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 September 30, 2009ORo
              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  o
 
 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  o  No  o
 
 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 o
              
              Accelerated
      filer o
              
              Non-accelerated
      filer o
                (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  o  No  ý
 
 As of
September 30, 2009, there were 47,139,635 shares 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
              4Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              17Item
      3.
              Quantitative
      and Qualitative Disclosures about Market Risk
              23Item
      4
              Controls
      and Procedures
              24PART
      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
              25Signatures
              26Exhibit
      Index
              27Certifications
              Attached
 
 
  -
2 -
  
 
 PART I -- FINANCIAL INFORMATION
 
 Item 1 -  Financial
Statements
 
 
 PLAYLOGIC
      ENTERTAINMENT INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED BALANCE SHEETSSeptember
      30, 2009
              
              
              December
      31, 2008
                (Derived
      from audited financial statements)(Unaudited)ASSETSCurrent
      AssetsCash
      and cash equivalents
              
              $
              775,416
              
              
              $
              81,978ReceivablesTrade,
      net of allowance for doubtful accounts
              
              
              4,736,634
              
              
              
              380,993Officers
              
              
              178,297
              
              
              
              109,876Value
      Added Taxes from foreign governments
              
              
              122,083
              
              
              
              71,783Current
      portion of software development costs
              
              
              10,761,777
              
              
              
              5,179,976Inventory
      finished product
              
              
              774,941
              
              
              
              812,020Intellectual
      property licenses
              
              
              1,905,947
              
              
              
              1,905,947Prepaid
      expenses and other receivables
              
              
              3,084,948
              
              
              
              560,765Total
      current assets
              
              
              22,340,043
              
              
              
              9,103,338Property
      and equipment, net of accumulated depreciation
              
              
              1,297,035
              
              
              
              1,226,134Other
      assetsSoftware
      development costs, net of current portion
              
              
              2,722,945
              
              
              
              3,401,058Restricted
      cash
              
              
              219,825
              
              
              
              210,000Total
      other assets
              
              
              2,942,770
              
              
              
              3,611,058Total
      Assets
              
              $
              26,579,848
              
              
              $
              13,940,530LIABILITIES AND SHAREHOLDERS'
      DEFICITCurrent
      LiabilitesAccounts
      and notes payableAccounts
      payable
              
              $
              7,622,897
              
              
              $
              5,453,262Other
      current liabilitiesCurrent
      maturities of long-term debt
              
              
              4,843,965
              
              
              
              3,342,000Accrued
      liabilities
              
              
              1,671,496
              
              
              
              1,896,466Deferred
      revenues
              
              
              1,813,153
              
              
              
              -indebtedness
      to related party
              
              
              18,928,513
              
              
              
              3,794,000Total
      current liabilities
              
              
              34,880,024
              
              
              
              14,485,728Long-term
      debt, less current maturities
              
              
              982,621
              
              
              
              2,146,338Total
      Liabilities
              
              
              35,862,645
              
              
              
              16,632,066Shareholders'
      DeficitPreferred
      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.  47,139,635 and 46,391,275 shares issued and
      outstanding, respectively
              
              
              47,140
              
              
              
              46,392Additional
      paid-in capital
              
              
              62,597,662
              
              
              
              61,229,130Deferred
      Compensation-Employee Stock Options
              
              
              717,213
              
              
              
              580,572Accumulated
      other comprehensive loss
              
              
              (5,402,609
              )
              
              
              (3,955,083
              )Accumulated
      deficit
              
              
              (66,944,974
              )
              
              
              (60,220,690
              )Total
      Shareholders' Deficit of the Company
              
              
              (8,985,568
              )
              
              
              (2,319,679
              )Non
      Controlling Interest
              
              
              (297,229
              )
              
              
              (371,857
              )Total
      Shareholders' Deficit
              
              
              (9,282,797
              )
              
              
              (2,691,536
              )Total
      Liabilities and Shareholders' Deficit
              
              $
              26,579,848
              
              
              $
              13,940,530
 
 
 See
accompanying notes to unaudited condensed consolidated financial
statements
 
 
  -
3 -
   
 PLAYLOGIC
      ENTERTAINMENT INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONSThree
      months ended September 30,
              
              
              Nine
      months ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008(Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)
              
              
              (Unaudited)Net
      revenuesSales,
      net of returns and allowances
              
              $
              2,019,382
              
              
              $
              1,068,377
              
              
              $
              6,701,682
              
              
              $
              9,418,489Cost
      of salesDirect
      costs and license fees
              
              
              (938,482
              )
              
              
              (405,806
              )
              
              
              (2,929,667
              )
              
              
              (2,656,048
              )Amortization
      of software development costs
              
              
              (1,047,792
              )
              
              
              (397,642
              )
              
              
              (2,034,383
              )
              
              
              (2,120,432
              )(1,986,274
              )
              
              
              (803,448
              )
              
              
              (4,964,050
              )
              
              
              (4,776,480
              )Gross
      profit
              
              
              33,108
              
              
              
              264,929
              
              
              
              1,737,632
              
              
              
              4,642,009Operating
      expensesResearch
      and development
              
              
              307,698
              
              
              
              125,589
              
              
              
              404,442
              
              
              
              301,031Selling
      and marketing
              
              
              922,155
              
              
              
              166,399
              
              
              
              1,865,581
              
              
              
              573,585General
      and administrative
              
              
              1,596,275
              
              
              
              1,683,894
              
              
              
              4,780,033
              
              
              
              4,123,612Depreciation
              
              
              93,628
              
              
              
              127,829
              
              
              
              301,098
              
              
              
              284,234Asset
      impairment charges
              
              
              -
              
              
              
              1,000,000
              
              
              
              -
              
              
              
              1,000,000Total
      operating expenses
              
              
              2,919,756
              
              
              
              3,103,711
              
              
              
              7,351,154
              
              
              
              6,282,462Loss
      from operations
              
              
              (2,886,648
              )
              
              
              (2,838,782
              )
              
              
              (5,613,522
              )
              
              
              (1,640,453
              )Other
      income/(expense)Interest
      expense
              
              
              (493,069
              )
              
              
              (142,172
              )
              
              
              (999,971
              )
              
              
              (259,890
              )Non
      cash Interest expense on discounted debt
              
              
              (288,847
              )
              
              
              (49,000
              )
              
              
              (483,091
              )
              
              
              (98,000
              )Realized
      and unrealized exchange profit
              
              
              407,849
              
              
              
              35,653
              
              
              
              446,927
              
              
              
              44,848Loss
      before provision for income taxes
              
              
              (3,260,715
              )
              
              
              (2,994,301
              )
              
              
              (6,649,657
              )
              
              
              (1,953,495
              )Equity
      in non controlling interest
              
              
              (123,837
              )
              
              
              -
              
              
              
              (74,627
              )
              
              
              -Provision
      for Income Taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      Loss
              
              
              (3,384,552
              )
              
              
              (2,994,301
              )
              
              
              (6,724,284
              )
              
              
              (1,953,495
              )Net
      loss per weighted-average share of common stock outstanding, computed on
      Net Loss-
      basic
              
              
              (0.07
              )
              
              
              (0.07
              )
              
              
              (0.14
              )
              
              
              (0.05
              )-
      fully diluted
              
              
              (0.06
              )
              
              
              (0.07
              )
              
              
              (0.11
              )
              
              
              (0.05
              )Weighted-average
      number of shares of common stock outstanding-
      basic
              
              
              47,139,635
              
              
              
              42,437,055
              
              
              
              47,037,497
              
              
              
              41,522,821-
      fully diluted
              
              
              58,614,563
              
              
              
              42,437,055
              
              
              
              58,512,425
              
              
              
              41,522,821
 
 
 See accompanying notes to unaudited condensed
consolidated financial statements
 
 
  -
4 -
  
 PLAYLOGIC ENTERTAINMENT, INC. AND
      SUBSIDIARIESCONSOLIDATED
      STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
                UnauditedAdditional
              
              
              
              
              
              
              
              
              Accumulated
      Other Comprehensive Loss
              
              
              40%
      non controllingCommon stock
              
              
              Paid-in
              
              
              Deferred
      Compensation
              
              
              Accumulated
              
              
              interest
      inShares
              
              
              Par
      Value
              
              
              Capital
              
              
              deficit
              
              
              PlayV
      Ltd
              
              
              TotalBalances
      at December 31, 2008
              
              
              46,391,275
              
              
              
              46,392
              
              
              
              61,229,130
              
              
              
              580,572
              
              
              
              (60,220,690
              )
              
              
              (3,955,083
              )
              
              
              (371,857
              )
              
              
              (2,691,536
              )Non
      Controlling interest in Joint-Venture
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              74,628
              
              
              
              74,628Common
      stock issued for cash
              
              
              643,360
              
              
              
              643
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              643Common
      stock issued for services
              
              
              105,000
              
              
              
              105
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              105Capital
      contributed to support operations
              
              
              
              
              
              
              
              
              
              
              75,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              75,000Issuing
      costs
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Stock
      options issued pursuant to Employee Compensation Plan
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              136,641
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              136,641Discount
      on debt
              
              
              
              
              
              
              
              
              
              $
              1,293,532
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,293,532Change
      in currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,447,526
              )
              
              
              
              
              
              
              (1,447,526
              )Net
      result for the year
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,724,284
              )
              
              
              
              
              
              
              
              
              
              
              (6,724,284
              )Balances
      at September 30, 2009
              
              
              47,139,635
              
              
              $
              47,140
              
              
              $
              62,597,662
              
              
              $
              717,213
              
              
              $
              (66,944,974
              )
              
              $
              (5,402,609
              )
              
              $
              (297,229
              )
              
              $
              (9,282,797
              )
 
 
 See
accompanying notes to unaudited condensed consolidated financial
statements
 
 
  -
5 -
  
 
 
 
 PLAYLOGIC
      ENTERTAINMENT, INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS9
      months ended September 30,2009
              
              
              2008(Unaudited)
              
              
              (Unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      Loss
              
              $
              (6,724,284
              )
              
              $
              (1,953,495
              )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesDepreciation
              
              
              301,098
              
              
              
              284,234Amortization
      of software development
              
              
              2,034,383
              
              
              
              2,120,432Impairment
      of software development
              
              
              -
              
              
              
              1,000,000Bad
      debt expense
              
              
              -
              
              
              
              19,893Expense
      charges for stock options
              
              
              136,641
              
              
              
              163,767Management
      fees contributed as capital
              
              
              75,000
              
              
              
              75,000Non-cash
      interest charge on warrants
              
              
              483,091
              
              
              
              98,000Change
      in capitalized software development costs
              
              
              (6,938,071
              )
              
              
              (6,267,998
              )(Increase)/
      Decrease in cash attributable to changes in operating assets and
      liabilitiesRestricted
      cash
              
              
              (4,287
              )
              
              
              (227,852
              )Accounts
      receivable - trade and other
              
              
              (4,224,708
              )
              
              
              (1,691,741
              )Inventory
      finished product
              
              
              104,585
              
              
              
              -Prepaid
      expenses and other
              
              
              (2,467,082
              )
              
              
              (363,140
              )Increase
      / (Decrease) inDeferred
      revenues
              
              
              1,737,155
              
              
              
              (153,344
              )Accounts
      payable - trade
              
              
              1,393,708
              
              
              
              (557,807
              )Payroll
      taxes payable
              
              
              (224,761
              )
              
              
              (932,348
              )Other
      current liabilities
              
              
              175,908
              
              
              
              170,974Net
      cash used in operating activities
              
              
              (14,141,625
              )
              
              
              (8,215,425
              )CASH
      FLOWS FROM INVESTING ACTIVITIESCash
      paid to acquire property and equipment
              
              
              (323,809
              )
              
              
              (826,784
              )Net
      cash used in investing activities
              
              
              (323,809
              )
              
              
              (826,784
              )CASH
      FLOWS FROM FINANCING ACTIVITIESPayments
      on bank line of credit
              
              
              -
              
              
              
              (1,089,186
              )Cash
      repaid on short term notes
              
              
              -
              
              
              
              (410,133
              )Principal
      payments on long-term debt
              
              
              (247,219
              )
              
              
              (22,785
              )Cash
      received from shareholder loans
              
              
              15,214,955
              
              
              
              8,209,281Cash
      repaid on shareholder loans
              
              
              -
              
              
              
              (3,850,500
              )Proceeds
      from sales of common stock
              
              
              643
              
              
              
              6,536,568Net
      cash provided by financing activities
              
              
              14,968,379
              
              
              
              9,373,245Effect
      of foreign exchange on cash
              
              
              190,494
              
              
              
              (373,941
              )Increase/(Decrease)
      in Cash
              
              
              693,439
              
              
              
              (42,905
              )Cash
      at beginning of period
              
              
              81,978
              
              
              
              349,464Cash
      at end of period
              
              
              775,417
              
              
              
              306,559Supplemental
      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, 2008 has
been derived from audited financial statements and the accompanying unaudited
condensed consolidated financial statements for the three and nine months ended
September 30, 2009 and 2008 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, 2008.
 
 The
results of operations for the three and nine months ended September 30, 2009 and
2008 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 condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. At September 30, 2009,
the Company had an accumulated deficit of approximately $66.9 million.
 During the nine months ended September 30, 2009, the Company incurred a
net loss of $6.7 million and negative operating cash flows of approximately
$14.1 million. These circumstances raise uncertainties about the Company’s
ability to continue as a going concern.
 
 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 twelve 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). 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**
 ____________
 
 *
$1.46550 and $ 1.4000 at September 30, 2009 and December 31, 2008,
respectively.
 **
Average for the 9 months ended September 30, 2009 was $1.3718
 Average for the 9 months ended September 30, 2008 was $1.5190
 
 Earnings/(Loss) Per
Share .
 Basic
earnings/(loss) per common share is computed by dividing net income(loss) by the
weighted-average number of shares of common stock outstanding for the period.
Basic earnings per share excludes the impact of unvested shares of restricted
stock issued under the Company’s incentive stock compensation
plan.  Diluted earnings per share reflects the potential impact of
common stock options and unvested shares of restricted stock issued under the
Company’s incentive stock compensation plan, and outstanding common stock
purchase warrants. Diluted and basic earnings per share for the three and nine
months ended September 30, 2009 and 2008 are the same because the impact of
shares issuable under the incentive stock compensation plan and common stock
purchase warrants is anti-dilutive after applying the treasury stock method, as
is required by FASB ASC 260 Earnings per Share
..
 
 Recently Issued Accounting
Pronouncements
 In 2008,
the Securities and Exchange Commission (the “SEC”) adopted rule amendments that
replace the category of “Small Business Issuers” with a broader category of
“Smaller Reporting Companies.” Under these rules, a “Smaller Reporting Company”
is a company with a public float less than $75,000,000 (measured at end of
June). Companies that meet this definition are able to elect “scaled disclosure
standards” on an item-by-item or “a-la-carte” basis. With this change, the SEC
has streamlined and simplified reporting for many companies, and has not added
any significant disclosure requirements.
 
 In February 2007, the FASB issued
Statement ASC 825, “The Fair Value Option for Financial Assets and Financial
Liabilities”, or SFAS 159.  SFAS 159 permits companies to choose to
measure many financial instruments and certain other items at fair
value.  It is expected to expand the use of fair value measurements
which is consistent with the Financial Accounting Standards Board’s long-term
measurement objectives for accounting for financial instruments. The
Company adopted this Statement as of January 1, 2009 but has not applied the
fair value option to any eligible assets or liabilities as such. There was no
impact to our financial condition or results of operations from the adoption of
this Statement.
 
 In
December 2007, the FASB issued ASC 805, Business Combinations.This
Statement provides greater consistency in the accounting and financial reporting
of business combinations. It requires the acquiring entity in a business
combination to recognize all assets acquired and liabilities assumed in the
transaction, establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed, and requires the
acquirer to disclose the nature and financial effect of the business
combination. ASC 805 is effective for all fiscal years beginning after
December 15, 2008 (January 1, 2009 for the Company) and interim
periods within those years, with earlier adoption prohibited. We are evaluating
the impact that the adoption of ASC 805 will have on our consolidated financial
position, cash flows and results of operations. The effect will be dependent
upon acquisitions at that time.
 
 In
December 2007, the FASB issued ASC 810, "Noncontrolling Interests in
Consolidated Financial Statements--An Amendment of ARB No. 51, or ASC 810". FASB
ASC 810 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. FASB ASC 810 is effective for fiscal years beginning on or after
December 15, 2008. The Company believes that FASB ASC 810 should not have a
material impact on the consolidated financial position or results of
operations.
 
  -
9 -
  
 
 
 PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
 CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 
 
 In March
2008, the FASB issued ASC 815, "Disclosures about Derivative Instruments and
Hedging Activities" ("ASC 815"). ASC 815 requires companies with derivative
instruments to disclose information that should enable financial-statement users
to understand how and why a company uses derivative instruments, how derivative
instruments and related hedged items are accounted for under FASB Statement No.
133 "Accounting for Derivative Instruments and Hedging Activities" and how
derivative instruments and related hedged items affect a company's financial
position, financial performance and cash flows. ASC 815 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. The adoption of this statement is not expected to have a
material effect on the Company's future financial position or results of
operations.
 
 Also in
May 2008, the FASB issued ASC 944, "Accounting for Financial Guarantee Insurance
Contracts--an interpretation of FASB Statement No. 60" ("ASC 944"). ASC 944
interprets Statement 60 and amends existing accounting pronouncements to clarify
their application to the financial guarantee insurance contracts included within
the scope of that Statement. ASC 944 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and all interim
periods within those fiscal years. As such, the Company is required to adopt
these provisions at the beginning of the fiscal year ended December 31, 2009.
The Company is currently evaluating the impact of ASC 944 on its financial
statements but does not expect it to have an effect on the Company's financial
position, results of operations or cash flows.
 
 In May
2008, the FASB issued ASC 470, "Accounting for Convertible Debt Instruments that
may be Settled in Cash upon Conversion (Including Partial Cash Settlement)"
("ASC 470"). ASC 470 applies to convertible debt securities that, upon
conversion, may be settled by the issuer fully or partially in cash. ASC 470
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity's
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. ASC 470 is effective for financial statements issued for
fiscal years after December 15, 2008, and must be applied on a retrospective
basis. Early adoption is not permitted. 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 June
2008, the FASB issued ASC 260, "Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities" ("ASC 260"). ASC
260 addresses whether instruments granted in share-based payment transactions
are participating securities prior to vesting, and therefore need to be included
in the earnings allocation in computing earnings per share under the two-class
method as described in ASC 260, Earnings per Share. Under the guidance of ASC
260, unvested share-based payment awards that contain non-forfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings-per-share
pursuant to the two-class method. ASC 260 is effective for financial statements
issued for fiscal years beginning after December 15, 2008 and all prior-period
earnings per share data presented shall be adjusted retrospectively. Early
application is not permitted. The Company is assessing the potential impact of
this ASC on the earnings per share calculation.
 
 In June
2008, the FASB ratified ASC 815, "Determining Whether an Instrument (or an
Embedded Feature) is Indexed to an Entity's Own Stock" ("ASC 815"). ASC
815provides that an entity should use a two-step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instrument's contingent exercise and settlement
provisions. ASC 815is effective for financial statements issued for fiscal years
beginning after December 15, 2008. Early application is not permitted. The
Company is assessing the potential impact of this ASC 815on the financial
condition and results of operations.
 
 In April
2009, the FASB issued ASC 805, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination thatArise 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 Eventswhich
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.
  -
10 -
  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
Codificationas 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.
 
 
 NOTE
B - SOFTWARE DEVELOPMENT COSTS
 
 The
following table provides the details of software development costs as of
September 30, 2009 and for the year ended December 31, 2008:
 
 September
      30, 2009
              
              
              December
      31, 2008 (derived from
                audited
                statements)(Unaudited)Beginning
      balance
              
              $
              8,581,034
              
              
              $
              7,285,353Additions
              
              
              6,938,071
              
              
              
              8,032,83215,519,105
              
              
              
              15,318,185Less:
      Amortization
              
              
              (2,034,383
              )
              
              
              (2,237,151
              )Less:
      Impairment charge
              
              
              0
              
              
              
              (4,500,000
              )(2,034,383
              )
              
              
              (6,737,151
              )Total
      software development costs
              
              
              13,484,722
              
              
              
              8,581,034Less:
      current portion
              
              
              (10,761,777
              )
              
              
              (5,179,976
              )Non-current
      portion
              
              $
              2,722,945
              
              
              
              3,401,058
 
 The
amount of software development costs resulting from advance payments and
guarantees to third-party developers was approximately $7.4 million at September
30, 2009. In addition, software development costs at September 30, 2009 included
an amount of $9.8 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 Q4 2010 and further.
 
 
  -
11 -
  PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
 CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 
 
 NOTE
C – RELATED PARTY TRANSACTIONS
 
 Common
stock
 On
February 10, 2009, the Company sold 200,185 shares of its common stock to an
accredited investor based in the Netherlands at nominal value of $0.001 per
share or gross proceeds of $200, pursuant to the terms of a subscription
agreement dated February 10, 2009.
 
 On
February 10, 2009, the Company sold 61,000 shares of its common stock to an
accredited investor based in the Netherlands at nominal value of $0.001 per
share or gross proceeds of $61, pursuant to the terms of a subscription
agreement dated February 10, 2009.
 
 On
February 13, 2009, the Company sold 30,000 shares of its common stock to an
accredited investor based in the Netherlands at nominal value of $0.001 per
share or gross proceeds of $30, pursuant to the terms of a subscription
agreement dated February 13, 2009.
 
 On June
1, 2009, the Company issued 105,000 shares of its common stock for services
provided by the PR and Marketing company the Company hired. This PR and
Marketing company is based in the United States. The shares have a par value of
$0.001 per share.
 
 Stock option
plan
 On
January 23, 2009, the Board of Directors has agreed to grant 1,322,500 options
to key employees. This grant is in accordance with the 2006 approved Employee
Stock Option Plan. The options have an exercise price of $0.60 per share. These
options vest ratably over three years and will expire in 4 years.  The
fair value of the options totaled $47,610 or $0.04 per share, of which $11,462
was recorded during the nine months ended September 30, 2009. The stock
price on the day of grant amounted to $0.25.
 
 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:
 
 Risk-free
      interest rate
              1.3%Dividend
      yield
              0%Volatility
      factor
              47.5%Weighted-average
      expected life
              4
      Years
 
 Loans from
shareholders
 
 Loan
agreement  1
 On
January 23, 2009, the Company entered into two bridge loan agreements with two
principal shareholders based in the Netherlands, pursuant to which the Company
borrowed a principal amount of €1,500,000 (€750,000 each) or $ 2,200,000
($1,100,000 each)).  These loans bear an interest of 10% per annum and
will be paid on a monthly basis. The principle amounts have to be repaid on
December 31, 2009. Under this loan agreement, the Company pledged as a
collateral all Intellectual Property owned by the Company. Concurrent with these
loan agreements, the Company issued to these shareholders warrants to purchase
1,500,000 (750,000 each) shares of the Company’s common stock at an exercise
price of $0.50 per share. The warrants may be exercised starting January 23,
2009 and expire on January 22, 2013.
 
 Loan agreement
2
 On March
16, 2009, the Company entered into two bridge loan agreements with two principal
shareholders based in the Netherlands, pursuant to which the Company borrowed a
principal amount of €250,000 (€125,000 each) or $ 365,000 ($182,500
each).  These loans bear an interest of 10% per annum and will be paid
on a monthly basis. The principle amount was initially to be repaid before the
end of June 2009. As of July 31, 2009 this loan agreement has been renewed and
the repayment date has been extended to September 1, 2009. Under this loan
agreement, the Company pledged as a collateral all Intellectual Property and
receivables owned by the Company. Concurrent with these loan agreements, the
Company issued to these shareholders warrants to purchase 318,182 (159,091 each)
shares of the Company’s common stock at an exercise price of $0.40 per share.
The warrants may be exercised starting July 31, 2009 and expire on July 31,
2013. Upon exercise, the warrants will be settled cashless.
 In
accordance with the contracts, the Company has issued additional 318,182
(159,091 each) cashless warrants at the same conditions as the Company has not
repaid the principle amount to the loan provider on or before September 1, 2009.
The Company has a verbal agreement with the loan providers to extend the term of
the loan to April 1, 2010, and parties are currently working on renewal of the
contract.
 
  -
12 -
  PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
 CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 
 
 Loan agreement
3
 On June
12, 2009, the Company entered into two bridge loan agreements with two principal
shareholders based in the Netherlands, pursuant to which the Company borrowed a
principal amount of €3,900,000 (€1,950,000 each) or $ 5,700,000 ($2,850,000
each)).  These loans bear an interest of 10% per annum and will be
paid on a monthly basis. The principle amounts have to be repaid on September 1,
2009. Under this loan agreement, the Company pledged as collateral all
Intellectual Property and accounts receivable owned by the Company. Concurrent
with these loan agreements, the Company issued to these shareholders warrants to
purchase 4,963,636 (2,481,818 each) shares of the Company’s common stock at an
exercise price of $0.40 per share. The warrants may be exercised starting April
7, 2009 and expire on April 7, 2013. Upon exercise, the warrants will be settled
cashless.
 In
accordance with the contracts, the Company has issued an additional
4,963,636 cashless warrants at the same conditions as the Company has not repaid
the principle amount to the loan provider on or before September 1, 2009. The
Company has a verbal agreement with the loan providers to extend the term of the
loan to April 1, 2010, and parties are currently working on renewal of the
contract.
 
 Loan agreement
4
 On July
30, 2009, the Company entered into two bridge loan agreements with two principal
shareholders based in the Netherlands, pursuant to which the Company borrowed a
principal amount of €1,800,000 (€ 900,000 each) or $ 2,638,000 ($1,319,000
each)).  These loans bear an interest of 10% per annum and will be
paid on a monthly basis. The principle amounts have to be repaid on September 1,
2009. Under this loan agreement, the Company pledged as collateral all
Intellectual Property and accounts receivable owned by the Company. Concurrent
with these loan agreements, the Company issued to these shareholders warrants to
purchase 2,290,908 (1,145,454 each) shares of the Company’s common stock at an
exercise price of $0.40 per share. The warrants may be exercised starting July
30, 2009 and expire on July 30, 2013. Upon exercise, the warrants will be
settled cashless.
 In
accordance with the contracts, the Company has issued an additional
2,290,908 cashless warrants at the same conditions as the Company has not repaid
the principle amount to the loan provider on or before September 1, 2009. The
Company has a verbal agreement with the loan providers to extend the term of the
loan to April 1, 2010, and parties are currently working on renewal of the
contract.
 
 Loan agreement
5
 On August
19, 2009, the Company entered into two bridge loan agreements with two principal
shareholders based in the Netherlands, pursuant to which the Company borrowed a
principal amount of €1,000,000 (€ 500,000 each) or $ 1,465,500 ($ 732,750
each)).  These loans bear an interest of 10% per annum and will be
paid on a monthly basis. The principle amounts have to be repaid on September 1,
2009. Under this loan agreement, the Company pledged as collateral all
Intellectual Property and accounts receivable owned by the Company. Concurrent
with these loan agreements, the Company issued to these shareholders warrants to
purchase 1,272,728 (636,364 each) shares of the Company’s common stock at an
exercise price of $0.40 per share. The warrants may be exercised starting August
19, 2009 and expire on August 19, 2013. Upon exercise, the warrants will be
settled cashless.
 In
accordance with the contracts, the Company has issued an additional
1,272,728 cashless warrants at the same conditions as the Company has not repaid
the principle amount to the loan provider on or before September 1, 2009. The
Company has a verbal agreement with the loan providers to extend the term of the
loan to April 1, 2010, and parties are currently working on renewal of the
contract.
 
 Loan
agreement 6
 On
September 22, 2009, the Company entered into two bridge loan agreements with two
principal shareholders based in the Netherlands, pursuant to which the Company
borrowed a principal amount of €1,550,000 (€ 775,000 each) or $ 2,271,525 ($
1,135,763 each)).  These loans bear an interest of 10% per annum and
will be paid on a monthly basis. The principle amounts have to be repaid on
April 1, 2010. Under this loan agreement, the Company pledged as collateral all
Intellectual Property and accounts receivable owned by the Company. Concurrent
with these loan agreements, the Company issued to these shareholders warrants to
purchase 1,972,726 (986,363 each) shares of the Company’s common stock at an
exercise price of $0.40 per share. The warrants may be exercised starting
September 22, 2009 and expire on September 22, 2013. Upon exercise, the warrants
will be settled cashless.
 
 In
accordance with APB 14, we allocated the debt proceeds between the debt and
detachable stock purchase warrants based on relative fair values. We have
recognized a total discount of all the debts (loans 1 to 6) amounting to
approximately $1,293,532 which will be amortized over the term of the loan.
During the 9 months ended September 30, 2009, $482,671 was amortized as interest
expense in the accompanying consolidated financial statements.
 
 On July 30, 2009, the
Company renewed the terms of six bridge loans that were in
default.
 Two bridge loans with a total principle
amount of €800,000 (€400,000 each), initially signed on November 7, 2008, had a
repayment date of April 1, 2009. As the Company is in default the Company agreed
to renew the contract and change the repayment date to September 1, 2009.
Under this loan agreement, the
Company pledged as collateral all Intellectual Property and accounts receivable
owned by the Company. Concurrent with these loan agreements, the Company issued
to these shareholders warrants to purchase 500,000 (250,000 each) shares of the
Company’s common stock at an exercise price of $0.40 per share. The warrants
have a cashless exercise and have a 4 year term.
 
  -
13 -
  PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
 CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 
 
 Two bridge loans with a total principle
amount of €1,200,000 (€600,000 each), initially signed on December 11, 2008, had
a repayment date of May 1, 2009. As the Company is in default the Company agreed
to renew the contract and change the repayment date to April 1, 2010.
Under this loan agreement, the
Company pledged as collateral all Intellectual Property and accounts receivable
owned by the Company. Concurrent with these loan agreements, the Company issued
to these shareholders warrants to purchase 700,000 (350,000 each) shares of the
Company’s common stock at an exercise price of $0.40 per share. The warrants
have a cashless exercise and have a 4 year term.
 
 Two bridge loans with a total principle
amount of €250,000 (€125,000 each), initially signed on March 16, 2009, had a
repayment date of June 30, 2009. As the Company is in default the Company agreed
to renew the contract and change the repayment date to September 1, 2009.Under this loan agreement,
the Company pledged as collateral all Intellectual Property and accounts
receivable owned by the Company.  Concurrent with these loan
agreements, the Company issued to these shareholders warrants to purchase
318,182 (159,091 each) shares of the Company’s common stock at an exercise price
of $0.40 per share. The warrants may be exercised starting July 31, 2009 and
expire on July 31, 2013. Upon exercise, the warrants will be settled
cashless.
 In
accordance with the contracts, the Company needs to issue an additional 318,182
(159,091 each) cashless warrants at the same conditions if the Company has not
repaid the principle amount to the loan provider on or before September 1,
2009.
 
 The total
amount of bridge loans outstanding as of September 30, 2009 amounts to
€13,800,000 (or $20,200,000). An amount €11,100,000 (or $ 16,250,000) of this
total has been received during the first nine months of 2009.  The
total number of warrants issued in connection with these 2009 loans is
22,763,636. The warrants all have a four year term and have exercise prices of
$0.40 and $0.50.
 
 SUBSEQUENT
EVENTS
 
 On
October 1, 2009, the Company entered into two bridge loan agreements with two
principal shareholders based in the Netherlands, pursuant to which the Company
borrowed a principal amount of €1,600,000 (€800,000 each) or $2,344,800
($1,172,400 each). An amount of  €1,100,000 (or $1,612,000) of this
loan has been received in September 2009 and is therefore included in the
balance sheet. These loans bear an interest of 10% per annum and will be paid on
a monthly basis. The principle amounts have to be repaid before April 1, 2010.
Under this loan agreement, the Company pledged as a collateral all Intellectual
Property and receivables owned by the Company. Concurrent with these loan
agreements, the Company will adjust current outstanding warrants with an
exercise price higher than $0.60 to an exercise price of $0.60 per share. This
will be done for warrants to purchase 870,000 (435,000 each) shares of the
Company’s common stock The warrants may be exercised starting October 1, 2009
and expire on October 1, 2013. Upon exercise, the warrants will be settled
cashless.
 
 On
October 16, 2009, the Company entered into two bridge loan agreements with two
principal shareholders based in the Netherlands, pursuant to which the Company
borrowed a principal amount of € 470,000 (€235,000 each) or $ 688,785 ($344,393
each).  These loans bear an interest of 10% per annum and will be paid
on a monthly basis. The principle amounts have to be repaid before April 1,
2010. Under this loan agreement, the Company pledged as a collateral all
Intellectual Property and receivables owned by the Company. Concurrent with
these loan agreements, the Company will adjust current outstanding warrants with
an exercise price higher than $0.60 to an exercise price of $0.60 per share.
This will be done for warrants to purchase 870,000 (435,000 each) shares of the
Company’s common stock The warrants may be exercised starting October 16, 2009
and expire on October 16, 2013. Upon exercise, the warrants will be settled
cashless.
 
 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.
 
 
  -
14 -
  PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
 CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 
 
 NOTE D
- COMMITMENTS AND CONTINGENCIES
 
 Litigation
 
 The
Company is involved in a few 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 consolidated financial position or results of operations .
 
 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 $400,000 (€ 291,500) for the offices and
$28,250 (€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 $410,000 (€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 $410,000 (€300,000) per year, payable
in quarterly installments.
 
 Future
minimum non-cancelable lease payments on the above leases for office space are
as follows:
 
 September 30,2009
              
              $
              202,5002010
              
              
              820,0002011
              
              
              820,0002012
              
              
              820,0002013
              
              
              405,000Thereafter
              
              
              -Total
              
              $
              3,067,500
 
 Transportation
leases
 The
Company leases 9 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 $12,000.
 
 Future
minimum non-cancelable lease payments on the above transportation leases are as
follows:
 
 September  30,2009
              
              $
              12,0002010
              
              
              48,0002011
              
              
              34,0002012
              
              
              -2013
              
              
              -Thereafter
              
              
              -Total
              
              $
              94,000
 
 Software development
contracts
 The
Company has entered into five (5) 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 $1.5 million through completion.
 
  -
15 -
  
 
 PLAYLOGIC
ENTERTAINMENT, INC. AND SUBSIDIARIES
 CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 
 
 NOTE E
- 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 nine months ended September 30,2009
              
              
              2008(Unaudited)
              
              
              (Unaudited)Europe and United KingdomCustomer
      A *
              
              
              1,533,670
              
              
              
              22.9
              %
              
              
              2,117,511
              
              
              
              25.4
              %Customer
      C
              
              
              1,535,320
              
              
              
              22.9
              %
              
              
              1,354,465
              
              
              
              16.2
              %Customer
      D
              
              
              102,953
              
              
              
              1.5
              %
              
              
              440,823
              
              
              
              5.3
              %Customer
      E
              
              
              40,257
              
              
              
              0.6
              %
              
              
              1,416,842
              
              
              
              17.0
              %Customer
      F
              
              
              42,487
              
              
              
              0.6
              %
              
              
              599,642
              
              
              
              7.2
              %Others
              
              
              569,777
              
              
              
              8.5
              %
              
              
              1,673,494
              
              
              
              20.0
              %3,824,464
              
              
              
              57.1
              %
              
              
              7,602,777
              
              
              
              91.1
              %AsiaOthers
              
              
              0
              
              
              
              0.0
              %
              
              
              32,970
              
              
              
              0.4
              %0
              
              
              
              0.0
              %
              
              
              32,970
              
              
              
              0.4
              %United States & CanadaCustomer
      G
              
              
              61,875
              
              
              
              0.9
              %
              
              
              714,365
              
              
              
              8.6
              %Customer
      H
              
              
              2,815,343
              
              
              
              42.0
              %
              
              
              
              
              
              
              0.0
              %others
              
              
              0
              
              
              
              0.0
              %
              
              
              
              
              
              
              0.0
              %2,877,218
              
              
              
              42.9
              %
              
              
              714,365
              
              
              
              8.6
              %Total
              
              
              6,701,682
              
              
              
              100.0
              %
              
              
              8,350,112
              
              
              
              100.0
              %
 
  -
16 -
  
 
 
 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 those contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2008, in the section entitled "Risk Factors," and
the Company's other periodic filings with the SEC. 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.
 
 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, 2008.
 
 Overview
 
 Playlogic
is a publisher of interactive entertainment products, such as video game
software and other digital entertainment products. We publish for most 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.
 
 As a
publisher, we are responsible for publishing, production, localization, QA and
testing, PR and marketing, manufacturing and sales of our products. Playlogic’s
products are sold to distributors who supply retailers worldwide. Furthermore,
we sell directly to consumers through online distribution channels with various
partners.
 
 Development
studios throughout the world help create the games which are published by
Playlogic. One of these studios is our fully owned subsidiary, Playlogic Game
Factory B.V., located in The Netherlands. Other independent studios in various
countries develop our games under Software Development Agreements (SDA). These
development contracts generally provide that we pay an advance on future
royalties earned upon achievement of milestones successfully completed and
delivered. In addition, we license the rights of existing Playlogic IP to other
development studios who then adapt these products to the specifications and
abilities of other (console) platforms.
 
 Studios
and developers contact us daily requesting financing and publishing of their
games or concepts. We evaluate each of these offers based on several factors,
including sales potential of concept or product, technology & tools used,
track record and project management of the studio.
 
 We select
which games we develop based on our analysis of consumer buying trends and
behavior and our experience with similar or competitive products. Once we select
a game to develop, we then assign a development studio, based upon its
qualifications, previous experience and prior performance. Once developed, we
distribute our games worldwide through existing distribution channels with
global or local distributors. When appropriate we have the ability to release
our titles simultaneously across a range of hardware formats to maximize overall
sales for a particular product with a minimum augmentation in development time
and resources.
 
 We
believe that greater online functionalities, applications and  digital
distribution on the new platforms will improve revenue margins and encourage
further industry growth. In addition, according to DFC Intelligence, new sales
potential, revenue opportunities from wireless gaming, online console gaming,
and in-game advertising are expected to grow substantially.
 
 Industry
Overview
 
 Over the
past two decades, the video game industry has advanced and become a valuable
contributor to the entertainment consumption business. The estimated break-down
of gamers in US households is 61% male and 39% female, with 47% of gamers
between 13 and 24 years old, 30% between 25 and 39 years old; and 23% over 40
years old.
 
  -
17 -
  Worldwide,
the video game market is projected to increase from $26.2 billion in 2004 to
$46.5 billion in 2010, growing at an 11.4 percent compound annual rate. Asia
Pacific, the largest market at $9.6 billion in 2004, is projected to maintain
its dominance, growing at a 12.3 percent compound annual rate through 2010 to
reach $17.4 billion. The United States has the second largest market and is
expected to grow from $8.4 billion in 2005 to $13.0 billion in 2010, an 8.9
percent compounded annual according to Company Annual Reports of Crandell &
Sidak. (WedBush Morgan).
 
 The video
game market reflects consumer spending on console games (including handheld
games), personal computer (PC) games, online games, and wireless games. The
category excludes spending on the hardware and accessories used to play the
games.
 
 With the
launch of the Nintendo Wii and Sony PlayStation 3, the gaming industry had a
record-breaking year in 2006. According to NPD Group's industry tracking sales
figures, overall profits are up 19 percent, and the combined hardware, software,
and accessories sales reached $12.5 billion in the U.S. alone, making it the
highest grossing year in the video game industry to date.
 
 Market
Trends – Worldwide
 
 The
fastest-growing segment during the next five years, global video game spending
is expected to increase significantly over the next years. By 2009, online and
wireless will be major distribution channels, spurred by broadband penetration
and new mobile phones that will be used as much for entertainment as for
communication. The PC game market will shrink, and console game spending will
grow as next generation consoles are introduced.
 
 The video
game market was in a transition year in 2005, awaiting the introduction of the
next-generation consoles. Growth slumped to 3.3 percent, the slowest increase
during the past five years. The next generation of consoles and recently
introduced handheld games will spur the console/handheld market in the U.S.,
EMEA, Asia Pacific, and Canada, while PC games will continue to decline or see
little growth in the U.S. and EMEA. The introduction of new wireless phones
capable of downloading games will boost the wireless game market in the U.S.,
EMEA, Asia Pacific, and Canada. Overall, the video game market will expand at an
11.4 percent CAGR to $46 billion in 2010 from $27 billion in 2005.
 
 Console
Installed Base
 
 Since the
introduction of PlayStation 2 in 2000, the console has sold over 140 million
units worldwide according to games industry. biz. The PlayStation 3 has been
introduced to the market in the second half of 2006. Microsoft introduced its
next generation console, the Xbox 360, in November 2005. Playlogic will continue
development of PlayStation2 titles, because of their large installed base of
over 140 million units.
 
 Microsoft’s
Xbox360 has sold 32 million units so far. As of September 30, 2009, Sony has
shipped approximately 26 million Playstation 3 units worldwide. Nintendo’s
next generation console, called ‘Wii’ has sold more than 55 million units so
far.
 
 Nintendo
Dual Screens (‘Nintendo DS’) and PlayStation Portable (‘PSP’) were both
successfully introduced to the market. The sales volume of the Nintendo DS
reached 110 million units by September 30, 2009, and PSP reached the sales
volume of 50 million units sold.
 
 PC
Games
 
 Playlogic
will continue to also release PC games since, in comparison to next generation
consoles games, these products are less expensive to develop, address a very
wide target audience and contribute significant better margins. Furthermore
Playlogic will focus on new successful platforms like the Nintendo DSi and
Nintendo Wii.
 
 Consumer
Facts
 
 Thirty
percent of most frequent game players are under eighteen years old while
twenty-six percent of most frequent game players are between 18 and 35 years
old. Forty-four percent of most frequent game players are over 35 years old.
Forty percent of most frequent console game players are under eighteen years old
while thirty-five percent of most frequent game players are between 18 and 35
years old. Twenty-five percent of most frequent console game players are over 35
years old. Thirty-eight percent of game players are women. Women age 18 or older
represent a significantly greater portion of the game-playing population (30%)
than boys age 17 or younger (23%).The average adult woman plays games 7.4 hours
per week.  The average adult man plays 7.6 hours per week. Though
males spend more time playing than do females, the gender/time gap has narrowed
significantly.
 
 Females
are being significantly attracted to playing certain online multi-user video
games that offer a more communal experience, and a small hardcore group of young
females are playing aggressive games that are usually thought of as being
"traditionally male" games. The most loyal fan-base is reported to be for large
role-playing games  (Nielsen Active Gamer Study).
 
 According
to the ESRB almost 41% of video and PC gamers are women.
  -
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 2009
  -
19 -
  
 Under
      DevelopmentFairytale
      Fights
              
              Playlogic
      Game Factory (NL)
              
              PS3,
      Xbox360, PC
              
              Q4
      2009Crazy
      Garage
              
              White
      Birds
              
              Wii,
      PSN, PC
              
              Q1
      2010The
      Strategist
              
              Humagade/Canada
              
              Wii,
      PSN, XBLA, PC
              
              Q1
      2010Zooloretto
              
              White
      Bear (NL)
              
              PC,
      Wii, DS
              
              Q1
      2010Young
      Archeologist
              
              White
      birds
              
              Wii,
      PC
              
              Q1
      2010Obscure
      2
              
              Hydravision
      (F)
              
              DSi
              
              Q1
      2010Undisclosed
      Title
              
              TBA
              
              PS3,
      Xbox360, PC
              
              Q3/Q4
      2010Undisclosed
      Title
              
              TBA
              
              PS3,
      Xbox360, PC
              
              Q3/Q4
      2010
 _______________
  1       Released
in the US only
  The games
industry is currently in a transition period. The current and Next Gen consoles
(Xbox360, PlayStation 3, Wii) and DS platforms have broadened the market,
appealing to an even larger mass consumer audience than ever before, providing
increased publishing opportunities. The investments in next generation platforms
are however larger than for the previous generation platforms. Playlogic has
created a healthy balance between games available for the current and the next
generation platforms.
 
 Material
agreements
 
 During
the nine months ended September 30, 2009, the Company entered into a number of
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, 2008 (the “2008 Form 10-K”). There have been no
material changes in our existing accounting policies from the disclosures
included in our 2008 Form 10-K.
 
 Recently
Issued Accounting Pronouncements
 
 In 2008,
the Securities and Exchange Commission (the “SEC”) adopted rule amendments that
replace the category of “Small Business Issuers” with a broader category of
“Smaller Reporting Companies.” Under these rules, a “Smaller Reporting Company”
is a company with a public float less than $75,000,000 (measured at end of
June). Companies that meet this definition are able to elect “scaled disclosure
standards” on an item-by-item or “a-la-carte” basis. With this change, the SEC
has streamlined and simplified reporting for many companies, and has not added
any significant disclosure requirements.
 
 In February 2007, the FASB issued
Statement ASC 825, “The Fair Value Option for Financial Assets and Financial
Liabilities”, or SFAS 159.  SFAS 159 permits companies to choose to
measure many financial instruments and certain other items at fair
value.  It is expected to expand the use of fair value measurements
which is consistent with the Financial Accounting Standards Board’s long-term
measurement objectives for accounting for financial instruments. The
Company adopted this Statement as of January 1, 2009 but has not applied the
fair value option to any eligible assets or liabilities as such. There was no
impact to our financial condition or results of operations from the adoption of
this Statement.
 
 In
December 2007, the FASB issued ASC 805, Business Combinations.This
Statement provides greater consistency in the accounting and financial reporting
of business combinations. It requires the acquiring entity in a business
combination to recognize all assets acquired and liabilities assumed in the
transaction, establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed, and requires the
acquirer to disclose the nature and financial effect of the business
combination. ASC 805 is effective for all fiscal years beginning after
December 15, 2008 (January 1, 2009 for the Company) and interim
periods within those years, with earlier adoption prohibited. We are evaluating
the impact that the adoption of ASC 805 will have on our consolidated financial
position, cash flows and results of operations. The effect will be dependent
upon acquisitions at that time.
 
 In
December 2007, the FASB issued ASC 810, "Noncontrolling Interests in
Consolidated Financial Statements--An Amendment of ARB No. 51, or ASC 810". FASB
ASC 810 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. FASB ASC 810 is effective for fiscal years beginning on or after
December 15, 2008. The Company believes that FASB ASC 810 should not have a
material impact on the consolidated financial position or results of
operations.
  -
20 -
  In March
2008, the FASB issued ASC 815, "Disclosures about Derivative Instruments and
Hedging Activities" ("ASC 815"). ASC 815 requires companies with derivative
instruments to disclose information that should enable financial-statement users
to understand how and why a company uses derivative instruments, how derivative
instruments and related hedged items are accounted for under FASB Statement No.
133 "Accounting for Derivative Instruments and Hedging Activities" and how
derivative instruments and related hedged items affect a company's financial
position, financial performance and cash flows. ASC 815 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. The adoption of this statement is not expected to have a
material effect on the Company's future financial position or results of
operations.
 
 Also in
May 2008, the FASB issued ASC 944, "Accounting for Financial Guarantee Insurance
Contracts--an interpretation of FASB Statement No. 60" ("ASC 944"). ASC 944
interprets Statement 60 and amends existing accounting pronouncements to clarify
their application to the financial guarantee insurance contracts included within
the scope of that Statement. ASC 944 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and all interim
periods within those fiscal years. As such, the Company is required to adopt
these provisions at the beginning of the fiscal year ended December 31, 2009.
The Company is currently evaluating the impact of ASC 944 on its financial
statements but does not expect it to have an effect on the Company's financial
position, results of operations or cash flows.
 
 In May
2008, the FASB issued ASC 470, "Accounting for Convertible Debt Instruments that
may be Settled in Cash upon Conversion (Including Partial Cash Settlement)"
("ASC 470"). ASC 470 applies to convertible debt securities that, upon
conversion, may be settled by the issuer fully or partially in cash. ASC 470
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity's
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. ASC 470 is effective for financial statements issued for
fiscal years after December 15, 2008, and must be applied on a retrospective
basis. Early adoption is not permitted. 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 June
2008, the FASB issued ASC 260, "Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities" ("ASC 260"). ASC
260 addresses whether instruments granted in share-based payment transactions
are participating securities prior to vesting, and therefore need to be included
in the earnings allocation in computing earnings per share under the two-class
method as described in ASC 260, Earnings per Share. Under the guidance of ASC
260, unvested share-based payment awards that contain non-forfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings-per-share
pursuant to the two-class method. ASC 260 is effective for financial statements
issued for fiscal years beginning after December 15, 2008 and all prior-period
earnings per share data presented shall be adjusted retrospectively. Early
application is not permitted. The Company is assessing the potential impact of
this ASC on the earnings per share calculation.
 
 In June
2008, the FASB ratified ASC 815, "Determining Whether an Instrument (or an
Embedded Feature) is Indexed to an Entity's Own Stock" ("ASC 815"). ASC
815provides that an entity should use a two-step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instrument's contingent exercise and settlement
provisions. ASC 815is effective for financial statements issued for fiscal years
beginning after December 15, 2008. Early application is not permitted. The
Company is assessing the potential impact of this ASC 815on the financial
condition and results of operations.
 
 In April
2009, the FASB issued ASC 805, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination thatArise 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 Eventswhich
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
855is 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.
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  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
Codificationas 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.
 
 Results of
Operations
 
 Three
and nine months ended September 30, 2009 compared to three and nine months ended
September 30, 2008
 
 Net sales . Net sales for the
nine months ended September 30, 2009 were $6,701,682 as compared to $9,418,489
for the nine months ended September 30, 2008. This decrease of $2,716,807 or 28%
in revenue is primarily related to the release of fewer number of titles
compared to 2008. For the three months ended September 30 the net revenue was
$2,019,382 in 2009 compared to $1,068,377 in the same period 2008. This increase
of $951,005 or 89% is caused by the fact that we have released more titles in
the third quarter of 2009 than the third quarter of 2008.
 
 Gross Profit .Gross profit
totaled $1,737,632 for the nine months ended September 30, 2009. For the nine
months ended September 30, 2008, gross profit totaled $4,642,009. This decrease
is caused by the fact that 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. Furthermore, the Company has shortened the
lifecycle per game on which the amortization is calculated. Therefore in some
cases straight line amortization could exceed the percentage of sales
amortization for a certain period. For the three months ended September 30 the
gross profit was $33,108 in 2009 compared to $264,929 in the same period
2008. The decrease of $231,821 is also due to the fact described
above.
 
 Selling, Marketing, General and
Administrative Expenses. Selling, marketing, general and administrative
expenses totaled $6,645,614, for the nine months ended September 30, 2009. For
the nine months ended September 30, 2008, selling, general and administrative
expenses totaled $4,697,197. This represents an increase
of  $1,948,417 or 42%. This increase in selling, general and
administrative expenses is due to higher spending in marketing expenses, such as
trade shows, but also game by game marketing. We presented our 2009 line up at
the E3 trade show in Los Angeles in June 2009 and at the GamesCom in
Cologne in August 2009. In the three months ended September 30, 2009 the
Selling, Marketing, General & Administrative expenses amounted to $2,518,430
compared to $1,850,293 in 2008.  This represents an increase of
$668,137 compared to prior year. This is due to the reason mentioned
above.
 
 Research and Development .
Research and development expenses totaled $404,442 for the nine months ended
September 30, 2009. For the nine months ended September 30, 2008, research and
development totaled $301,031. This represents an increase of $103,411 or 34%.
This increase is due to the fact that our in-house studio is focusing on the
development of a game to be released in Q2 2011. For the three months ended
September 30, 2009, the Research and Development expenses amounted to $307,698
compared to $125,589 in the same period 2008. This increase is also due to the
fact that one in-house studio is focusing on the development of a game to be
released in Q2 2011. Furthermore, the studio is investing time in the
development of future downloadable content.
 
 Depreciation . Depreciation
expenses totaled $301,098 for the nine months ended September 30, 2009. For the
nine months ended September 30, 2008, the depreciation expense totaled $284,234.
The increase is due to new investments made due to the move of the Company’s
headquarters during 2008. Mainly investments in leasehold improvement and
furniture have been made. For the three months ended September 30, 2009 the
depreciation amounted $93,628 compared to $127,829 in the same period 2008. This
decrease is due to the fact that some fixed assets of our in-house studio have
been fully depreciated during the third quarter of 2009.
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22 -
  
 Interest Expense .Interest
expense totaled $999,971 for the nine months ended September 30, 2009. For the
nine months ended September 30, 2008, interest expense totaled $259,890. This
represents an increase of $740,081. This increase in interest expense is
primarily due to the increase of interest bearing short term loans during the
year.  Also, the Company issued warrants in connection with these
loans.  The amortization of the debt discount is recorded as interest
expense (expenses amount to $483,091 for the first nine months of 2009 compared
to $98,000 for the same period in 2008. These expenses are shown on a separate
line in the P&L). For the three months ended September 30, 2009 the interest
expense amounted to $493,069 compared to $191,172 in the same period 2008. This
increase is caused by the same facts as described above.
 
 Net Result. Our net loss was
$6,724,284 for the nine months ended September 30, 2009. For the nine months
ended September 30, 2008, the net loss totaled $1,953,495. The decrease in the
net result is due to the lower sales in the first nine months of 2009 as
disclosed above. Furthermore, the need to spend more money on PR and Marketing
of the products has led to higher costs. For the three months ended September
30, 2009 the net loss amounted to $3,384,552 compared to a net loss of
$2,994,301 in the same period 2008. The decrease in the result is due to
increased expenses in PR and Marketing as well as a lower gross margin due to
higher cost of goods due to console games as opposed to PC titles.
 
 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 $(1,447,527) for the nine months ended
September 30, 2009 and $(975,302) for the nine months ended September 30, 2008.
For the three months ended September 30, 2009 the comprehensive income amounted
to $(1,082,831) compared to $(104,667) in the same period 2008. 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 September 30, 2009 our cash balance was $775,416.
 
 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
September 30, 2009 was $4,736,634.
 
 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
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 nine months ended September
30, 2009, our accumulated foreign currency translation adjustment loss was
approximately $5.4 million.
 
 
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23 -
  
 
 
 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 September 30, 2009 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
third quarter of 2009, 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
 
 In June
2007, Playlogic Entertainment Inc. was sued in class action before the US
district court in Manhattan, with respect to alleged damage as a result of copy
protection software included in Age of Pirates – Caribbean Tales. We do not
foresee any liability in this matter, as plaintiffs have clearly sued the wrong
company and the wrong entity. Playlogic acts only as a publisher of the game and
therefore is not liable for possible faults in production or distribution.
Moreover, as far as any claim could be brought against Playlogic, it would be
the Dutch subsidiary Playlogic International NV, with its statutory seat in
Amsterdam, The Netherlands, that would have to be sued. As a consequence, the
pending case should fail on both grounds and any new action against the Dutch
subsidiary would have to be brought before the Dutch courts that are even more
likely than the US courts to reject class actions like this.
 
 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 2008 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,
2008.
 
 
 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.
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 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.
 
 
 
  -
25 -
  
 
 
 
 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:
      November 18,  2009
              By:
              /s/ Willem
      M. SmitWillem
      M. Smit
                Chief
      Executive Officer
 
 
 
 
 
 
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26 -
  
 
 
 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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