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| PDOS.OB > SEC Filings for PDOS.OB > Form 10-Q on 19-Aug-2009 | All Recent SEC Filings |
19-Aug-2009
Quarterly Report
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. You should read statements that contain these words carefully because they:
·discuss our future expectations;
·contain projections of our future results of operations or of our financial condition; and ·state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there may be events in the future that we are not able to accurately predict or over which we have no control. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."
GENERAL
We are a comics-based entertainment company. We own the rights to a library of over 5,600 of comic book characters, which we adapt and produce for film, television and all other media. Our library contains characters in a full range of genre and styles. With deals in place with film studios and media players, our management believes we are positioned to become a leader in the creation of new content across all media.
We are focused on adding titles and expanding our library with the primary goal of creating new franchise properties and characters. In addition to in-house development and further acquisitions, we are developing content with professionals outside the realm of comic books. We have teamed up with screenwriters, producers, directors, movie stars, and novelists to develop entertainment content and potential new franchise properties. We believe our core brand offers a broader range of storylines and genres than the traditional superhero-centric genre. Management believes this approach is maintained with Hollywood in mind, as the storylines offer the film industry fresh, high-concept brandable content as a complimentary alternative to traditional super hero storylines.
Over the next several years, we are working to become the leading independent comic book commercialization producer for the entertainment industry across all platforms including film, television, direct-to-home, publishing, and digital media, creating merchandising vehicles through all retail product lines. Our management believes this will allow us to maximize the potential and value of our owned content creator relationships and acquisitions, story development and character/franchise brand-building capabilities while keeping required capital investment relatively low.
Set forth below is a discussion of the financial condition and results of operations of Platinum Studios, Inc. (the "Company", "we", "us," and "our") for the three and six months ended June 30 , 2009 and 2008. The following discussion should be read in conjunction with the information set forth in the consolidated financial statements and the related notes thereto appearing elsewhere in this report.
RESULTS OF CONSOLIDATED OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 2009 COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2008
NET REVENUE (UNAUDITED)
Net revenue for the three and six months ended June 30, 2009 was $86,523 and $156,091, respectively compared to $376,885 and $556,267 for the three and six months ended June 30, 2008, respectively. Currently the Company derives most of its revenue from options to purchase rights, the purchase of rights to properties and first look deals. This type of revenue can vary significantly between quarters and years. The revenues for the three and six months ended June 30, 2009 primarily represented purchased rights revenue from two customers. The revenues for the three months ended June 30, 2008 represented $297,695 in purchased rights revenue from two customers. The revenues for the six months ended June 30, 2008 represented $397,695 in purchased rights revenue from three customers.
Cost of revenues
For the three and six months ended June 30, 2009 cost of revenues were $10,000 compared to $136,265 and $203,838 for the three and six months ended June 30, 2008. The decrease is primarily due royalty fees paid in the third quarter of 2008 combined with the elimination of printed comics due to cash conservation initiatives.
Operating expenses
Operating expenses decreased $725,531 or 59% for the three months ended June 30, 2009 to $495,583, as compared to $1,221,114 for the three months ended June 30, 2008. The decrease was primarily due to decreased payroll and contractor costs. Operating expenses decreased $1,266,471 or 55% for the six months ended June 30, 2009 to $1,036,771, as compared to $2,303,742 for the six months ended June 30, 2008.The decrease was due to decreases in advertising costs, accounting fees, payroll and contractor costs as the Company has worked to stream line its business model to conserve cash while being able to make necessary expenditures to ensure the growth of the Company.
Research and development costs decreased $98,548 or 68% for the three months ended June 30, 2009 to $47,126 as compared to $145,674 for the three months ended September 30, 2008. The decrease was primarily due to decreased artwork expense, salary expense and consulting fees. Research and development costs decreased $273,179 or 76% for the six months ended June 30, 2009 to $85,048 as compared to $358,227 for the six months ended June 30, 2008. The decrease was primarily due to decreased artwork expense, consulting fees and legal fees.
Stock option expense
Stock option expense for the three months ended June 30, 2009 was $0 compared to $6,653 for the same period in 2008. Stock option expense for the six months ended June 30, 2009 was $100,947 compared to $3,383,345 for the same period in 2008. This expense was due to the granting of options as part of the employee incentive plan. The majority of these options vested at the time of the grant, resulting in a significant non-cash expense for the first quarter of 2008. The Company does not anticipate additional expense of this magnitude in future quarters.
Depreciation and amortization
For the three and six months ended June 30, 2009 depreciation and amortization was $38,403 and $81,395, respectively, compared to $43,122 and $87,461 for the three and six months ended June 30, 2008.
Gain on settlement of debt
The company recorded a gain on settlement of debt of $481,968 for the six months ended June 30, 2009 and a loss on settlement of debt three months ended June 30, 2009 of $30,642. This net gain was primarily due to the final payment due Wowio former partners, partially offset by losses incurred in the settlement of accounts payable and notes payable through the issuance of common stock.
As a result of the foregoing, the net loss decreased by $543,651 for the three months ended June 30, 2009 to $807,451 and decreased by $4,928,195 for the six months ended June 30, 2009 to $1,082,504 as compared to the same periods in 2008.
LIQUIDITY AND CAPITAL RESOURCES (UNAUDITED)
Net cash used in operations during the six months ended June 30, 2009 was $1,700,946.
Net cash used by investing activities was $12,857,404 for the three months ended June 30, 2009, primarily due to the production of the film "Dead of Night".
Net cash provided by financing activities was $14,587,712 for the six months ended June 30, 2009, primarily attributed to financing secured for the production of the film "Dead of Night".
MARKET RISKS
We conduct our operations in primary functional currencies: the United States dollar, the British pound and the Australian dollar. Historically, neither fluctuations in foreign exchange rates nor changes in foreign economic conditions have had a significant impact on our financial condition or results of operations. We currently do not hedge any of our foreign currency exposures and are therefore subject to the risk of exchange rate fluctuations. We invoice our international customers primarily in U.S. dollars, except in the United Kingdom and Australia, where we invoice our customers primarily in British pounds and Australian dollars, respectively. In the future we anticipate billing certain European customers in Euros, though we have not done so to date.
We are exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation and as our foreign currency consumer receipts are converted into U.S. dollars. Our exposure to foreign exchange rate fluctuations also arises from payables and receivables to and from our foreign subsidiaries, vendors and customers. Foreign exchange rate fluctuations did not have a material impact on our financial results in the six months ended June 30, 2009 or in the years ended December 31, 2008, 2007 and 2006.
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. We place our cash and cash equivalents with high credit quality institutions to limit credit exposure. We believe no significant concentration of credit risk exists with respect to these investments.
Concentrations of credit risk with respect to trade accounts receivable are limited due to the wide variety of customers who are dispersed across many geographic regions.
GOING CONCERN
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred significant losses which have resulted in an accumulated deficit of $21,792,582 as of June 30, 2009. The Company plans to seek additional financing in order to execute its business plan, but there is no assurance the Company will be able to obtain such financing on terms favorable to the Company or at all. These items raise
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
REVENUE RECOGNITION. Revenue from the licensing of characters and storylines ("the properties") owned by the Company are recognized in accordance with guidance provided in Securities and Exchange Commission Staff Accounting Bulletin No. 104 "Revenue Recognition" (an amendment of Staff Accounting Bulletin No. 101 "Revenue Recognition") ("SAB 104"). Under the SAB 104 guidelines, revenue is recognized when the earnings process is complete. This is considered to have occurred when persuasive evidence of an agreement between the customer and the Company exists, when the properties are made available to the licensee and the Company has satisfied its obligations under the agreement, when the fee is fixed or determinable and when collection is reasonably assured. The Company derives its licensing revenue primarily from options to purchase rights, the purchase of rights to properties and first look deals. For option agreements and first look deals that contain non-refundable payment obligations to us, we recognize such non-refundable payments as revenue at the inception of the agreement and receipt of payment, prior to the collection of any additional amounts due, provided all the criteria for revenue recognition under SAB 104 have been met. First look deals that have contingent components are deferred and recognized at the later of the expiration of the first look period or in accordance with the terms of the first look contract. For licenses requiring material continuing involvement or performance based obligations, by the Company, the revenue is recognized as and when such obligations are fulfilled. The Company records as deferred revenue any licensing fees collected in advance of obligations being fulfilled or if a licensee is not sufficiently creditworthy, the Company will record deferred revenue until payments are received. License agreements typically include reversion rights which allow the Company to repurchase property rights which have not been used by the studio (the buyer) in production within a specified period of time as defined in the purchase agreement. The cost to repurchase the rights is generally based on the costs incurred by the studio to further develop the characters and story lines.
CHARACTER DEVELOPMENT COSTS. Character development costs consist primarily of costs to acquire properties from the creator, development of the property using internal or independent writers and artists, and the registration of a property for a trademark or copyright. These costs are capitalized in the year incurred if the Company has executed a contract or is negotiating a revenue generating opportunity for the property. If the property derives a revenue stream that is estimable, the capitalized costs associated with the property are expensed as
On June 12, 2008, the Company received a valuation of its intellectual property which consists of a library of comic characters. The valuation provides that the fair market value of a 100% equity interest in the intellectual property held and controlled by the Company under a going-concern premise is $150,038,000. The valuation was conducted by Sanli Pastore & Hill, Inc. ("SP&H") at the request of the Company. In performing the valuation SP&H used the American Society of Appraisers definition of fair market value.
PURCHASED INTANGIBLE ASSETS AND LONG-LIVED ASSETS. Intangible assets are capitalized at acquisition costs and intangible assets with definite lives are amortized on the straight-line basis. The Company periodically reviews the carrying amounts of intangible assets and property in conformance with the Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). Under SFAS 144, long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, the impairment charge to be recognized is measured by the excess of the carrying amount over the fair value of the asset.
ADVERTISING COSTS. Advertising costs are expensed the later of when incurred or when the advertisement is first run. For the three and six months ended June 30, 2009 advertising expenses were $0. For the three and six ended June 30, 2008 advertising expenses were $11,935 and $47,510, respectively.
RESEARCH AND DEVELOPMENT. Research and development costs, primarily character development costs and design not associated with an identifiable revenue opportunity, are charged to operations as incurred. For the three and six months ended June 30, 2009 research and development expenses were $47,126 and $85,048, respectively. For the three and six months ended June 30, 2008 research and development expenses were $145,674 and 358,227, respectively.
INCOME TAXES. From inception thru September 14, 2006 the Company operated as a limited liability company and elected to be taxed similar to a partnership. Accordingly, each member was responsible for reporting its respective share of the Company's net income or loss for Federal and California income tax purposes and the Company did not pay Federal income tax. From September 15, 2006 forward the Company has accounted for income taxes using the liability method, whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company was subject to an annual minimum tax of $800 and a fee based on gross receipts in California from inception through September 14, 2006.
A description of the notes is as follows:
May 6, 2009 Secured Debt - The May 6, 2009 Secured Debt has an aggregate
principal amount of $2,400,000, and is convertible into shares of the Company's
common stock at a conversion price of $0.048. The May 6, 2009 Secured Debt bears
interest at the rate of eight percent per annum. Upon the occurrence of an event
of default, the May 6, 2009 Secured Debt bears interest at the rate of ten
percent per annum. Interest is payable upon the expiration of the notes on May
6, 2010. The original principal amount of $2,400,000 is to be repaid upon the
expiration of the notes on May 6, 2010. The Company may prepay the notes at any
time. The May 6, 2009 Secured Debt has the following features that can be
considered to be embedded derivatives: (i) the conversion feature of the notes,
(ii) a holder's right to force a redemption of the Notes upon an event of
default, and, (iii) the increased interest rate upon an event of default. In
connection with this debt the Company also issued warrants to purchase
25,000,000 shares of the Company's common stock for $0.048 per share.
June 3, 2009 Secured Debt - The June 3, 2009 Secured Debt has an aggregate
principal amount of $1,350,000, and is convertible into shares of the Company's
common stock at a conversion price of $0.038. The June 3, 2009 Secured Debt
bears interest at the rate of eight percent per annum. Upon the occurrence of an
event of default, the June 3, 2009 Secured Debt bears interest at the rate of
ten percent per annum. Interest is payable upon the expiration of the notes on
June 3, 2010. The original principal amount of $1,350,000 is to be repaid upon
the expiration of the notes on June 3, 2010. The Company may prepay the notes at
any time. The June 3, 2009 Secured Debt has the following features that can be
considered to be embedded derivatives: (i) the conversion feature of the notes,
(ii) a holder's right to force a redemption of the Notes upon an event of
default, and, (iii) the increased interest rate upon an event of default. In
connection with this debt the Company also issued warrants to purchase
14,062,500 shares of the Company's common stock for $0.038 per share.
June 3, 2009 Unsecured Debt - The June 3, 2009 Unsecured Debt has an aggregate
principal amount of $544,826, and is convertible into shares of the Company's
common stock at a conversion price of $0.048. The June 3, 2009 Unsecured Debt
bears interest at the rate of eight percent per annum. Upon the occurrence of an
event of default, the June 3, 2009 Unsecured Debt bears interest at the rate of
ten percent per annum. The Company is required to make payments of $29,687.50
per month. The monthly payments are to be applied first to interest and second
to principal. The remaining principal amount is to be repaid upon the expiration
of the note on June 3, 2010. The Company may prepay the note at any time. The
June 3, 2009 Unsecured Debt has the following features that can be considered to
be embedded derivatives: (i) the conversion feature of the notes, (ii) a
holder's right to force a redemption of the Notes upon an event of default, and,
(iii) the increased interest rate upon an event of default.
A description of the Warrants is as follows:
1) The May 6, 2009 warrant entitles the holder to purchase up to 25,000,000 shares of the Company's common stock at a price of $0.048 per share. The May 6, 2009 warrant is exercisable up until May 6, 2019. The May 6, 2009 warrant shall expire and no longer be exercisable upon a change in control. The exercise price and the number of shares underlying the warrant is subject to anti-dilution adjustments from time to time if the Company issues common stock at below the exercise price at that time for the warrants.
2) The June 3, 2009 warrant entitles the holder to purchase up to 14,062,500 shares of the Company's common stock at a price of $0.038 per share. The June 3, 2009 warrant is exercisable up until June 3, 2019. The June 3, 2009 warrant shall expire and no longer be exercisable upon a change in control. The exercise price and the number of shares underlying the warrant is subject to anti-dilution adjustments from time to time if the Company issues common stock at below the exercise price at that time for the warrants.
In determining the fair market value of the Warrants, we used the binomial model with the following significant assumptions: exercise price $0.038 - $0.048, trading prices $0.04 - $0.042, expected volatility 115.6% - 116.2%, expected life of 60 months, dividend yield of 0.00% and a risk free rate of 3.2% - 3.56%. The fair value of these warrants has been recorded as part of the debt discount as discussed above as well as being recognized as a derivative liability. The derivative liability will be re-valued at each reporting date with changes in value being recognized as part of current earnings.
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