-cancelable contracts primarily lease commitments on our office space at June 30, 2010, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands).

 

Contractual Obligations		Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Lease Commitments (1)		294		70		224		0		0

 

(1)    The Company also has a lease commitment in Irvine for our development studio offices through March 31, 2011. The Company has a lease commitment for its corporate offices through October 2012. The Company also has a lease commitment at the French representation office through February 28, 2011 with an option for an additional 3 years.

 

Item 3.   Quantitative and Qualitative Disclosures about Market Risk  

 

We do not have any derivative financial instruments as of June 30, 2010. However, we are exposed to certain market risks arising from transactions in the normal course of business, principally the risk associated with foreign currency fluctuations. We do not hedge our interest rate risk, or our risk associated with foreign currency fluctuations.

 

INTEREST RATE RISK

 

  Currently, we do not have a line of credit.  

 

FOREIGN CURRENCY RISK

 

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

 

We recognized loss   of $7,000 and $11,000 during the six months ended June 30, 2010 and 2009 respectively, primarily in connection with foreign exchange fluctuations in the timing of payments received on accounts receivable or payments made on accounts payable in foreign currencies.  

 

Item 4T. Controls and Procedures  

 

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

 

There were no changes made in our internal controls over financial reporting that occurred during the quarter ended June 30, 2010 that have materially affected or are reasonably likely to materially affect these controls.  

 

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

 

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

 

 

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PART II - OTHER INFORMATION

 

Item 1A.     RISK FACTORS

 

There have been no material changes to the risk factors disclosed in Item 1A to Part 1 of our form 10-K for the fiscal year ended December 31, 2009.

 

Item 2.       Legal Proceedings

 

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

 

On September 8, 2009 Bethesda Softworks LLC filed a Complaint for Declaratory Judgment, Preliminary Injunction and Other Relief against the Company in the United   States   District   Court for the District of Maryland.   Bethesda seeks to terminate the rights Interplay holds to sell and develop certain FALLOUT(r)-branded video games, including an MMOG.   Interplay   disputes all claims raised by Bethesda and has answered the lawsuit and asserted Counter-Claims,   including claims for Breach of Contract,   Tortious   Interference with Prospective Economic Advantage, Rescission,   Accounting and   Declaratory   Relief seeking an award of damages and other relief.   Interplay also seeks a declaration from the Court that it has not infringed upon the   FALLOUT(R)   mark   and   that it has   satisfied   the   terms   of   the Trademark Licensing Agreement related to Interplay's production of a FALLOUT(R) massively-multiplayer online   game.   The Court denied Bethesda's   Motion for Preliminary Injunction on December 10, 2009, a decision that Bethesda appealed.   Bethesda subsequently dismissed its appeal.   Interplay will continue to defend its rights and pursue its Counter-Claims against Bethesda.  

 

The Company received notices from the Internal Revenue Service (“IRS”) that it owes approximately $242,000 in payroll taxes, payroll tax penalties, and interest for unpaid and late payment of payroll taxes for the years 2008,   2009 and 2010 which has been accrued as of June 30, 2010 .     The Company has negotiated a payment plan with the Internal Revenue Service.

 

The Company received notice from the Franchise Tax Board that it owes approximately $12,000 in franchise tax , interest and penalties for the tax year ending 2008 which has been accrued as of June 30, 2010. The Company has established a payment plan with the Franchise Tax Board.

 

The Company received notice from the California Employment Development Department (EDD) that it owes approximately $42,000 in payroll tax contributions, interest and penalties for the tax years ending 2008, 2009 and 2010 which has been accrued as of June 30, 2010.  The Company is in the process of negotiating a payment plan with the EDD.

 

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

 

The annual meeting of the stockholders of the Company was held on June 17, 2010.

 

The following resolution was passed by a number of holders of the Company's common stock, voting in person or by proxy, sufficient to constitute a quorum for the transaction of business:

 

(1) Election of each director listed below:

 

		For		Withheld
Herve Caen		72,428,072		265,367
Eric Caen		72,592,272		101,167
Michel Welter		72,624,765		68,674
Xavier De Portal		72,625,765		70,674
Alberto Haddad		72,620,672		72,767

 

Item 6.       Exhibits

 

(a) Exhibits - The following exhibits, other than exhibit 32.1 which is being furnished herewith, are filed as part of this report:

 

Exhibit Number	Exhibit Title
3.5	Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company, as filed with Delaware Secretary of State on January 21, 2004; (refilled to reflect original execution date).
10.07	Form of warrant agreement for directors and employees of the Company; (Incorporated herein by reference to exhibit 4.1 of the Company’s S-8 filed on May 2, 2008).
31.1	Certificate of Hervé Caen, Chief Executive Officer of Interplay Entertainment Corp. pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended.
31.2	Certificate of Hervé Caen, Interim Chief Financial Officer of Interplay Entertainment Corp. pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended.
32.1	Certificate of Hervé Caen, Chief Executive Officer and Interim Chief Financial Officer of Interplay Entertainment Corp. pursuant to Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended.

 

 

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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.

 

 

INTERPLAY ENTERTAINMENT CORP.
Date: August 20, 2010	By:	/s/   Hervé Caen
		Hervé Caen
		Chief Executive Officer and Interim Chief Financial Officer (Principal Executive and Financial and Accounting Officer)

 

 

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