ITEM 1. FINANCIAL STATEMENTS.
INDIEPUB ENTERTAINMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per
share amounts)
|
|
SEPTEMBER 30,
|
|
|
DECEMBER 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
57
|
|
|
$
|
27
|
|
Accounts receivable and due from factor, net of allowances
of $51 and $20 at September 30, 2012 and December 31, 2011, respectively
|
|
|
34
|
|
|
|
106
|
|
Inventory, net
|
|
|
–
|
|
|
|
131
|
|
Prepaid expenses and other current assets
|
|
|
203
|
|
|
|
183
|
|
Product development costs, net
|
|
|
1,452
|
|
|
|
1,410
|
|
Deferred tax assets
|
|
|
1
|
|
|
|
–
|
|
Total current assets
|
|
|
1,747
|
|
|
|
1,857
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
68
|
|
|
|
202
|
|
Other non-current assets
|
|
|
129
|
|
|
|
–
|
|
Total assets
|
|
$
|
1,944
|
|
|
$
|
2,059
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,890
|
|
|
$
|
4,352
|
|
Financing arrangements
|
|
|
219
|
|
|
|
1,141
|
|
Accrued expenses and other current liabilities
|
|
|
1,249
|
|
|
|
6,289
|
|
Notes payable, current portion
|
|
|
–
|
|
|
|
1,137
|
|
Total current liabilities
|
|
|
3,358
|
|
|
|
12,919
|
|
|
|
|
|
|
|
|
|
|
Notes payable, non-current portion
|
|
|
–
|
|
|
|
1,540
|
|
Loan agreement, net of discount
|
|
|
3,863
|
|
|
|
–
|
|
Other long-term liabilities
|
|
|
219
|
|
|
|
781
|
|
Deferred tax liabilities
|
|
|
1
|
|
|
|
–
|
|
Total liabilities
|
|
|
7,441
|
|
|
|
15,240
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value: 295,000,000 shares authorized, 10,412,528 shares issued and
10,399,525 shares outstanding at September 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
|
|
|
81,373
|
|
|
|
76,570
|
|
Accumulated deficit
|
|
|
(82,204
|
)
|
|
|
(85,043
|
)
|
Accumulated other comprehensive loss
|
|
|
(207
|
)
|
|
|
(247
|
)
|
Treasury stock, at cost, 13,003 shares at September 30, 2012 and December
31, 2011
|
|
|
(4,469
|
)
|
|
|
(4,469
|
)
|
Total stockholders’ deficit
|
|
|
(5,497
|
)
|
|
|
(13,181
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' deficit
|
|
$
|
1,944
|
|
|
$
|
2,059
|
|
See accompanying notes to condensed
consolidated financial statements.
INDIEPUB ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS AND COMPREHENSIVE
(LOSS) INCOME
(In thousands, except share and per
share amounts)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
154
|
|
|
$
|
1,166
|
|
|
$
|
628
|
|
|
$
|
8,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
131
|
|
|
|
1,837
|
|
|
|
881
|
|
|
|
12,628
|
|
Gross income (loss)
|
|
|
23
|
|
|
|
(671
|
)
|
|
|
(253
|
)
|
|
|
(4,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
779
|
|
|
|
1,418
|
|
|
|
3,394
|
|
|
|
6,356
|
|
Selling and marketing
|
|
|
100
|
|
|
|
396
|
|
|
|
273
|
|
|
|
2,156
|
|
Research and development
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,263
|
|
Impairment of intangible assets
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,749
|
|
Depreciation and amortization
|
|
|
18
|
|
|
|
252
|
|
|
|
73
|
|
|
|
1,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
897
|
|
|
|
2,066
|
|
|
|
3,740
|
|
|
|
13,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(874
|
)
|
|
|
(2,737
|
)
|
|
|
(3,993
|
)
|
|
|
(17,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on extinguishment of liabilities
|
|
|
1,068
|
|
|
|
–
|
|
|
|
7,629
|
|
|
|
–
|
|
Other income (expense)
|
|
|
9
|
|
|
|
–
|
|
|
|
(56
|
)
|
|
|
–
|
|
Interest expense
|
|
|
(391
|
)
|
|
|
(1,354
|
)
|
|
|
(741
|
)
|
|
|
(2,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations before income taxes
|
|
|
(188
|
)
|
|
|
(4,091
|
)
|
|
|
2,839
|
|
|
|
(19,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(188
|
)
|
|
|
(4,091
|
)
|
|
|
2,839
|
|
|
|
(19,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on pension benefit obligation
|
|
|
25
|
|
|
|
–
|
|
|
|
40
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net comprehensive (loss) income
|
|
$
|
(163
|
)
|
|
$
|
(4,091
|
)
|
|
$
|
2,879
|
|
|
$
|
(19,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income per common share – basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
0.30
|
|
|
$
|
(2.91
|
)
|
Weighted average common shares outstanding – basic
|
|
|
10,218,328
|
|
|
|
7,659,166
|
|
|
|
9,363,740
|
|
|
|
6,780,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.53
|
)
|
|
$
|
0.16
|
|
|
$
|
(2.91
|
)
|
Weighted average common shares outstanding – diluted
|
|
|
10,218,328
|
|
|
|
7,659,166
|
|
|
|
21,562,096
|
|
|
|
6,780,772
|
|
See accompanying notes to condensed
consolidated financial statements.
INDIEPUB ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In thousands)
|
|
NINE MONTHS ENDED
SEPTEMBER 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,839
|
|
|
$
|
(19,745
|
)
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
1,515
|
|
Depreciation and amortization
|
|
|
73
|
|
|
|
1,158
|
|
Impairment of intangible assets
|
|
|
–
|
|
|
|
1,749
|
|
Amortization of product development costs and other write-offs
|
|
|
654
|
|
|
|
3,387
|
|
Stock-based compensation
|
|
|
193
|
|
|
|
899
|
|
Gain on extinguishment of liabilities
|
|
|
(7,629
|
)
|
|
|
(114
|
)
|
Loss on disposal of assets
|
|
|
64
|
|
|
|
–
|
|
Accretion of interest on financing facilities
|
|
|
472
|
|
|
|
1,328
|
|
Other changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable and due from factor, net
|
|
|
32
|
|
|
|
11,882
|
|
Inventory, net
|
|
|
–
|
|
|
|
5,899
|
|
Product development costs, net
|
|
|
(823
|
)
|
|
|
(2,917
|
)
|
Prepaid expenses and other current assets
|
|
|
(22
|
)
|
|
|
460
|
|
Accounts payable
|
|
|
(480
|
)
|
|
|
231
|
|
Accrued expenses and other liabilities
|
|
|
(204
|
)
|
|
|
(224
|
)
|
Net cash (used in) provided by operating
activities
|
|
|
(4,791
|
)
|
|
|
7,771
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
(5
|
)
|
|
|
(72
|
)
|
Proceeds from sale of fixed assets
|
|
|
1
|
|
|
|
–
|
|
Net cash used in investing activities
|
|
|
(4
|
)
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayments in connection with purchase order
and receivable financing facilities
|
|
|
–
|
|
|
|
(9,606
|
)
|
Borrowings in connection with MMB Loan Agreement
|
|
|
5,858
|
|
|
|
–
|
|
Borrowings in connection with Panta and MMB financing
facilities
|
|
|
857
|
|
|
|
118
|
|
Repayments in connection with Panta and MMB financing
facilities
|
|
|
(1,841
|
)
|
|
|
–
|
|
Proceeds from the sale of equity securities, net
of $91 of costs in 2011
|
|
|
–
|
|
|
|
1,584
|
|
Issuance of notes payable
|
|
|
–
|
|
|
|
183
|
|
Repayments of notes payable
|
|
|
(49
|
)
|
|
|
(308
|
)
|
Net cash provided by (used in) financing
activities
|
|
|
4,825
|
|
|
|
(8,029
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
30
|
|
|
|
(330
|
)
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
27
|
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
57
|
|
|
$
|
49
|
|
See accompanying notes to condensed
consolidated financial statements.
INDIEPUB ENTERTAINMENT, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF STOCKHOLDERS’ DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER
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
|
|
|
–
|
|
|
|
–
|
|
|
|
193
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
193
|
|
Common stock issued to satisfy
liabilities
|
|
|
2,389
|
|
|
|
2
|
|
|
|
2,003
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,005
|
|
Issuance of warrants and convertible
debt
|
|
|
–
|
|
|
|
–
|
|
|
|
2,607
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,607
|
|
Other comprehensive income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
40
|
|
|
|
–
|
|
|
|
–
|
|
|
|
40
|
|
Net income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,839
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,839
|
|
Balance at September
30, 2012
|
|
|
10,413
|
|
|
$
|
10
|
|
|
$
|
81,373
|
|
|
$
|
(82,204
|
)
|
|
$
|
(207
|
)
|
|
|
13
|
|
|
$
|
(4,469
|
)
|
|
$
|
(5,497
|
)
|
See accompanying notes to condensed
consolidated financial statements.
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 September
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 operating losses
since inception, resulting in an accumulated deficit of approximately $82.2 million as of September 30, 2012. In addition, the
Company has a history of negative cash flows from operating activities. As of September 30, 2012, the Company’s working
capital deficit was approximately $1.6 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 October 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. 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 utilizing the same terms and conditions. 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. As of
September 30, 2012, there was approximately $123,000 of available borrowings remaining under the First Amendment. 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 Event, for further information.
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 $990,000 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 September 30, 2012, approximately $10.4 million of the settlements were finalized for
approximately $964,000 cash, the issuance of approximately 2.4 million shares of the Company’s common stock, the reliquinshment
of approximately $131,000 in inventory, 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 $7.1 million, which amount is included in
the category gain on extinguishment of liabilities in the Company’s condensed consolidated statements of operations and
comprehensive (loss) income. The Company anticipates it will finalize the remaining agreements during the fourth quarter of 2012,
although no assurances can be given in this regard. In addition, the Company utilized proceeds from the Loan Agreement to settle
amounts owed under sales and distribution agreements with former master distributors of the Company’s products.
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 nine months ended September 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.
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 and through August 17, 2012, the date on which these
agreements were terminated, 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 September
30, 2012, the Company derived the majority of its revenue through the recognition of royalties under its sub-publishing and distribution
agreement with Southpeak, which agreement was terminated on August 17, 2012. For the three months ended September 30, 2011, the
Company derived the majority of its revenue through the recognition of royalties under its sales and distribution agreement with
AEG. For the nine months ended September 30, 2012, the Company derived the majority of its revenue through the recognition of
royalties under its sales and distribution agreement with AEG and sub-publishing and distribution agreement with Southpeak, which
agreements were terminated on August 17, 2012. During the third quarter of 2012, the Company recorded a gain of approximately
$528,000 in connection with the termination of these agreements. For the nine months ended September 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 57% (of which the following customers constituted balances greater than 10%: customer A
– 13%; customer B – 12%; customer C – 12%; and customer D – 11%) of net revenue. During the nine months
ended September 30, 2012 and 2011, the Company sold $0 and approximately $11.9 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 September
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 nine months ended September 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 when 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 nine months ended September 30, 2011,
the Company wrote off approximately $0 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 (loss) income. There were no write-offs to research and development in
the comparable 2012 periods. During the three and nine months ended September 30, 2012, the Company wrote off approximately $16,000
and $419,000, 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. During the three and nine months
ended September 30, 2011, the Company wrote off approximately $0 and $272,000, respectively, of product development costs. 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 (loss)
income. 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.
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 (loss) income.
Revenue Recognition
The Company earns its revenue from the
sale of interactive software titles developed by and/or licensed from third party developers or created internally. 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 previous distribution agreement, payments for cost of goods sold, plus a
per-unit tech fee which represented an unearned advance against future royalties, were due to the Company within three to five
business days of shipment of the goods. The cost of goods sold portion was recognized as revenue at the time of sale, while the
per-unit unearned advance on royalties was deferred until such time
that the Company received information
from its distributor that allowed it to conclude that all components of the earnings process had been completed
. Under
the Company’s former sub-publishing and distribution agreement, the Company received payments for per-unit advances based
upon the manufacture, sale and sell-through of the Company’s product. These per-unit advances were deferred until such time
that the Company received information from its distributor that allowed it to conclude that all components of the earnings process
had been completed. Unearned advances were 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 certain members of management, employees and directors during the nine months ended
September 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 and August 23, 2011 grants. For the
stock option modifications that occurred during the first quarter of 2012 and the second and third quarters 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:
|
|
Nine Months
Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Risk-free interest rate
|
|
|
0.19
|
%
|
|
|
0.03% – 2.47%
|
|
Expected stock price volatility
|
|
|
135.3
|
%
|
|
|
60.0% – 87.17%
|
|
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.
(Loss) Income Per Share
Basic (loss) income per share (“EPS”)
is computed by dividing the net (loss) income 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 27,694 and 94,159 shares
were unvested as of September 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 September 30, 2012, no stock options and 15,761,979 warrants would have
been included in the weighted average shares outstanding calculation for the period if the effect had not been antidilutive. For
the nine months ended September 30, 2012, no stock options and 15,761,979 warrants were included in the weighted average shares
outstanding calculation 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 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 September 30, 2012, an additional 12,470,881 shares would have been included
in the weighted average shares outstanding calculation for the period and approximately $383,000 of interest expense would have
been added back to net income if the effect had not been antidilutive. For the nine months ended September 30, 2012, this resulted
in the inclusion of an additional 7,938,420 shares outstanding for the period and the add back of approximately $652,000 of interest
expense to net income. The Company incurred a net loss for the three and nine-month periods ended September 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 September 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 September 30, 2012,
tax years 2009 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.
|
|
·
|
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 September 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)
|
|
|
|
September 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)
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Prepaid royalties
|
|
$
|
76
|
|
|
$
|
76
|
|
Other
|
|
|
127
|
|
|
|
107
|
|
Totals
|
|
$
|
203
|
|
|
$
|
183
|
|
NOTE 6. PRODUCT DEVELOPMENT COSTS, NET
The Company’s capitalized product
development costs for the nine months ended September 30, 2012 were as follows (amounts in thousands):
Product development costs, net – December 31, 2011
|
|
$
|
1,410
|
|
New product development costs incurred
|
|
|
823
|
|
Write-off of product development costs
|
|
|
(419
|
)
|
Amortization of product development costs
|
|
|
(235
|
)
|
Product development costs, net – September 30, 2012
|
|
$
|
1,579
|
|
Amortization of product development costs
for the three months ended September 30, 2012 and 2011 was approximately $46,000 and $473,000, respectively. Amortization of product
development costs for the nine months ended September 30, 2012 and 2011 was approximately $235,000 and $3,000,000, respectively.
For the nine months ended September 30, 2012, write-off of product development costs consisted of approximately $419,000 written
off to cost of goods sold. For the nine months ended September 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 $1,452,000 of product development
costs as current assets and approximately $127,000 as long-term assets as of September 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 (loss) income. Wells Fargo released all security interests that they and their predecessors held in the Company’s
assets.
There were no amounts outstanding as of
September 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 (loss) income and were $0 for the three months ended September 30, 2012 and 2011, respectively,
and approximately $0 and $65,000 for the nine months ended September 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”).
During the nine months ended September
30, 2012 and 2011, the Company sold $0 and approximately $11,600,000, respectively, of receivables to WCS with recourse. At
September 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 September 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 (loss) income and were $0 and approximately
$1,000 for three months ended September 30, 2012 and 2011, respectively, and were $0 and approximately $575,000 for the nine-month
periods ended September 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
$219,000 remained outstanding as of September 30, 2012.
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. 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. The fair value of the warrants and the beneficial conversion feature of the convertible
loan balance resulted in the Company reducing the face amount of the indebtedness by approximately $757,000, which amount
will be amortized into interest expense over the term that the borrowings are outstanding utilizing the effective interest
method. 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 $114,000, into the
outstanding loan balance. As of September 30, 2012, there were borrowings of approximately $5,859,000 and available
borrowings remaining of approximately $123,000 under the Loan Agreement and First Amendment. As of November 9, 2012, all
available borrowings had been fully utilized. Refer to Note 16 – Subsequent Event, for further information.
NOTE 8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities
consisted of:
|
|
(Amounts in Thousands)
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
344
|
|
|
$
|
1,078
|
|
Product development costs
|
|
|
–
|
|
|
|
600
|
|
Due to customers
|
|
|
223
|
|
|
|
413
|
|
Unearned advances
|
|
|
2
|
|
|
|
791
|
|
Royalties
|
|
|
553
|
|
|
|
3,344
|
|
Interest
|
|
|
127
|
|
|
|
63
|
|
Total
|
|
$
|
1,249
|
|
|
$
|
6,289
|
|
NOTE 9. NOTES PAYABLE
Outstanding notes payable are as follows:
|
|
(Amounts in Thousands)
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
2.95% note due June 2012, assumed from Zoo Publishing acquisition
|
|
$
|
–
|
|
|
$
|
184
|
|
Obligation arising from Zoo Publishing acquisition
|
|
|
–
|
|
|
|
600
|
|
New World IP, LLC Note
|
|
|
–
|
|
|
|
1,100
|
|
Zen Factory Group, LLC Promissory Notes
|
|
|
–
|
|
|
|
793
|
|
Total
|
|
|
–
|
|
|
|
2,677
|
|
Less current portion
|
|
|
–
|
|
|
|
1,137
|
|
Non-current portion
|
|
$
|
–
|
|
|
$
|
1,540
|
|
In conjunction with its March 2012 settlements
of obligations, the Company entered into agreements to settle approximately $2,677,000 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 $300,000 cash and 989,296 shares of the Company’s common stock valued at approximately $917,000,
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 months ended September 30, 2012, a federal tax benefit recorded at a 34%
rate against the Company’s loss for the period was offset fully by an increase in the valuation allowance against the Company’s
deferred tax assets. For the nine months ended September 30, 2012, federal income tax expense recorded at a 34% rate against the
Company’s income for the period 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 September 30, 2012 and December 31, 2011.
The Company paid approximately $3,000
and $10,000 to various state jurisdictions for income taxes during the nine months ended September 30, 2012 and 2011, respectively.
As of September 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 September 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 stock, par
value $0.001 per share, to 295,000,000 shares of common stock, par value $0.001 per share. As of September 30, 2012, there were
authorized 5,000,000 shares of preferred stock, par value $0.001.
Common Stock
As of September 30, 2012, there were 10,412,528
shares of common stock issued and 10,399,525 shares of common stock outstanding.
In conjunction with the settlement of
certain obligations, during the first nine months of 2012, the Company issued 2,388,089 shares of common stock valued at approximately
$2.0 million.
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 $75,000 during each of the nine-month
periods ending September 30, 2012 and 2011. The remaining balance as of September 30, 2012 of approximately $37,000 will be expensed
throughout the remaining vesting period of the restricted common stock grants until February 2013.
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
|
|
|
(49,849
|
)
|
Non-vested shares at September 30, 2012
|
|
|
27,694
|
|
Preferred Stock
As of September 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 (loss) income at that date, as
the options were fully vested and no further service was required from the former employee.
On August 23, 2011, the Company granted
options to purchase 113,000 shares of common stock to various employees under the 2007 Plan at an exercise price of $1.56 per
share.
In July 2011, the Company’s Chief
Operating Officer separated service from the Company. In conjunction with the separation, on August 16, 2011, the Company’s
Board of Directors agreed to immediately vest 25% of the original grant shares and extend the term of all vested options through
August 16, 2013. Without such modification, the options would have expired 90 days after such separation of service. The modification
to the stock option award resulted in incremental expense of approximately $45,000, 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
(loss) income 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 September 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
|
|
|
(167,733
|
)
|
|
$
|
2.62
|
|
Outstanding at September 30, 2012
|
|
|
988,150
|
|
|
$
|
3.81
|
|
Options exercisable at September 30, 2012
|
|
|
941,868
|
|
|
$
|
3.88
|
|
The following table summarizes information
about outstanding stock options at September 30, 2012:
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of Exercise
Prices
|
|
|
Number
Outstanding
|
|
|
Weighted-
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted-
Average
Exercise
Price
|
|
$
|
1,548.00
|
|
|
|
219
|
|
|
|
3.1
|
|
|
$
|
1,548.00
|
|
|
|
219
|
|
|
$
|
1,548.00
|
|
$
|
1,350.00
|
|
|
|
235
|
|
|
|
6.0
|
|
|
$
|
1,350.00
|
|
|
|
235
|
|
|
$
|
1,350.00
|
|
$
|
912.00
|
|
|
|
1,171
|
|
|
|
6.0
|
|
|
$
|
912.00
|
|
|
|
1,171
|
|
|
$
|
912.00
|
|
$
|
180.00
|
|
|
|
1,250
|
|
|
|
6.3
|
|
|
$
|
180.00
|
|
|
|
1,250
|
|
|
$
|
180.00
|
|
$
|
5.50
|
|
|
|
4,000
|
|
|
|
7.9
|
|
|
$
|
5.50
|
|
|
|
2,000
|
|
|
$
|
5.50
|
|
$
|
3.86
|
|
|
|
42,138
|
|
|
|
8.4
|
|
|
$
|
3.86
|
|
|
|
33,035
|
|
|
$
|
3.86
|
|
$
|
2.46
|
|
|
|
234,865
|
|
|
|
4.6
|
|
|
$
|
2.46
|
|
|
|
216,354
|
|
|
$
|
2.46
|
|
$
|
1.56
|
|
|
|
29,000
|
|
|
|
7.7
|
|
|
$
|
1.56
|
|
|
|
12,332
|
|
|
$
|
1.56
|
|
$
|
1.50
|
|
|
|
675,272
|
|
|
|
5.6
|
|
|
$
|
1.50
|
|
|
|
675,272
|
|
|
$
|
1.50
|
|
$
|
1.50
to $1,548.00
|
|
|
|
988,150
|
|
|
|
5.5
|
|
|
$
|
3.81
|
|
|
|
941,868
|
|
|
$
|
3.88
|
|
The following table summarizes the activity
of non-vested outstanding stock options:
|
|
Number
Outstanding
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual Life
(Years)
|
|
Non-vested shares at December 31, 2011
|
|
|
229,646
|
|
|
$
|
3.01
|
|
|
|
8.9
|
|
Options granted
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
Options vested
|
|
|
(166,484
|
)
|
|
$
|
3.15
|
|
|
|
|
|
Options forfeited or expired
|
|
|
(16,880
|
)
|
|
$
|
2.87
|
|
|
|
|
|
Non-vested shares at September 30, 2012
|
|
|
46,282
|
|
|
$
|
2.54
|
|
|
|
8.2
|
|
As of September 30, 2012, there was approximately
$35,000 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 1.4 years.
At September 30, 2012, there were 1,128,770
shares available for issuance under the 2007 Plan.
The intrinsic value of options outstanding
at September 30, 2012 was $0.
Warrants
As of September 30, 2012, there were 16,587,843
warrants outstanding with terms expiring through 2017, all of which are currently exercisable.
On July 30, 2012, in conjunction with
an amendment to the MMB Loan Agreement, the Company issued to MMB a warrant to purchase 4,000,000 shares of the Company’s
common stock at a price of $0.40 per share. The warrant was immediately exercisable and expires on July 30, 2017. The Company
valued the warrant at approximately $698,000 at the date of grant.
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.
A summary of the status of the Company’s
outstanding warrants as of September 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
|
|
|
15,317,775
|
|
|
$
|
0.40
|
|
Exercised
|
|
|
–
|
|
|
$
|
–
|
|
Outstanding at September 30, 2012
|
|
|
16,587,843
|
|
|
$
|
0.89
|
|
Warrants exercisable at September 30, 2012
|
|
|
16,587,843
|
|
|
$
|
0.89
|
|
The following table summarizes information
about outstanding warrants at September 30, 2012:
|
|
|
Warrants Outstanding
|
|
Range of Exercise Prices
|
|
|
Number
Outstanding
|
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
|
Weighted-
Average
Exercise
Price
|
|
$1,704.00
|
|
|
|
2,383
|
|
|
|
0.8
|
|
|
$
|
1,704.00
|
|
$1,278.00
|
|
|
|
531
|
|
|
|
0.8
|
|
|
$
|
1,278.00
|
|
$180.00
|
|
|
|
12,777
|
|
|
|
1.9
|
|
|
$
|
180.00
|
|
$6.00
|
|
|
|
6,818
|
|
|
|
0.8
|
|
|
$
|
6.00
|
|
$1.96
|
|
|
|
803,355
|
|
|
|
1.3
|
|
|
$
|
1.96
|
|
$0.50
|
|
|
|
365,000
|
|
|
|
4.7
|
|
|
$
|
0.50
|
|
$0.40
|
|
|
|
14,952,775
|
|
|
|
4.6
|
|
|
$
|
0.40
|
|
$0.01
|
|
|
|
444,204
|
|
|
|
2.2
|
|
|
$
|
0.01
|
|
$0.01 to $1,704.00
|
|
|
|
16,587,843
|
|
|
|
4.4
|
|
|
$
|
0.89
|
|
NOTE 12. INTEREST EXPENSE
|
|
(Amounts in Thousands)
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Interest on various notes
|
|
$
|
–
|
|
|
$
|
27
|
|
|
$
|
27
|
|
|
$
|
27
|
|
Interest arising from amortization of debt discount
|
|
|
256
|
|
|
|
–
|
|
|
|
410
|
|
|
|
–
|
|
Interest on financing arrangements
|
|
|
135
|
|
|
|
1,327
|
|
|
|
304
|
|
|
|
2,006
|
|
Interest expense
|
|
$
|
391
|
|
|
$
|
1,354
|
|
|
$
|
741
|
|
|
$
|
2,033
|
|
NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for
the nine months ended September 30, 2012 and 2011 is as follows:
|
|
(Amounts in Thousands)
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Supplemental Data:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
215
|
|
|
$
|
938
|
|
Cash paid for income taxes
|
|
$
|
3
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
2,005
|
|
|
$
|
713
|
|
Issuance of warrant in partial satisfaction of current liability
|
|
$
|
202
|
|
|
$
|
–
|
|
Cashless exchange of 572,990 warrants for 570,867 shares of common stock
|
|
$
|
–
|
|
|
$
|
1
|
|
Issuance of notes payable to satisfy current liabilities
|
|
$
|
–
|
|
|
$
|
2,583
|
|
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 nine months ended September 30, 2012.
Change in benefit obligation
|
|
|
|
|
Benefit obligation at January 1, 2012
|
|
$
|
1,148,107
|
|
Service cost
|
|
|
–
|
|
Interest cost
|
|
|
43,054
|
|
Actuarial gain
|
|
|
(1,245
|
)
|
Disbursements
|
|
|
(10,304
|
)
|
Benefit obligation at September 30, 2012
|
|
$
|
1,179,612
|
|
Change in plan assets
|
|
|
|
|
Fair value of plan assets at January 1, 2012
|
|
$
|
899,328
|
|
Employer contributions
|
|
|
–
|
|
Benefit payments
|
|
|
(10,304
|
)
|
Actual return on assets
|
|
|
71,405
|
|
Fair value of plan of assets at September 30, 2012
|
|
$
|
960,429
|
|
Funded status
|
|
$
|
(219,183
|
)
|
The amount unfunded as of December 31, 2011 was approximately
$249,000.
Net periodic pension cost for the period January 1, 2012 through
September 30, 2012 consists of the following:
Service costs
|
|
$
|
–
|
|
Interest costs
|
|
|
43,054
|
|
Expected return on assets
|
|
|
(40,485
|
)
|
Amortization costs
|
|
|
8,288
|
|
Net periodic pension cost
|
|
$
|
10,857
|
|
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 September 30, 2012 and December 31, 2011:
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
Non-current liabilities
|
|
$
|
219,183
|
|
|
$
|
248,779
|
|
Amounts recognized in accumulated other comprehensive income
for the nine months ended September 30, 2012:
Minimum pension liability
|
|
$
|
40,453
|
|
|
|
|
|
|
Accrued pension expense as of September 30, 2012
|
|
$
|
10,857
|
|
The following table sets forth, by level,
within the fair value hierarchy, the plan’s assets measured at fair value as of September 30, 2012:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash/Money Market/CDs
|
|
$
|
16,224
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
16,224
|
|
Mutual Funds
|
|
|
944,205
|
|
|
|
–
|
|
|
|
–
|
|
|
|
944,205
|
|
Total Investments at Fair Value
|
|
$
|
960,429
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
960,429
|
|
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 $4,000.
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.
FOOTNOTE 16. SUBSEQUENT EVENT
On November 9, 2012, the Company
entered into the Second Amendment to Loan and Security Agreement (the “Second Amendment”) with MMB, pursuant to which
the parties agreed to amend that certain Loan and Security Agreement dated as of March 9, 2012 and that certain First Amendment
to Loan and Security Agreement dated as of July 30, 2012, by and between the Company and MMB. Pursuant to the Second Amendment,
MMB agreed to provide up to $150,000 in additional funding to the Company under the Loan and Security Agreement under the same
terms and conditions.
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 September
30, 2012 as Compared to the Three Months Ended September 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 (loss) income:
|
|
(Amounts in Thousands
Except Per Share Data)
For the Three Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
154
|
|
|
|
100
|
%
|
|
$
|
1,166
|
|
|
|
100
|
%
|
Cost of goods sold
|
|
|
131
|
|
|
|
85
|
|
|
|
1,837
|
|
|
|
158
|
|
Gross income (loss)
|
|
|
23
|
|
|
|
15
|
|
|
|
(671
|
)
|
|
|
(58
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
779
|
|
|
|
506
|
|
|
|
1,418
|
|
|
|
122
|
|
Selling and marketing
|
|
|
100
|
|
|
|
65
|
|
|
|
396
|
|
|
|
34
|
|
Depreciation and amortization
|
|
|
18
|
|
|
|
12
|
|
|
|
252
|
|
|
|
21
|
|
Total operating expenses
|
|
|
897
|
|
|
|
583
|
|
|
|
2,066
|
|
|
|
177
|
|
Loss from operations
|
|
|
(874
|
)
|
|
|
(568
|
)
|
|
|
(2,737
|
)
|
|
|
(235
|
)
|
Gain on extinguishment of liabilities
|
|
|
1,068
|
|
|
|
694
|
|
|
|
–
|
|
|
|
–
|
|
Other income
|
|
|
9
|
|
|
|
6
|
|
|
|
–
|
|
|
|
–
|
|
Interest expense
|
|
|
(391
|
)
|
|
|
(254
|
)
|
|
|
(1,354
|
)
|
|
|
(116
|
)
|
Loss from operations before income taxes
|
|
|
(188
|
)
|
|
|
(122
|
)
|
|
|
(4,091
|
)
|
|
|
(351
|
)
|
Income taxes
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Net loss
|
|
$
|
(188
|
)
|
|
|
(122
|
)%
|
|
$
|
(4,091
|
)
|
|
|
(351
|
)%
|
Loss per common share – basic
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
$
|
(0.53
|
)
|
|
|
|
|
Loss per common share – diluted
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
$
|
(0.53
|
)
|
|
|
|
|
Net Revenues
. Net revenues for the three months ended
September 30, 2012 were approximately $154,000, compared to approximately $1.2 million for the comparable 2011 period. Our revenue
for the quarter was derived primarily from royalty revenue from the sub-publishing and distribution agreement for our
Minute
to Win It
game on the Microsoft gaming platform.
During the third quarter of 2011, our sales consisted primarily
of casual game sales in North America. The breakdown of gross sales by platform for the third quarter of 2011 was approximately
75% for the Nintendo Wii platform, approximately 23% for the Nintendo DS platform, approximately 1% for the Sony PS3 platform,
and approximately 1% for the Microsoft Xbox 360 platform. The 2011 period consisted of approximately 218,000 units sold in North
America at an average gross price of $5.12 per unit. Consistent with our shift to a digital strategy, we reduced our development
of new boxed games in 2011, and therefore had fewer new products in the marketplace. In addition, in July 2011, we began selling
our legacy console games via a distribution agreement at prices at or marginally above cost.
Gross Income (Loss)
. Gross income for the three months
ended September 30, 2012 was approximately $23,000, or 15% of net revenue, while gross loss for the three months ended September
30, 2011 was approximately $(671,000), or (58)% 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 third quarter of 2012, net revenues were derived
primarily from royalty revenue related to the sub-publishing and distribution agreement for our
Minute to Win It
game on
the Microsoft gaming platform. Cost of goods sold was negatively impacted during the third quarter of 2012 due to downwardly-revised
sales expectations for one game currently in production, which resulted in an additional $16,000 of product development cost during
the period. The 2011 sales were primarily catalogue product sold at cost or marginally above, therefore generating minimal gross
profit. Additionally during the 2011 period, in conjunction with our distribution agreement, approximately $160,000 of per-unit
tech fees were deferred pending receipt of reports from the distributor indicating the revenue had been earned. The gross margin
was adversely affected by the acceleration of approximately $214,000 of product development amortization on our catalogue products
due to a combination of reforecasting of projected future sales for each game in conjunction with the Company’s move towards
its digital strategy, and low margins on the sales of our catalogue products, which required additional amortization of product
development costs which could not be recouped from the sales price of the goods. Increased inventory reserves for product being
sold below cost or for product that we could be unable to sell accounted for approximately $266,000 of additional expense during
the quarter, and approximately $24,000 of additional royalty expense was recorded as a result of changes in estimated unit sales
for certain of our products.
General and Administrative Expenses
. General and administrative
expenses for the three months ended September 30, 2012 were approximately $779,000 as compared to approximately $1.4 million for
the comparable period in 2011. Non-cash stock-based compensation included in general and administrative expenses for the three
months ended September 30, 2012 was approximately $59,000. For the three months ended September 30, 2011, non-cash stock-based
compensation was approximately $147,000, and included approximately $45,000 of expense related to the modification of stock option
awards granted to our former Chief Operating Officer. 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 $360,000. 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. In addition,
rent expense was reduced by approximately $56,000 due to the relocation of our corporate office to a location more compatible
with our anticipated space requirements. Legal and professional fees declined by approximately $152,000 in the 2012 period due
to fewer legal and accounting matters during the period. The 2011 period also included approximately $72,000 of expenses related
to the early retirement and commitment fees paid to terminate the WCS and Wells Fargo financing facilities and related professional
fees. For the 2012 period, the fees associated with our credit facilities approximated $50,000. Other taxes for the third quarter
of 2012 decreased by approximately $40,000 compared to the same period in 2011 due to the reduction in authorized shares approved
at the May 2012 Annual Meeting of Stockholders. The indiePub and digital initiative costs included in general and administrative
expenses for the 2012 period were approximately $140,000, compared to approximately $181,000 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 reduction in advertising during the 2012 period.
Selling and Marketing Expenses
. Selling and marketing
expenses decreased from approximately $396,000 for the three months ended September 30, 2011 to approximately $100,000 for the
three months ended September 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 substantially completed when we entered into a distribution agreement
for the sale of our legacy console products.
Depreciation and Amortization Expenses
. Depreciation
expense for the three months ended September 30, 2012 was approximately $18,000 compared to depreciation expense of approximately
$34,000 for the comparable 2011 period. The reduction is due to fixed assets that became fully depreciated during the period.
In addition, during the 2011 period we had amortization expense of approximately $218,000 for the amortization of intangible assets.
The 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 September 30, 2012 was approximately $391,000, compared to approximately $1.4 million for the three months ended September
30, 2011. The 2012 period interest expense includes approximately $9,000 of default interest related to our Panta agreement (as
described below under
Limited Recourse Agreement
), approximately $127,000 related to our MMB Loan (as described below under
Loan Agreement
), and approximately $255,000 of interest related to the amortization of deferred debt discount associated
with warrants issued and the beneficial conversion feature associated with our convertible loans. The 2011 period includes approximately
$1.3 million related to the Panta agreements, approximately $65,000 of default interest related to the Panta agreements, and approximately
$27,000 related to our various promissory notes. All interest related to the Panta agreements was accelerated at September 30,
2011, due to our default under the terms of the agreements.
Gain on Extinguishment of Liabilities.
During the first
nine months of 2012, we entered into agreements with multiple unsecured creditors for the settlement of amounts due to them. During
the third quarter of 2012, we recorded a gain on completed settlements of approximately $540,000. We settled these liabilities
with a combination of cash and shares of our common stock. In addition, during the third quarter of 2012 we terminated our distribution
and sub-publishing agreements. In conjunction with the settlement of amounts owed between us and the other parties, we recorded
a gain on the transaction of approximately $528,000.
Income Taxes
. For the three months ended September 30,
2012, we recorded a no tax benefit on a pre-tax loss of approximately $(188,000). For the period, a federal tax benefit of 34.0%,
state tax expense, net of federal benefit, of (0.8)%, and miscellaneous adjustments, primarily comprised of non-cash interest
expense, of (47.1)% were fully offset by a decrease in the valuation allowance of 13.9%. For the three months ended September
30, 2011, we recorded a pre-tax loss of approximately $(4.1) 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.
(Loss) Income Per Common Share
. Basic and diluted loss
per share for the three months ended September 30, 2012 was approximately $(0.02) based on weighted average shares outstanding
for the period of approximately 10.2 million shares. The basic and diluted loss per share for the three months ended September
30, 2011 was $(0.53) based on weighted average shares outstanding for the period of approximately 7.7 million shares. In each
period, basic shares was equal to diluted shares due to our net loss position.
For the Nine Months Ended September
30, 2012 as Compared to the Nine Months Ended September 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 (loss) income:
|
|
(Amounts in Thousands
Except Per Share Data)
For the Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
628
|
|
|
|
100
|
%
|
|
$
|
8,598
|
|
|
|
100
|
%
|
Cost of goods sold
|
|
|
881
|
|
|
|
140
|
|
|
|
12,628
|
|
|
|
147
|
|
Gross loss
|
|
|
(253
|
)
|
|
|
(40
|
)
|
|
|
(4,030
|
)
|
|
|
(47
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
3,394
|
|
|
|
540
|
|
|
|
6,356
|
|
|
|
74
|
|
Selling and marketing
|
|
|
273
|
|
|
|
44
|
|
|
|
2,156
|
|
|
|
25
|
|
Research and development
|
|
|
–
|
|
|
|
–
|
|
|
|
2,263
|
|
|
|
26
|
|
Impairment of intangible assets
|
|
|
–
|
|
|
|
–
|
|
|
|
1,749
|
|
|
|
20
|
|
Depreciation and amortization
|
|
|
73
|
|
|
|
12
|
|
|
|
1,158
|
|
|
|
14
|
|
Total operating expenses
|
|
|
3,740
|
|
|
|
596
|
|
|
|
13,682
|
|
|
|
159
|
|
Loss from operations
|
|
|
(3,993
|
)
|
|
|
(636
|
)
|
|
|
(17,712
|
)
|
|
|
(206
|
)
|
Gain on extinguishment of liabilities
|
|
|
7,629
|
|
|
|
1,215
|
|
|
|
–
|
|
|
|
–
|
|
Other expense
|
|
|
(56
|
)
|
|
|
(9
|
)
|
|
|
–
|
|
|
|
–
|
|
Interest expense
|
|
|
(741
|
)
|
|
|
(118
|
)
|
|
|
(2,033
|
)
|
|
|
(24
|
)
|
Income (loss) from operations before income taxes
|
|
|
2,839
|
|
|
|
452
|
|
|
|
(19,745
|
)
|
|
|
(230
|
)
|
Income taxes
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Net income (loss)
|
|
$
|
2,839
|
|
|
|
452
|
%
|
|
$
|
(19,745
|
)
|
|
|
(230
|
)%
|
Income (loss) per common share – basic
|
|
$
|
0.30
|
|
|
|
|
|
|
$
|
(2.91
|
)
|
|
|
|
|
Income (loss) per common share – diluted
|
|
$
|
0.16
|
|
|
|
|
|
|
$
|
(2.91
|
)
|
|
|
|
|
Net Revenues
. Net revenues for the nine months ended
September 30, 2012 were approximately $628,000, compared to approximately $8.6 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 were deferred until such time when we received information from our distributor that allowed us
to conclude that all components of the earnings process had been completed. During the first nine months of 2012, we recognized
into revenue approximately $437,000 of royalties under the distribution agreement. In July 2011, we also entered into a sub-publishing
and distribution agreement for our
Minute to Win it
game on the Microsoft gaming platform. We recognized royalties of approximately
$116,000 under this agreement during the first nine months of 2012. In August 2012, these agreements were terminated. The remainder
of our revenue was derived primarily from sales of our digital games and international royalties.
During the first nine months of 2011,
our sales consisted primarily of casual game sales in North America. The breakdown of gross sales by platform for the first nine
months of 2011 was approximately 71% for the Nintendo Wii platform, approximately 23% 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 872,000
units sold in North America at an average gross price of $11.08 per unit.
Gross Loss
. Gross loss for the nine months ended September
30, 2012 was approximately $(253,000), or (40)% of net revenue, while gross loss for the nine months ended September 30, 2011
was approximately $(4.0) million, or (47)% 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 nine 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 in 2011, which positively impacted our gross margin. In addition, during the second and third quarters 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 $419,000 of product development costs during the period. The 2011 sales were primarily
catalogue product sold at a price at or slightly above the value of the inventory, therefore generating minimal gross profit.
Additionally, in conjunction with our distribution agreement, during the 2011 period, we deferred approximately $160,000 of per-unit
tech fees, which were realized and recorded in 2012. The gross margin was adversely affected by the acceleration of approximately
$2.6 million of product development amortization on our catalogue products due to their shortened expected lives, as we moved
towards our 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 could be unable to sell accounted for approximately $1.7 million of additional expense
during 2011, and approximately $482,000 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 nine months ended September 30, 2012 were approximately $3.4 million as compared to approximately $6.4 million
for the comparable period in 2011. Non-cash stock-based compensation included in general and administrative expenses was approximately
$193,000 and $899,000 for the nine months ended September 30, 2012 and 2011, respectively. Non-cash stock-based compensation included
in general and administrative expenses for the nine months ended September 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 nine months ended September 30, 2011 included approximately
$579,000 of expense related to the modification of stock option awards granted primarily to our Chief Executive Officer, former
Chief Operating Officer and our former President. 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 $1,336,000 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 $168,000 during the nine-month period. In addition, cost-saving
measures implemented in late 2011 accounted for a reduction in office expense of approximately $121,000. Other taxes decreased
by approximately $88,000 during the 2012 period due to a reduction in the number of authorized shares of common stock approved
at our May 2012 Annual Meeting of Stockholders. In addition, we had fewer legal and accounting matters during the 2012 period,
resulting in a savings of approximately $266,000 for outside services. These savings were partially offset by increased net rent
expense of approximately $204,000. 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 Liabilities in our condensed consolidated
statements of operations and comprehensive (loss) income. In addition, we had increased consulting costs of approximately $80,000
in 2012 due to the utilization of services of various consultants due to our reduced headcount. The 2011 period also includes
approximately $537,000 of expenses related to early retirement and commitment fees paid to terminate the WCS and Wells Fargo financing
facilities and related professional fees. The fees for our current loans approximated $130,000 during the first nine months of
2012. The indiePub and digital initiative costs included in general and administrative expenses for the 2012 period were approximately
$351,000, compared to approximately $535,000 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, the elimination of
office space leased in the 2011 period for indiePub employees, and elimination of attendance at trade shows and reduced advertising
in the 2012 period.
Selling and Marketing Expenses
. Selling and marketing
expenses decreased from approximately $2.2 million for the nine months ended September 30, 2011 to approximately $273,000 for
the nine months ended September 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 substantially 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 nine 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 nine months ended September 30, 2012 were approximately $73,000 compared to approximately $1.2
million in the 2011 period. The amortization of intangible assets was approximately $1.1 million for the nine months ended September
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 nine months
ended September 30, 2012 was approximately $741,000 as compared to approximately $2.0 million for the nine months ended September
30, 2011. The 2012 period includes approximately $27,000 of interest related to various notes that were outstanding during the
period, approximately $62,000 of default interest related to our MMB and Panta agreements (as described below under
Limited
Recourse Agreement
), approximately $242,000 related to our new MMB Loan (as described below under
Loan Agreement
),
and approximately $410,000 of interest related to the amortization of deferred debt discount associated with warrants issued and
the beneficial conversion feature associated with our convertible loans. 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, approximately
$1.3 million related to the Panta agreements, approximately $65,000 of default interest related to the Panta agreements and approximately
$27,000 of interest related to various notes payable.
Gain on Extinguishment of Liabilities.
During the first
nine months of 2012, we entered into agreements with multiple unsecured creditors for the settlement of amounts due to them. During
the first nine months of 2012, we recorded a gain on completed settlements of approximately $7.1 million. We settled these liabilities
with a combination of cash, inventory, shares of our common stock, and warrants to purchase our common stock. In addition, during
the third quarter of 2012 we terminated our distribution and sub-publishing agreements. In conjunction with the settlement of
amounts owed between us and the other parties, we recorded a gain on the transaction of approximately $528,000.
Income Taxes
. For the nine months ended September 30,
2012, we recorded pre-tax income of approximately $2.8 million due to the gain recognized on the settlement of certain liabilities
with our unsecured creditors and the termination and settlement of our distribution and sub-publishing agreements. 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 5.0%. This income tax expense was offset entirely by a decrease
in our valuation allowance of 41.3%. We recorded no income tax benefit for the nine months ended September 30, 2011 against our
pre-tax loss of approximately $19.7 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 nine months ended September 30, 2012 was approximately $0.30 based on weighted average shares outstanding for the period
of approximately 9.4 million shares. Diluted income per share for the nine months ended September 30, 2012 was approximately $0.16
based on weighted average shares outstanding for the period of approximately 21.6 million shares. The basic and diluted loss per
share for the nine months ended September 30, 2011 was $(2.91) based on weighted average shares outstanding for the period of
approximately 6.8 million shares.
Liquidity and Capital Resources
We had net income of approximately $2.8
million for the nine months ended September 30, 2012, comprised primarily of a loss from operations of approximately $(4.0) million,
interest expense of approximately $741,000, and a non-cash gain on the settlement of liabilities of approximately $7.6 million.
Our principal sources of cash during 2012 were net borrowings under our current and previous financing arrangements. During 2011,
our principal sources of cash were proceeds from the sale of our common stock in July, 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 nine months ended September 30, 2012 was approximately $4.8 million due primarily to cash utilized for operations during
the quarter, including approximately $823,000 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 $7.8 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 nine months of 2011. This was offset by cash utilized for operating expenses during the first nine months of
2011.
Net cash used in investing activities
was approximately $4,000 and $72,000 for the nine months ended September 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 nine months ended September 30, 2012 was approximately $4.8 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 nine
months ended September 30, 2011 was approximately $8.0 million, consisting primarily of: (i) net proceeds from the sale of our
common stock of approximately $1.6 million; (ii) net repayments of approximately $8.0 million on our receivable factoring facility;
(iii) net repayments of approximately $1.6 million on our purchase order financing facility, and; (iv) net borrowings of approximately
$0.1 million on our limited recourse agreement. This was partially offset by the issuance of the WCS Note for $183,000 in 2011.
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 nine months ended September
30, 2012 and 2011, we sold $0 and approximately $11.6 million, respectively, of receivables to WCS with recourse. At
September 30, 2012 and December 31, 2011, accounts receivable and due from factor were $0 and there were no advances outstanding
to us as of September 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 (loss) income and were $0 and approximately
$1,000 for three months ended September 30, 2012 and 2011, respectively, and were $0 and approximately $575,000 for the nine-month
periods ended September 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 (loss) income. Wells Fargo released all
security interests that they and their predecessors held in the Company’s assets.
There were no amounts outstanding as of
September 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 (loss) income and were $0 for each of the three month periods ended September 30, 2012
and 2011, and $0 and approximately $65,000 for the nine months ended September 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.
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
$219,000 remained outstanding as of September 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 us 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 substantially
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. The fair value
of the warrants and the beneficial conversion feature of the convertible loan balance resulted in a reduction to the face amount
of the indebtedness by approximately $757,000, which amount will be amortized into interest expense over the term that the borrowings
are outstanding utilizing the effective interest method. 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. As of September 30, 2012, there were borrowings of approximately $5,859,000 and available
borrowings remaining of approximately $123,000 under the Loan Agreement and First Amendment. As of November 9, 2012, all
available borrowings had been fully utilized.
On November 9, 2012, we entered
into the Second Amendment to Loan and Security Agreement (the “Second Amendment”) with MMB, pursuant to which the parties
agreed to amend that certain Loan and Security Agreement dated as of March 9, 2012 and that certain First Amendment to Loan and
Security Agreement dated as of July 30, 2012, by and between the Company and MMB. Pursuant to the Second Amendment, MMB agreed
to provide to us up to $150,000 in additional funding under the Loan and Security Agreement under the same terms and conditions.
Debt Settlements
As of September 30, 2012, we entered into
agreements providing for the settlement of approximately $10.8 million of liabilities due to unsecured creditors for approximately
$990,000 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 $10.4 million were completed through September 30, 2012, resulting in the payment of cash of approximately
$964,000, the relinquishment of approximately $131,000 in inventory, the issuance of approximately 2.4 million shares of our common
stock valued at approximately $2.0 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 $7.1 million.
Of the settlements not yet completed, we have paid cash to the unsecured creditors of approximately $26,000 and will issue approximately
165,000 shares of our common stock. We anticipate these settlements will be finalized during the fourth 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 granted 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 would 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 September 2012, based upon royalty reports we received from our distributor, we were able to conclude
that advances from the per-unit tech fee and royalties in the amount of approximately $437,000 were earned, which amount we recorded
as revenue. On August 17, 2012, the distribution agreement was terminated and all amounts owed between the parties to the agreement
were settled.
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 granted 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 terminated, whichever was earlier. Under the terms of the agreement,
we earned royalties based upon the distributor’s net receipts from the sale of the game. Prior to earning such royalties,
we were 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 were
deferred until such time when we received information from our distributor that allowed us to conclude that all components of
the earnings process had been completed. During the third quarter of 2012, based upon royalty reports we received from the sub-publisher
and distributor, we were able to conclude that royalties of approximately $116,000 were earned, which amount we recorded as revenue.
On August 17, 2012, the sub-publishing and distribution agreement was terminated and all amounts owed between the parties to the
agreement were settled.
In conjunction with the termination and
settlement of these agreements, we recorded a gain on the settlement of approximately $528,000.
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 October 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 September 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.
Off-Balance Sheet Arrangements
As of September 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.