UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q





ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.For the quarterly period ended March 31, 2010ORo
TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  _____ to _______.





Commission file number  0-49649








PLAYLOGIC ENTERTAINMENT, INC


(Exact Name of Registrant as Specified in Its Charter)





Delaware

23-3083371(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)Strawinskylaan 1041,

WTC Amsterdam, C-Tower, 10th floor

1077 XX(Address of principal executive offices)

(Zip Code)





Registrant's Telephone Number, Including Area Code: + 31-20-676-0304





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





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(Section 232.405 of this chapter) during the preceding 12 months(or such shorter period that the registrant was required to submit and post such files.  Yes   ̈No   ̈





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





Large accelerated filer  ̈

Accelerated filer  ̈

Non-accelerated filer  ̈

(Do not check if a smaller reporting company)

Smaller reporting company ý





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





As of June 23, 2010, there were 69,717,713shares of the Registrant's Common Stock outstanding.

















PLAYLOGIC ENTERTAINMENT, INC.





FORM 10-Q





TABLE OF CONTENTS








PART I -- FINANCIAL INFORMATION
Page No.Item 1.
Financial Statements
3Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16Item 3.
Quantitative and Qualitative Disclosures about Market Risk
22Item 4
Controls and Procedures
23PART II -- OTHER INFORMATIONItem 1.
Legal Proceedings
24Item 1A.
Risk Factors
24Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
24Item 3.
Defaults Upon Senior Securities
24Item 4.
Submission of Matters to a Vote of Security Holders
24Item 5.
Other Information
24Item 6.
Exhibits
24Signatures
25Exhibit Index
26Certifications
Attached














-2-














PART I -- FINANCIAL INFORMATION





Item 1 -  Financial Statements








PLAYLOGIC ENTERTAINMENT INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


Unaudited





March 31,

2010

unaudited


December 31,

2009

Derived from

audited

financial

statementsASSETSCurrent AssetsCash and cash equivalents

$
417,926


$
918,943ReceivablesTrade, net of allowance for doubtful accounts


1,327,075



2,266,499Officers


-



80,483Value Added Taxes from foreign governments


66,496



68,184Prepaid expenses and other receivables


871,585



637,345Current portion of software development costs


4,279,205



4,721,666Inventory finished product


1,165,612



1,872,589Total current assets


8,127,899



10,565,709Property and equipment, net of accumulated depreciation


967,050



1,055,874Long term assetsSoftware development costs, net of current portion


2,171,604



1,674,390Long term Receivables


1,117,947



-Intellectual property licenses


1,722,471



1,807,926Restricted cash


-



216,000Total other assets


5,012,022



3,698,316Total Assets

$
14,106,971


$
15,319,900LIABILITIES AND SHAREHOLDERS' DEFICITCurrent LiabilitesAccounts and notes payableAccounts payable

$
7,883,470


$
7,638,962Other current liabilitiesCurrent maturities of long-term debt


40,431



43,200Accrued liabilities


2,307,632



1,881,985indebtedness to third parties






-indebtedness to related parties


5,535,774



5,364,698Total current liabilities


15,767,307



14,928,845Long-term debt, less current maturities


733,064



973,145Total Liabilities


16,500,371



15,901,990Shareholders'  Equity/(Deficit)Preferred stock - $0.001 par value. 20,000,000 shares authorized. None issued and outstanding


-



-Common stock - $0.001 par value.100,000,000 shares authorized.  69,717,713 and 58,012,513 shares issued and outstanding, respectively


69,718



58,013Additional paid-in capital


85,781,258



85,731,396Accumulated other comprehensive loss


(4,805,310
)


(5,050,189
)Accumulated deficit


(82,751,850
)


(80,556,080
)Total Shareholders' Equity/(Deficit) of the Company


(1,706,184
)


183,140Non Controlling Interest


(687,216
)


(765,230
)Total Equity/(Deficit)


(2,393,400
)


(582,090
)Total Liabilities and Shareholders' Equity

$
14,106,971


$
15,319,900





See accompanying notes to unaudited condensed consolidated financial statements





-3-











PLAYLOGIC ENTERTAINMENT INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS





Three months ended March 31,2010


2009Net revenuesSales, net of returns and allowances

$
2,569,730


$
1,216,823Cost of salesDirect costs and license fees


(881,133
)


(678,228
)Amortization of software development costs


(570,770
)


(129,109
)(1,451,903
)


(807,337
)Gross profit


1,117,827



409,486Operating expensesResearch and development


288,444



41,944Selling and marketing


433,537



330,729General and administrative


1,429,541



1,395,761Bad debt expense


286,581



-Depreciation


195,199



75,435Total operating expenses


2,633,302



1,843,869Loss from operations


(1,515,475
)


(1,434,383
)Other income/(expense)Interest expense


(509,342
)


(254,914
)Non cash Interest expense on discounted debt


(171,076
)


(49,000
)Gain/(loss) on foreign exchange


12,046



(12,039
)Loss before provision for income taxes


(2,183,847
)


(1,750,336
)Equity in non controlling interest


(11,923
)


(245
)Provision for Income Taxes


-



-Net Loss


(2,195,770
)


(1,750,581
)Net loss per weighted-average share of common stock outstanding, computed on Net Loss- basic


(0.04
)


(0.04
)- fully diluted


(0.04
)


(0.04
)Weighted-average number of shares of common stock outstanding- basic


58,792,860



46,900,984- fully diluted


58,792,860



46,900,984





See accompanying notes to unaudited condensed consolidated financial statements





-4-











PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY








Additional





Accumulated Other


40% non controllingCommon stock

Paid-in


Accumulated


Comprehensive


interest inShares


Par Value


Capital


deficit


Loss


PlayV Ltd


TotalBalances at December 31, 2009


58,012,513



58,013



85,731,396



(80,556,080
)


(5,050,189
)


(765,231
)


(582,090
)Non Controlling interest in Joint-Venture






















78,015



78,015Common stock issued through exercise of warrants


11,705,200



11,705



(11,705
)














(0
)Capital contributed to support operations










25,000















25,000Issuing costs


























-Stock options issued pursuant to Employee Compensation Plan










36,567















36,567Change in currency translation adjustment


















244,879







244,879Net result for the year














(2,195,770
)










(2,195,770
)Balances at March 31, 2010


69,717,713


$
69,718


$
85,781,258


$
(82,751,850
)

$
(4,805,310
)

$
(687,216
)

$
(2,393,400
)





See accompanying notes to unaudited condensed consolidated financial statements





-5-





PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS





3 months ended March 31,2010


2009CASH FLOWS FROM OPERATING ACTIVITIESNet Loss

$
(2,195,771
)

$
(1,750,580
)Adjustments to reconcile net loss to net cash used in operating activitiesDepreciation


182,696



75,435Amortization of software development


570,769



129,109Bad debt expense


286,581



-Expense charges for stock options


36,567



46,623Management fees contributed as capital


25,000



25,000Non-cash interest charge on warrants


171,076



49,000(Increase)/ Decrease in cash attributable to changes in operating assets and liabilitiesChange in capitalized software development costs


(613,024
)


(2,333,879
)Restricted cash


-



-Accounts receivable - trade and other


(464,921
)


(217,653
)Inventory finished product


599,909



238,412Prepaid expenses and other


(309,596
)


(123,657
)Increase / (Decrease) inDeferred revenues


-



87,531Accounts payable - trade


647,313



1,565,742Payroll taxes payable


129,078



(95,638
)Other current liabilities


431,931



115,408Net cash used in operating activities


(502,392
)


(2,189,147
)CASH FLOWS FROM INVESTING ACTIVITIESCash paid to acquire property and equipment


(4,535
)


(56,948
)Net cash used in investing activities


(4,535
)


(56,948
)CASH FLOWS FROM FINANCING ACTIVITIESPrincipal payments on long-term debt


(188,420
)


(216,514
)Cash received from shareholder loans


-



2,609,786Proceeds from sales of common stock


-



643Net cash (used in) provided by financing activities


(188,420
)


2,393,915Effect of foreign exchange on cash


64,248



(338,779
)Increase/(Decrease) in Cash


(631,099
)


(190,958
)Cash at beginning of period


1,049,025



390,026Cash at end of period


417,926



199,068Supplemental disclosures of interest and income taxes paidInterest paid during the period


-



-Income taxes paid (refunded)


-



-Supplemental disclosures of non-cash investing and financing activitiesCommon stock issued to repay notes payable


-



-Cost of acquiring capital paid with issuance of common stock


-



-





See accompanying notes to unaudited condensed consolidated financial statements


-6-


PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES


CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





NOTE A – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES





Basis of presentation


The accompanying condensed consolidated balance sheet as of December 31, 2009 has been derived from audited financial statements and the accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2010 and 2009 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  They do not include all of the information and footnotes for complete consolidated financial statements as required by GAAP.  In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s annual report on Form 10-K for the year ended December 31, 2009 as filed at the SEC on May 17, 2010.





The results of operations for the three months ended March 31, 2010 and 2009 presented are not necessarily indicative of the results to be expected for the year.





There is no provision for dividends for the quarter to which this quarterly report relates.





Description of business


Playlogic Entertainment, Inc. (“Playlogic,” the “Company” or “we”) develops and publishes interactive software games designed for video game consoles, handheld platforms and personal computers. We currently offer our products primarily in versions that operate on the Sony PlayStation 2 (“PS2”), Sony PlayStation 3 (“PS3”), Nintendo Wii (“Wii”), and Microsoft Xbox 360 (“Xbox360”) console systems, Nintendo Game Boy Advance (“GBA”), Sony PlayStation Portable (“PSP”), and Nintendo Dual Screen (“NDS”) hand-held devices, and the personal computer (“PC”).





We develop and publish action/adventure, racing, simulation, first-person action, and other software games for casual players, game enthusiasts, children, adults, and mass-market consumers.   Our principal sources of revenue are derived from publishing operations.  Publishing revenues are derived from the sale of internally developed software titles or software titles developed by third parties.  Our publishing business involves the development, marketing, and sale of products directly through distributors or through licensing arrangements, under which we receive royalties.





We sell our products worldwide.





Management acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce consolidated financial statements which present fairly the consolidated financial condition, results of operations and cash flows of the Company for the respective periods being presented





Going concern


The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As of March 31, 2010, we have an accumulated deficit of approximately $82.8 million. At March 31, 2010 and December 31, 2009, we had a working capital deficit of $7.6 million and $4.4 million, respectively, resulting from recurring negative operating cash flow which raises substantial doubts about our ability to continue as a going concern. For the three months ending March 31, 2010 and March 31, 2009, we have recorded net losses of $2.2 million and $1.8 million respectively. Furthermore, we showed negative cash flow from operations for these periods amounting to $0.5 million and $2.2 million respectively. Our continued existence as a going concern is dependent upon our ability to generate sufficient cash flows to support our ongoing operations by meeting our current obligations as they come due and servicing our long-term debt on a timely basis.





While the Company has contracts in place with several third-party developers and is developing titles through its Playlogic Game Factory B.V. subsidiary, and anticipates successful debuts of such titles; the market for interactive entertainment software is characterized by short product lifecycles and frequent introduction of new products. Many software titles do not achieve sustained market acceptance or do not generate a sufficient level of sales to offset the costs associated with product development. A significant percentage of the sales of new titles generally occur within the first three to six months following their release. Therefore, the Company’s profitability depends upon the Company’s ability to develop and sell new, commercially successful titles and to replace revenues from titles in the later stages of their lifecycles. Any competitive, financial, technological or other factor which delays or impairs the Company’s ability to introduce and sell the Company’s software could adversely affect future operating results.


-7-


PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES


CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)








The Company’s continued existence is dependent upon its ability to generate sufficient cash flows from operations to support its daily operations as well as provide sufficient resources to retire existing liabilities and obligations on a timely basis and its ability to raise debt and/or equity financing.





The Company anticipates future sales of equity securities to raise working capital to support and preserve the integrity of the corporate entity. However, there is no assurance that the Company will be able to obtain additional funding through the sales of additional equity securities or, that such funding, if available, will be obtained on terms favorable to or affordable by the Company.





If no additional operating capital is received during the next few months, the Company will be forced to rely on existing cash in the bank and upon additional funds loaned by management and/or significant stockholders to preserve the integrity of the corporate entity at this time.  In the event, the Company is unable to acquire advances from management and/or significant stockholders, the Company’s ongoing operations would be negatively impacted to the point that all operating activities are ceased.





While the Company is of the opinion that good faith estimates of the Company’s ability to secure additional capital in the future to reach the Company’s goals have been made, there is no guarantee that the Company will receive sufficient funding to sustain operations or implement any future business plan steps.





No adjustment has been made in the accompanying financial statements to the amounts and classification of assets and liabilities which could result should the Company be unable to continue as a going concern.





Principles of consolidation


The consolidated financial statements include the consolidated financial statements of Playlogic Entertainment, Inc. a Delaware corporation, Playlogic International N.V. (a corporation domiciled in The Netherlands), its wholly-owned subsidiary Playlogic Game Factory B.V. (a corporation domiciled in The Netherlands) and Playlogic Suisse SA (a corporation domiciled in Switzerland). Furthermore, we have 60% controlling interest in a joint-venture founded in the United Kingdom.  All inter-company accounts and transactions have been eliminated in consolidation.





For reporting purposes, the Company operated in only one industry for all periods presented in the accompanying consolidated financial statements and makes all operating decisions and allocates resources based on the best benefit to the Company as a whole.





Reclassifications


Certain prior year amounts have been reclassified to conform to current year presentation.





Currency translation


The accompanying unaudited condensed consolidated financial statements are reported in U.S. Dollars.  Accounts of foreign operations are translated into U.S. dollars using exchange rates for assets and liabilities at the balance sheet date and average prevailing exchange rates for the period for revenue and expense accounts. Adjustments resulting from translation are included in other comprehensive income (loss). Realized and unrealized transaction gains and losses are included in income in the period in which they occur, except on inter-company balances considered to be long term. Transaction gains and losses on inter-company balances considered to be long term are recorded in other comprehensive income.





Comprehensive income (loss) is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. The Company’s items of other comprehensive income (loss) are foreign currency translation adjustments, which relate to investments that are permanent in nature and therefore do not require tax adjustments.


-8-


PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES


CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)








The Euro is the functional currency of our operating subsidiaries domiciled in The Netherlands. We translate Euro into US Dollars, in accordance with the following table:





Financial statement element

Applicable rateAssets

Balance sheet date *Liabilities

Balance sheet date *Equity

HistoricalRevenues

Annual average**Expenses

Annual average**Gains

Annual average**Losses

Annual average**


____________





* $1.3477 and $ 1.4400 at March 31, 2010 and December 31, 2009, respectively.


** Average for the 3 months ended March 31, 2010 was $1.3815


Average for the 3 months ended March 31, 2009 was $1.3094





Earnings/(Loss) Per Share .


Basic EPS is computed by dividing the net income (loss) applicable to common stockholders for the period by the weighted average number of shares of common stock outstanding during the same period. 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 and common stock equivalents outstanding.





The Company incurred a net loss for the three months ended March 31, 2010 and 2009; therefore, the basic and diluted weighted average shares outstanding exclude the impact of all common stock equivalents because their impact would be anti-dilutive.





The Company defines common stock equivalents as unexercised stock options, unvested time-based and market-based restricted stock and warrants outstanding during the period.





Unexercised stock options to purchase 6,177,500 and 4,525,000 shares of the Company’s common stock as of March 31, 2010 and 2009, respectively, were not included in the computation of diluted earnings per share because the exercise of the stock options would be anti-dilutive to earnings per share.





Unexercised warrants to purchase 1,755,582 shares and 10,442,233 shares of our common stock as of March 31, 2010 and 2009, respectively, were excluded from the computation of diluted earnings per share because the exercise of warrants would be anti-dilutive to earnings per share.





Recently Issued Accounting Pronouncements


In April 2009, the FASB issued ASC 805, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that arise from Contingencies , which requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value, if fair value can be determined during the measurement period. ASC 805 specifies that an asset or liability should be recognized at time of acquisition if the amount of the asset or liability can be reasonably estimated and that it is probable that an asset existed or that a liability had been incurred at the acquisition date. ASC 805 is effective for all fiscal years beginning after December 15, 2008 (31 December 2009 for the Company). The adoption of this statement is not expected to have a material effect on the Company's future financial position or results of operations.





In May 2009, the FASB issued ASC 855, Subsequent Events which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. ASC 855 is effective for interim or annual financial periods ending after June 15, 2009 (the Company's second quarter ended June 30, 2009). The implementation of this standard did not have a material impact on the Company's financial statements. Subsequent events were evaluated through the date of issuance of these consolidated financial statements on November 18, 2009 at the time this Quarterly Report on Form 10-Q was filed with the Securities and Exchange Commission.


-9-


PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES


CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)








In June 2009, the FASB issued ASC 105 which replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States. ASC 105 is effective for interim and annual periods ending after September 15, 2009 (the Company's third quarter ended September 30, 2009). We do not expect the adoption of this standard to have an impact on our financial position or results of operations.





In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements. This guidance modifies the fair value requirements of FASB ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements, by allowing the use of the “best estimate of selling price” in addition to vendor specific objective evidence and third party evidence for determining the selling price of a deliverable. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence, (b) third-party evidence, or (c) estimates. In addition, the residual method of allocating arrangement consideration is no longer permitted. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. We do not expect the adoption of ASU 2009-13 to have a material impact on our Condensed Consolidated Financial Statements.





In October 2009, the FASB issued ASU 2009-14, Software (Topic 985) – Certain Revenue Arrangements that Include Software Elements. This guidance modifies the scope of FASB ASC subtopic 965-605, Software-Revenue Recognition , to exclude from its requirements non-software components of tangible products and software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality. ASU 2009-14 is effective for fiscal years beginning on or after June 15, 2010. We do not expect the adoption of ASU 2009-14 to have a material impact on our Condensed Consolidated Financial Statements.





The FASB’s Accounting Standards Codification (ASC) is effective for all interim and annual financial statements issued after September 15, 2009.  The ASC is now the single official source of authoritative, nongovernmental generally accepted accounting principles (GAAP) in the United States.  The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission.  Our accounting policies were not affected by the conversion to ASC.  However, we have conformed references to specific accounting standards in these notes to our consolidated financial statements to the appropriate section of ASC.




In January 2010, the FASB issued guidance that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. The guidance is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures that are effective for annual periods beginning after December 15, 2010. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.





There were various other accounting standards and interpretations issued during 2010 and 2009, none of which are expected to have a material impact on the Company’s consolidated financial position, operations, or cash flows.





-10-


PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES


CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





NOTE B - SOFTWARE DEVELOPMENT COSTS





The following table provides the details of software development costs as of March 31, 2010 and for the year ended December 31, 2009:





March 31, 2010


December 31, 2009 (derived from

audited

statements)(Unaudited)Beginning balance

$
6,396,056


$
8,581,034Additions


625,523



7,559,0927,021,579



16,140,126Less: Amortization


(570,770
)


(4,994,070
)Less: Impairment charge


0



(4,750,000
)(570,770
)


(9,744,070
)Total software development costs


6,450,809



6,396,056Less: current portion


(4,279,205
)


(4,721,666
)Non-current portion

$
2,171,604



1,674,390





The amount of software development costs resulting from advance payments and guarantees to third-party developers was approximately $1.4 million at March 31, 2010. We are in default on payments to some third-party developers, which has resulted in projects that are put on hold until the next payment is made. This could cause a delay in release of our titles. In addition, software development costs at March 31, 2010 included an amount of $3.1 million related to titles that have not been released yet.





The non-current portion of the capitalized software development costs is expected to be amortized starting Q2 2011 and further.








NOTE C – SHAREHOLDER’S EQUITY





Common stock


During the first three months of 2010, 17 million warrants were exercized cashless at an agreed upon price of $1.25 per share. The Company has issued a total of 11,705,200 new shares in connection with these exercizes. The warrants had exercise prices of $0.40 to $0.60 each.





Stock option plan


On March 18, 2010, the Board of Directors has agreed to grant 1,652,500 options to key employees. This grant is in accordance with the 2007 approved Employee Stock Option Plan. The options have an exercise price of $0.30 per share. These options vest ratably over three years and will expire in 4 years.  The fair value of the options totaled $114,023 or $0.069 per share, of which $1,267 was recorded during the three months, ended March 31, 2010. The stock price on the day of grant amounted to $0.21.





The fair value of options granted was estimated at the grant date using the Black-Scholes option-pricing model.  The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which do not have vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.  The following table summarizes the assumptions and variables used to compute the weighted average fair value of stock option grants:


-11-


PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES


CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)








Risk-free interest rate
2.29%Dividend yield
0%Volatility factor
53.1%Weighted-average expected life
4 Years








NOTE D – RELATED PARTY TRANSACTIONS





As of March 31, 2010 the Company has an outstanding loan payable to related parties amounting to $ 6 million. This loan is the remaining balance of loans provided during 2008 and 2009. In connection with these loans the Company issued warrants. In accordance with APB 14, the debt proceeds have been allocated between the debt and detachable stock purchase warrants based on relative fair values. As of March 31, 2010 we have unamortized debt discount amounting to $464,226. We have recorded the net of $5,535,774 as indebtedness to related parties in the balance sheet.  We have verbal agreement to extend the term of the loan to December 31, 2010.





The total amortization on the debt discount amounts to $171,076 for the three months ended March 31, 2010.





Under this loan agreement, the Company pledged as collateral all current and future Intellectual Property, receivables and bank balances owned by the Company. Furthermore, the loan providers have a first right of pledge on all the issued and outstanding shares of Playlogic Game Factory B.V. for the principle amount of $ 6,000,000 plus any accrued costs and unpaid interest with a maximum of $1,000,000. The total pledge granted is therefore maximized on $7 million.





Starting January 1, 2010, the Company owes an interest on the loan of $6,000,000 equal to 31.21% per year (which was calculated based on a weekly interest payment of Euro 25,000), which interest must be paid in weekly installments in arrear on or before every Friday of the week, for the first time on or before April 2, 2010.  We have recorded an interest expense of Euro 325,000 (or $449,000) for the first three months of 2010. The Company has a grace period with respect to the interest payments of 5 weeks. The Company is currently in default with the interest payments.








Contributed capital





Willem M. Smit, the Company’s Chief Executive Officer, has agreed to not receive any cash compensation until such time that the Company achieves positive cash flows from operations. However, the Company does reimburse Mr. Smit for his business related expenses and provides him with an automobile. As Mr. Smit provides executive management and oversight services to the Company, an amount of $100,000 per annum (or $25,000 per quarter) is imputed as the value of his services and recorded as additional contributed capital to the Company.





Receivables due from officers





Effective January 1, 2006 the Company entered into a service agreement with Altaville Investments B.V., a company beneficially owned by its CEO Willem M. Smit. The Company pays for certain service among others housekeeping and cleaning services provided by Altaville to the Company an annual aggregate amount of approximately $50,000 which is paid in 4 quarterly installments.  As of March 31, 2010, the Company has no receivables from officers.








NOTE E - COMMITMENTS AND CONTINGENCIES





Litigation


Due to the Company’s cash flow situation, we are in default on payments to some of our vendors. Some of these vendors have gone legal to collect their outstanding receivables. We are in continuous discussions with both vendors and collection agencies and law firms to settle these issues in a way that it doesn’t harm our business. A significant part of our accounts payable balance is overdue. All amounts claimed have been recorded in the financial statements as accounts payable. We could incur costs for legal advice in some cases (if we hire external lawyers) which we will recognize upon the date of the action. If a vendor with a significant outstanding amount demands immediate payment in full, our ability to continue as a going concern will be at risk. The Company is actively searching for new funding and/or financing, to resolve these matters and we are in continuous open dialogue with the vendors involved.


-12-


PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES


CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)








In 2009, we have lost a lawsuit started by Visionvale, the developers of the title Ancient Wars: Sparta (released in 2007), in which Visionvale had claimed the final payment for the development of the title. Visionvale also claimed that the software development agreement was, because of non-payment, legally terminated and that the licensing rights reverted back to Visionvale. Playlogic has disputed that the agreement had been terminated and claimed that parties did not agree on a license but a transfer of IP rights. The court decided that the IP rights had been transferred to Playlogic, but Playlogic had to pay the remaining outstanding amounts, including interest and costs. The costs amounting to approximately $100,000 have been included in the Statement of Operations for the year 2009.


Visionvale has published the game as well and additionally they have published a sequel of the game, which both portray an infringement on the IP rights owned by Playlogic. We have not been granted any penalty payments by Visionvale for this infringement, on which we have appealed. We have recorded all costs related to this lawsuit in 2009, but have not recorded the potential benefit.





Furthermore, the Company is involved in a number of minor legal actions incidental to its ordinary course of business.




With respect to the above matters, the Company believes that it has adequate legal claims or defenses and/or provided adequate accruals for related costs such that the ultimate outcome will not have a material adverse effect on the Company’s future results of operations.





We have started legal cases against a number of customers for non payment. Some relate to sales of our games in 2007. We have recorded these items as receivables in our books, but have provided the most part of this. The main lawsuits in which we claim money from our customers relate to:





Evolved: we entered into a license deal in 2006 for a number of our titles, to be sold in the USA. Although Evolved, even today, is selling our product, we have not received any payment from them. Evolved claims they had to incur costs on the titles that should have been paid by Playlogic and are offsetting the revenues against that.





Koch Media:  We are facing a payment issue from our main customer for our distribution in the Europe, Koch Media. Amounts due for payment in December 2009 have not yet been paid by Koch to us. As Koch is a significant customer, we are facing cash flow issues over the last months. We have started legal proceedings against Koch Media Group. As the contract is written in accordance with Austrian Laws, we have hired an Austrian law firm to assist us in this matter. We are claiming a total of Euro 1.7 million (or approximately $2.4 million), which is build up on unpaid sales of our products plus damages from our side. We have not recorded the claim of damages in the financial statements.





We have classified the above receivables, among others, as net long term receivables.





Office leases





The Company has entered into a lease agreement with the World Trade Center in Amsterdam for a period of 5 years ending July 31, 2013. The lease requires annual payments of approximately $420,000 (€ 291,500) for the offices and $30,000 (€20,600) for parking spaces at the building, all payable in quarterly installments. The offices total approximately 8,000 square feet (or 900 square meter). This lease agreement contains an extension option, which if exercised by the Company, will extend the expiration date to July 31, 2018. The Company has negotiated a rent-free period with the WTC for the period up to December 31, 2008. First payments have started in January 2009. The Company has accrued for the rent free period and will release the accrual over the term of the lease.





Our wholly-owned subsidiary, Playlogic Game Factory, B. V., leases offices located at Hambroeklaan 1 in Breda from Neglinge BV pursuant to a lease agreement which expires on October 1, 2013. This lease agreement contains an extension option, which if exercised, will extend the expiration date to October 1, 2018. At the execution of this lease agreement, the landlord committed itself to invest approximately $425,000 (€300,000) in leasehold improvements which are scheduled to be repaid by Playlogic Game Factory B.V. over a 10 year period. The lease requires annual payments of approximately $360,000 (€250,000) per year, payable in quarterly installments.





We have recorded a rent expense for the three months ended March 31, 2010 and March 31, 2009 amounting to approximately $210,000 and $240,000 respectively (difference due to foreign exchange).





-13-


PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES


CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)








Future minimum non-cancelable lease payments on the above leases for office space are as follows:





March 31,2011

$
810,0002012


810,0002013


515,0002014


-2015


-Thereafter


-Total

$
2,135,000





Transportation leases


The Company leases 5 automobiles for certain officers and employees pursuant to the terms of their individual employment agreements under operating lease agreements. These agreements are for terms of 3 to 4 years. The leases require monthly aggregate payments of approximately $6,000.





Future minimum non-cancelable lease payments on the above transportation leases are as follows:





March 31,2011

$
72,0002012


72,0002013


39,0002014


-2015


-Thereafter


-Total

$
183,000





Software development contracts


The Company has entered into three (3) separate software development contracts with unrelated entities. These contracts require periodic payments of agreed-upon amounts upon the achievement of certain developmental milestones, as defined in each individual contract. All of these contracts have completion deadlines of less than one (1) year from the contract execution and will require an aggregate funding liability of approximately $0.8 million through completion, for which invoices have not yet been included in accounts payable.





-14-


PLAYLOGIC ENTERTAINMENT, INC. AND SUBSIDIARIES


CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)








NOTE F - SEGMENT INFORMATION AND REVENUE CONCENTRATIONS





The Company sells its products to wholesale distributors in various domestic and foreign markets. The following table shows the Company’s gross revenue composition:





For the three months ended March 31,2010

2009Europe and United KingdomCustomer A

737,790
28.3%

452,290
37.2%Customer B

953,248
36.6%

47,373
3.9%Customer C

0
0.0%

82,400
6.8%Customer D

0
0.0%

198,789
16.3%2,121,043
82.8%

1,216,823
100.0%Asia and AustraliaCustomer F

0
0.0%

0
0.0%Customer G

0
0.0%

0
0.0%0
0.0%

0
0.0%United States & CanadaCustomer I

448,687
17.2%

0
0.0%448,687
17.2%

0
0.0%Total

2,569,730
100.0%

1,216,823
100.0%





-15-


Item 2. Management’s Discussion and Analyses of Financial Condition and Results of Operation





CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS


The statements contained herein which are not historical facts are considered forward-looking statements under federal securities laws and may be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "potential," "predicts," "projects," "seeks," "will," or words of similar meaning and include, but are not limited to, statements regarding the outlook for the Company's future business and financial performance. Such forward-looking statements are based on the current beliefs of our management as well as assumptions made by and information currently available to them, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Actual outcomes and results may vary materially from these forward-looking statements based on a variety of risks and uncertainties including, but not limited to, those discussed under the heading "Item 1A. Risk Factors” in our Form 10K for the year ended December 31, 2009,  beginning on page 12.All forward- looking statements are qualified by these cautionary statements and apply only as of the date they are made. The Company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise





Given these uncertainties, readers of this Annual Report and investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.





Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided in addition to the accompanying condensed consolidated financial statements and footnotes to assist readers in understanding our results of operations, financial condition and cash flows. The following discussion should be read in conjunction with the MD&A included in our annual consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2009.





Overview





Playlogic is a publisher of interactive entertainment products, such as video game software and other digital entertainment products. We publish on all major interactive entertainment hardware platforms, like Sony’s PlayStation 3,and Playstation2, Microsoft’s Xbox 360 and Nintendo’s Wii, PCs and handheld devices (such as Nintendo DS, and PSP) and mobile devices.




Our principal sources of revenue are derived from publishing operations. Publishing revenues are derived from the sale of our digital entertainment products. We own most of the intellectual properties of our products, which we believe positions us to maximize profitability. Owning our Intellectual Properties increases the value of our company as our portfolio increases every quarter with new titles published.




As a publisher, we are responsible for publishing, sales and marketing of our products. We sell our products to distributors, who sell to retail. Furthermore, we sell directly to consumers through online distribution channels. Since 2008 we have been selling our products online through our own website in a specifically designed store. In 2009 further strategic, operational and organizational changes have been made for publishing titles digitally through PSN and Xbox Live.




Various studios throughout the world develop games which we publish. One of these studios is our subsidiary, Playlogic Game Factory B.V., located in The Netherlands. Other independent studios in various countries develop our games under development contracts. These development contracts generally provide that we pay the studio an upfront payment, which is an advance on future royalties, earned, and a payment upon achievement of various milestones. In addition, we license the rights to our existing titles to other studios who then develop those titles for other platforms.




Game development studio’s require financing for their titles to be developed and published. We evaluate each of these offers based on several factors, including sales potential, market conditions, technology used, track record and human resources of the studio, production pipeline and project management skills. Determining factors is the implementation of our product strategy in the face rapidly changing market conditions consumer choice and behavior.




We select which games we develop, based on our analysis of consumer trends and behavior and our experience with similar or competitive products. Full due diligence and a financial risk analysis / assessment are part of this process. Once a title has been selected a development studio is assigned based upon its qualifications, previous experience and prior performance. Once developed, we distribute our games worldwide through existing distribution channels with experienced distributors.




We generally aim to release our titles simultaneously across a range of hardware formats leveraging development risks and increasing potential total unit sales per SKU with a marginal augmentation in development time, resources and associated costs.




We believe that greater online functionality and the vast processing capabilities, as well as games with simplified and innovative controls (i.e. Nintendo Wii motion plus, Nintendo DSi, Playstation 3 Sixaxis, Playstation Eye, Playstation Move and Microsoft’s Natal) of the new platforms will further increase the total world wide installed base, diversifying the consumer base and foster further growth in our industry.


-16-


Playlogic has created a balance between games available in various genres for all exisiting platforms. To spread risk and broaden Playlogic’s portfolio a greater focus will be towards digital releases minimizing retail exposure and associated costs.





Industry Overview





We believe that at a high level the game market is divided into three broad segments: hard-core consumers, moderate consumers and mass-market (or casual consumers). Of course, the market is much more complex than this basic analysis. Hard-core consumers can be further subdivided into hard-core PC gamers and hard-core console gamers. We think these are two very different types of consumers. These groups could be further divided into such segments as hard-core simulation gamers, hard-core FPS gamers, hard-core fighting gamers, hard-core Nintendo fans, etc. However, before understanding these smaller sub-segments, it is important to understand the broader classification of gamer types.




We believe, the most important point to note is that there is little movement between the groups. Think of it as a pyramid, with the mass-market gamer at the base and the hard-core gamer at the pinnacle. The majority of gamers will be at the bottom. As a general rule of thumb, about 50-75% of the game-playing population sits at the base in the mass-market gamer category.




Somewhere between 15% to 30% are in the moderate gamer slots and the rest are the hardcore gamers. Of course, it will vary by type of product and market, but as a general rule of thumb the pyramid theory should apply to most analysis.


We believe it is very hard to take an established mass market gamer and make them a moderate or hard-core gamer. However, that is not to say that the overall pyramid is not growing. DFC's entire forecast for the interactive entertainment industry is based on the premise that the overall pyramid is growing. However, this growth is occurring slowly over time.


We think that adults playing games has been the biggest growth driver for the game industry. Obviously, this starts to benefit companies like Nintendo that have brands that were popular 25 years ago.




We believe it is hard to take a casual gamer and all of the sudden make them a hard-core gamer. However, demographics naturally grow the pyramid over time. DFC's argument was a simple two-fold analysis where we said: 1) there will be growth in the pyramid as the core audience ages and continues to play games when they reach adulthood, and 2) advances in technology will allow for people to have access to games anytime, anyplace, anywhere. In other words, gamers will not be limited to playing in front a TV set. They can also play on a PC or all kinds of future portable devices.




When looking at the concept of anytime, anyplace, anywhere, we believe a key issue is what type of products will be suitable for specific platforms. In other words, is a hard-core gamer looking to play first-person shooters on a portable game system? DFC's theory has been that hard-core gamers tend to play a wide range of products depending on location and availability. Thus, delivering an intense FPS on a cell phone doesn't necessarily make sense. While it is difficult to get a mass-market gamer to play a hard-core game, hard-core gamers also like to play more mass market games. This is especially true when it comes to playing on a portable system that simply doesn't have the power of a PC or Xbox 360.




To test our anytime, anyplace, anywhere thesis, DFC recently conducted a survey of over 6000 users. A major portion of this survey focused on the usage of portable devices and mobile phones.




We believe the results clearly showed that most PC gamers are "multiplatform gamers." In other words, they also play console and portable games. Of course, the dedicated game platforms still dominate with this audience. When it comes to portable systems, the Nintendo DS is the strongest (based on units sold), but it is closely followed by the Sony PSP. However, a surprising number of consumers also own an iPhone or an iPod Touch.


Furthermore, among these users the iPod Touch is very popular. When specifically asked, over 22% of respondents said they either owned or planned to buy an iPod Touch. In the recent DFC report on the iPhone game market we argued that the iPod Touch was an important driver for the overall iPhone market and is why the iPhone is a more compelling platform than other mobile phones.




We believe the growth in portable games is really about a growth in the overall pyramid and new technology that allows for play anytime, anyplace, anywhere. The Nintendo DS has set all kinds of records for best-selling game system ever. We think that it will be hard for other dedicated game systems to match the success of the DS in the next few years. However, that does not mean that non-dedicated game devices and mobile phones will replace or overtake the dedicated devices. The dedicated devices should still account for the bulk of revenue, even if total sales remain stagnant. The iPhone/iPod Touch platform is a compelling alternative but it has a long way to come close to replacing a Nintendo DS or Sony PSP. Nevertheless, the game market has grown to the point where multiple devices can co-exist, and even overlap in consumer ownership.





The report, “Consumer Trends in Virtual Goods and Downloadable Gaming in North America and Europe,” found that gamers are quite comfortable purchasing virtual items. 88 percent of respondents said they had purchased some form of digital content (including music, movies and games), and 60 percent of those responding indicated they had purchased an in-game virtual good.


-17-


We believe the current Xbox 360/PS3/Wii console cycle is already on a path to be much longer than previous cycles, and by the time new consoles do hit the market, advances in online gaming and distribution could mean the next cycle will be the last.




While the traditional video game business is still a safe bet for the short term, longer term prospects are more hazy, and Merel isn't sure if there will be another console cycle after the next one.




Whether on consoles or PC, online gaming has really taken off in recent years. The rise of casual and social games has certainly been a big contributor. Lazard Capital Markets recently held a meeting with PlaySpan, which helps facilitates payments for virtual goods in online games, and the firm noted that there are big growth opportunities in micro-transactions.





Lazard's Colin Sebastian said the worldwide market for online games should surpass $15 billion this year, and sales of virtual goods are likely to exceed $1 billion. 2





Consumers





We think that several Demographic trends and fundamental market drivers will determine the the size of the interactive entertainment software market. The most compelling of these include the widening age demographic of the interactive game consumer, rapid growth of teen and twenty-something population, Growth of the female gamer market, penetration of Nintendo Wii among people over 40, and the increasing disposable incomes of teens and pre-teens. The trends will continue to drive sales growth in both the hardware and software sectors.





We believe that the primary driver behind the industry’s growth is the dramatic expansion in age profile of the interactive game consumer.




The first mass-market generation of interactive consumers (and now the oldest) started playing video games with the release of the Atari home console during the late 1970s. It is estimated that the age range of consumers in this period was approximately between 8-20. Since the 1970s succeeding generations of video game consumers have embraced more advanced systems and complex technology. Some older consumers drop out of the market each year, replaced by a large number of children receiving their first DS or Playstation consoles. The mean number of the original generation of ‘Atari Kids’ is now approaching 40, with an emerging group of ‘Nintendads’ right behind them and many still play games on PC or home consoles. The age demographic of 90% of the gamers is believed to be in the range of 6- 40 years of age, dramatically older than the 1970s generation.




We believe there will be a continuing expansion of the age demographic for at least another 20 years, as the oldest gamers stay interested in games well into their 60s and children continue to embrace games.










1 Source: DFC Intelligence


2 Source: Lazard


-18-







We believe the demographics of game players will widen, and be a major source of the growth of the industry. The first generation gamers are now in their 30s and are still playing games and new consumers enter the market, including children at the age of 6 to 8 and an increasing number of women players.





(Expected) ReleaseGame

Studio

Platform

date to retailCompleted GamesAlpha Black Zero

Khaeon (NL)

PC

ReleasedAirborne Troops

Widescreen Games (F)

PS2, PC

ReleasedCyclone Circus

Playlogic Game Factory (NL)

PS2

ReleasedXyanide

Overloaded (NL)

Mobile Phones

ReleasedWorld Racing 2

Synetic (G)

PS2, Xbox, PC

ReleasedKnights of the Temple 2

Cauldron (SK)

PS2, Xbox, PC

ReleasedGene Troopers

Cauldron (SK)

PS2, Xbox, PC

ReleasedXyanide

Playlogic Game Factory (NL)

Xbox

Released (1)Age of Pirates: Caribbean Tales

Akella (Russia)

PC

Released Q3 2006Infernal

Metropolis (Poland)

PC

Released Q1 2007Ancient Wars: Sparta

World Forge (Russia)

PC

Released Q2 2007Xyanide Resurrection

Playlogic Game Factory (NL)

PSP

Released Q3 2007Evil Days Of Luckless John

3A Entertainment (Great Britain)

PC

Released Q3 2007Xyanide: Resurrection

Playlogic Game Factory (NL)

PS2

Released Q3 2007Obscure 2

Hydravision (F)

PC

Released Q3 2007Obscure 2

Hydravision (F)

PS2

Released Q3 2007Obscure 2

Hydravision (F)

Wii

Released Q1 2008Xyanide: Resurrection

Playlogic Game Factory (NL)

PC

Released Q1 2008Dragon Hunters

Engine software (NL)

DS

Released Q1 2008Aggression 1914

Buka (Russia)

PC

Released Q1 2008Dimensity

Dagger Studio (Bulgaria)

PC

Released Q2 2008Red Bull Break Dancing

Smack Down Productions (F)

DS

Released Q2 2008Simon the Sorcerer 4

RTL /Silverstyle Studio (GER)

PC

Released Q2 2008Worldshift

RTL Games (Germany)

PC

Released Q2 2008Stateshift

Engine Software (NL)

PC

Released Q2 2008Building & Co

Electrogames (F)

PC

Released Q3 2008Vertigo

Icon Games Entertainment Ltd (GB)

PC, Wii

Released Q1 2009Pool Hall Pro

Icon Games Entertainment Ltd (GB)

PC,  Wii

Released Q1 2009Age of Pirates 2: City of Abandoned Ships

Akella (Russia)

PC

Released Q1 2009Sudoku Ball Detective

White Bear (NL)

Wii/PC/DS

Released Q2 2009Infernal returns

Metropolis (Poland)

Xbox360

Released Q2 2009Obscure 2

Hydravision (F)

PSP

Released Q3 2009Aliens in the Attic

Engine Software (NL)

DS

Released Q3 2009Aliens in the Attic

Revisotronic

PC, PS2, Wii,

Released Q3 2009Aliens in the Attic

Engine Software (NL)

DS

Released Q3 2009Fairytale Fights

Playlogic Game Factory (NL)

PS3, Xbox360, PC

Released Q4 2009





-19-





Under DevelopmentCrazy Garage

White Birds

Wii, PSN, PC

Q3/Q4 2010The Strategist

Humagade/Canada

Wii, PSN, XBLA, PC

Q3/Q4 2010Young Archeologist

White birds

Wii, PC

Q3/Q4 2010Undisclosed Title

TBA

PS3, Xbox360, PC

Q4 2010/Q1 2011Undisclosed Title

TBA

PS3, Xbox360, PC

Q4 2010/Q1 2011Undisclosed Title

TBA

PS3, Xbox360, PC

Q4 2010/Q1 2011


_______________





1       Released in the US only








Material agreements





During the three months ended March 31, 2010 the Company did not entered into any material publishing and distribution agreements.





Critical Accounting Policies and Estimates





Our most critical accounting policies, which are those that require significant judgment, include: capitalization and recognition of software development costs and licenses; share-based compensation and revenue recognition. In-depth descriptions of these can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (the “2009 Form 10-K”). There have been no material changes in our existing accounting policies from the disclosures included in our 2009 Form 10-K.





Recently Issued Accounting Pronouncements





In April 2009, the FASB issued ASC 805, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that arise from Contingencies , which requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value, if fair value can be determined during the measurement period. ASC 805 specifies that an asset or liability should be recognized at time of acquisition if the amount of the asset or liability can be reasonably estimated and that it is probable that an asset existed or that a liability had been incurred at the acquisition date. ASC 805 is effective for all fiscal years beginning after December 15, 2008 (31 December 2009 for the Company). The adoption of this statement is not expected to have a material effect on the Company's future financial position or results of operations.





In May 2009, the FASB issued ASC 855, Subsequent Events which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. ASC 855 is effective for interim or annual financial periods ending after June 15, 2009 (the Company's second quarter ended June 30, 2009). The implementation of this standard did not have a material impact on the Company's financial statements.





In June 2009, the FASB issued ASC 105 which replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States. ASC 105 is effective for interim and annual periods ending after September 15, 2009 (the Company's third quarter ended September 30, 2009). We do not expect the adoption of this standard to have an impact on our financial position or results of operations.





In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements. This guidance modifies the fair value requirements of FASB ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements, by allowing the use of the “best estimate of selling price” in addition to vendor specific objective evidence and third party evidence for determining the selling price of a deliverable. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence, (b) third-party evidence, or (c) estimates. In addition, the residual method of allocating arrangement consideration is no longer permitted. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. We do not expect the adoption of ASU 2009-13 to have a material impact on our Condensed Consolidated Financial Statements.





-20-


In October 2009, the FASB issued ASU 2009-14, Software (Topic 985) – Certain Revenue Arrangements that Include Software Elements. This guidance modifies the scope of FASB ASC subtopic 965-605, Software-Revenue Recognition , to exclude from its requirements non-software components of tangible products and software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality. ASU 2009-14 is effective for fiscal years beginning on or after June 15, 2010. We do not expect the adoption of ASU 2009-14 to have a material impact on our Condensed Consolidated Financial Statements.





The FASB’s Accounting Standards Codification (ASC) is effective for all interim and annual financial statements issued after September 15, 2009.  The ASC is now the single official source of authoritative, nongovernmental generally accepted accounting principles (GAAP) in the United States.  The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission.  Our accounting policies were not affected by the conversion to ASC.  However, we have conformed references to specific accounting standards in these notes to our consolidated financial statements to the appropriate section of ASC.





In January 2010, the FASB issued guidance that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. The guidance is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures that are effective for annual periods beginning after December 15, 2010. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.





There were various other accounting standards and interpretations issued during 2010 and 2009, none of which are expected to have a material impact on the Company’s consolidated financial position, operations, or cash flows..





Results of Operations





Three months ended March 31, 2010  compared to three months ended March 31, 2009





Net sales . Net sales for the three months ended March 31, 2010 were $2,569,730 compared to $1,216,823 for the three months ended March 31, 2009. This increase of $1,352,907 or 111% in revenue is primarily related to the higher number of titles compared in the market compared to early 2009. Also, an amount of $346,482 is generated through distribution activities.





Gross Profit .Gross profit totaled $1,117,827 for the three months ended March 31, 2010. For the three months ended March 31, 2009, gross profit totaled $409,486. This increase is mainly caused by the fact that our revenue has increased compared to the first three months of 2009. Furthermore, our gross profit as a percentage of sales can vary significantly from period to period due to the sales mix and the type of sales deals included. The part of our revenue that is generated through distribution activities has lower margins than revenues generated through publishing activities.





Selling, Marketing, General and Administrative Expenses . Selling, marketing, general and administrative expenses totaled $2,149,659, for the three months ended March 31, 2010. For the three months ended March 31, 2009, selling, general and administrative expenses totaled $1,726,490. This represents an increase of  $423,169 or 24%. This increase in selling, general and administrative expenses is due to higher spending in marketing. Also, we have provided for some aged debts amounting to $160,216 recorded in General and Administrative expenses.





Research and Development . Research and development expenses totaled $288,444 for the three months ended March 31, 2010. For the three months ended March 31, 2009, research and development totaled $41,944. This represents an increase of $246,500or 588%. This increase is due to the fact that our in-house studio has completed our internally developed game Fairytale Fights and has spent time on developing new titles. As per US GAAP, we have expensed these internal hours as Research and Development expenses.





Depreciation . Depreciation expenses totaled $195,199 for the three months ended March 31, 2010. For the three months ended March 31, 2009, the depreciation expense totaled $75,435. The increase is due to the depreciation of a new software tool that we have started to use in Q4 2009.





Interest Expense .Interest expense totaled $509,342 for the three months ended March 31, 2010. For the three months ended March 31, 2009, interest expense totaled $254,914. This represents an increase of $254,428 or 100%. This increase in interest expense is due to the current loan outstanding. As disclosed in our 2009 10K, we pay a weekly interest of €25,000 on the current outstanding loan of $6,000,000. Also, in 2009 the Company issued warrants in connection with these loans.  The amortization of the debt discount is recorded as interest expense (expenses amount to $171,076 for the first three months of 2010 compared to $47,000 for the same period in 2009. These expenses are shown on a separate line in the P&L).





Net Result. Our net loss was $2,195,770 for the three months ended March 31, 2010. For the three months ended March 31, 2009, the net loss totaled $1,750,581. The decrease in the net result is due to the higher expenses in the first three months of 2010 as disclosed above. Furthermore, the need to spend more money on PR and Marketing of the products has led to higher costs. Also, the interest charge for the period is much higher than in the same period 2009.


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Other comprehensive income . Other comprehensive income represents the change of the Currency Translation Adjustments balance during the reporting period. The Currency Translation Adjustments balance that appears in the stockholders’ equity section is cumulative in nature and is a consequence from translating all assets and liabilities at current rate whereas the stockholders’ equity accounts are translated at the appropriate historical rate and revenues and expenses being translated at the weighted-average rate for the reporting period. The change in currency translation adjustments was $254,008  for the three months ended March 31, 2010 and $94,232  for the three months ended March 31, 2009. The amounts are relatively high this year due to the sharp fluctuations of the US Dollar compared to the EURO.





Liquidity and Capital Resources





As of March 31, 2010 our cash balance was $417,926.





We expect our capital requirements to increase over the next several years as we continue to develop new products both internally and through our third-party developers, increase marketing and administration infrastructure, and embark on in-house business capabilities and facilities. Our future liquidity and capital funding requirements will depend on numerous factors, including, but not limited to, the cash generation from the released games, the cost of hiring and training production personnel who will produce our titles, the cost of hiring and training additional sales and marketing personnel to promote our products, and the cost of hiring and training administrative staff to support current management.





Our net accounts receivable, after providing an allowance for doubtful accounts, at March 31, 2010 was $1,327,075.





The Company’s management states that in order to satisfy its working capital requirements through the second quarter of 2010, it will need to obtain additional financing from third parties. If the Company does not obtain any necessary financing in the next month, we may need to cease operations. There is no legal obligation for either management or significant shareholders to provide additional future funding. Consequently, there is substantial doubt about our ability to continue as a going concern. We have no current plans, proposals, arrangements or understandings with respect to the sale or issuance of additional securities prior to the location of a merger or acquisition candidate. Accordingly, there can be no assurance that sufficient funds will be available to us to allow us to cover the expenses related to such activities.





Fluctuations in Quarterly Operating Results and Seasonality





We have experienced fluctuations in quarterly 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 accuracy of retailers’ forecasts of consumer demand; the size and timing of acquisitions; the timing of orders from major customers; and order cancellations and delays in product shipment. Quarterly comparisons of operating results are not necessarily indicative of future operating results.





Item 3. Quantitative and Qualitative Disclosures about Market Risk





We are subject to market risks in the ordinary course of our business; primarily risks associated with interest rate and foreign currency fluctuations.





Interest Rate risk


After signing the waiver agreement we have agreed to pay an amount of Euro 25,000 (or $36,000) interest per week to the loan providers. This means an effective interest percentage of 31% per year. This interest is only calculated on the remaining loan of $6 million.





Foreign Currency Exchange Rate Risk





We transact business in foreign currencies and are exposed to risks resulting from fluctuations in foreign currency exchange rates. Accounts relating to foreign operations are translated into United States dollars using prevailing exchange rates at the relevant quarter end. Translation adjustments are included as a separate component of stockholders' equity. For the year ended December 31, 2009, our foreign currency translation adjustment loss was approximately $4.8 million.





We recognized a foreign exchange transaction gain in interest and other expense, net in our consolidated statement of operations for the three months ended March 31, 2010 of $254,008 (gain) and a foreign exchange transaction loss for the three months ended March 31, 2009 of $94,232 (gain).


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Item 4. Controls and Procedures





Evaluation of Disclosure Controls and Procedures





Based on an evaluation under the supervision and with the participation of management, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) were effective as of March 31, 2010 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.





Changes in Internal Control over Financial Reporting





There were no changes in our internal control over financial reporting during the first quarter of 2010, which were identified in connection with management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.








PART II — OTHER INFORMATION





Item 1. Legal Proceedings





Litigation


Due to the Company’s cash flow situation, we are in default on payments to some of our vendors. Some of these vendors have gone legal to collect their outstanding receivables. We are in continuous discussions with both vendors and collection agencies and law firms to settle these issues in a way that it doesn’t harm our business. A significant part of our accounts payable balance is overdue. All amounts claimed have been recorded in the financial statements as accounts payable. We could incur costs for legal advice in some cases (if we hire external lawyers) which we will recognize upon the date of the action. If a vendor with a significant outstanding amount demands immediate payment in full, our ability to continue as a going concern will be at risk. The Company is actively searching for new funding and/or financing, to resolve these matters and we are in continuous open dialogue with the vendors involved.




In 2009, we have lost a lawsuit started by Visionvale, the developers of the title Ancient Wars: Sparta (released in 2007), in which  Visionvale had claimed the final payment for the development of the title. Visionvale aldo claimed that the software development agreement was, because of non-payment, legally terminated and that the licensing rights reverted back to Visionvale. Playlogic has disputed that the agreement had been terminated and claimed that parties did not agree on a license but a transfer of IP rights. The court decided that the IP rights had been transferred to Playlogic, but Playlogic had to pay the remaining outstanding amounts, including interest and costs. The costs amounting to approximately $100,000 have been included in the Statement of Operations for the year 2009.


Visionvale has published the game as well and additionally they have published a sequel of the game, which both portray an infringement on the IP rights owned by Playlogic. We have not been granted any penalty payments by Visionvale for this infringement, on which we have appealed. We have recorded all costs related to this lawsuit in 2009, but have not recorded the potential benefit.


Furthermore, the Company is involved in a number of minor legal actions incidental to its ordinary course of business.





With respect to the above matters, the Company believes that it has adequate legal claims or defenses and/or provided adequate accruals for related costs such that the ultimate outcome will not have a material adverse effect on the Company’s future results of operations.




We have started legal cases against a number of customers for non payment. Some relate to sales of our games in 2007. We have recorded these items as receivables in our books, but have provided the most part of this. The main lawsuits in which we claim money from our customers relate to:




Evolved: we entered into a license deal in 2006 for a number of our titles, to be sold in the USA. Although Evolved, even today, is selling our product, we have not received any payment from them. Evolved claims they had to incur costs on the titles that should have been paid by Playlogic and are offsetting the revenues against that.





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Koch Media:  We are facing a payment issue from our main customer for our distribution in the Europe, Koch Media. Amounts due for payment in December 2009 have not yet been paid by Koch to us. As Koch is a significant customer, we are facing cash flow issues over the last months. We have started legal proceedings against Koch Media Group. As the contract is written in accordance with Austrian Laws, we have hired an Austrian law firm to assist us in this matter. We are claiming a total of Euro 1.7 million (or approximately $2.4 million), which is build up on unpaid sales of our products plus damages from our side. We have not recorded the claim of damages in the financial statements.





Except as referred to above there were no new material legal proceedings or material developments to the pending legal proceedings that have been previously reported in Part I, Item 3 of our 2009 Form 10-K.  A full discussion of our pending legal proceedings is also contained in Part I, Item 1, “Notes to Unaudited Condensed Consolidated Financial Statements” of this Report.








Item 1A. Risk Factors





There have been no material changes to the Risk Factors disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009.








Item 2 - Changes in Securities.





No response required.








Item 3 - Defaults Upon Senior Securities.





No response required.








Item 4 - Submission of Matters to a Vote of Security Holders.





No response required.








Item 5 - Other Information.





No response required.








Item 6. Exhibits





Exhibits :31.1

Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.











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SIGNATURES








Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





Playlogic International, Inc.Date: June 24,  2010
By:
/s/ Willem M. SmitWillem M. Smit

Chief Executive Officer




















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Exhibit Index








Exhibits31.1

Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.














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