10-Q 1 interplay_10q-093010.htm FORM 10-Q interplay_10q-093010.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2010
 
or
 
o     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
Commission File Number 0-24363
 
Interplay Entertainment Corp.
(Exact name of the registrant as specified in its charter)
 
Delaware
33-0102707
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
12301 Wilshire Blvd, Los Angeles, California  90025
(Address of principal executive offices)
 
(310) 979-7070
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. 
 
Large accelerated filer o     Accelerated filer o     Non- accelerated filer x     Smaller reporting company
 
Indicate by check mark whether the registrant is shell company (as defined in Rule 12b-2 of the Exchange Act)   Yes o     No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
 
Class
Issued and Outstanding at September 30, 2010
Common Stock, $0.001 par value
122,662,052
 
As of September 30, 2010 122,662,052  shares of Common Stock of the Registrant were issued and outstanding. 
 
 
 

 
 
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
 
FORM 10-Q
 
SEPTEMBER 30, 2010
 
TABLE OF CONTENTS
______________
 
   
Page Number
     
Part I.
Financial Information
 
     
    Item 1.
Financial Statements
 
     
 
Condensed Consolidated Balance Sheets as of  September 30, 2010 (unaudited) and December 31, 2009
3
     
 
Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2010 and 2009 (unaudited)
4
     
 
Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2010 and 2009 (unaudited)
5
     
 
Notes to Condensed Consolidated Financial Statements (unaudited)
6
     
    Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
8
     
    Item 3.
Quantitative and Qualitative Disclosures About Market Risk
18
     
    Item 4T.
Controls and Procedures
18
     
Part II.
Other Information
 
     
    Item 1A.
Risk Factors
19
     
    Item 6.
Exhibits
20
     
Signatures
21
 
 
2

 
 
PART I - FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
SEPTEMBER 30,2010
   
DECEMBER 31, 2009
 
   
(unaudited)
       
ASSETS
           
             
Current Assets:
           
Cash
 
$
25,000
   
$
1,000
 
Trade Receivables, net of allowances of $ 0 and  $0, respectively
   
134,000
     
  88,000
 
Inventories
   
43,000
     
  28,000
 
Deposits  
   
19,000
     
    14,000
 
Prepaid expenses
   
5,000
     
    13,000
 
Other receivables  
   
14,000
     
    12,000
 
Total current assets
   
240,000
     
  156,000
 
                 
Property and equipment, net
   
39,000
     
  41,000
 
Total assets
 
$
279,000
   
$
197,000
 
                 
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
               
                 
Current Liabilities:
               
Account payable and accrued expenses
 
$
  1,961,000
   
$
1,745,000
 
Note payable to officer and directors      
   
287,000
     
487,000
 
Deferred income
   
606,000
     
765,000
 
Total current liabilities
   
  2,854,000
     
2,997,000
 
                 
Commitments and contingencies
               
                 
Stockholders' Deficit:
               
Preferred stock, $0.001 par value 5,000,000 shares authorized;  no shares issued or outstanding,
               
Common stock, $0.001 par value 300,000,000 shares authorized;
               
122,662,052 and 115,695,268 shares issued and outstanding in 2010 and 2009
   
        123,000
     
116,000
 
Paid-in capital 
   
  124,359,000
     
123,357,000
 
Accumulated deficit 
   
(127,151,000
)
   
(126,356,000
)
Accumulated other comprehensive income (loss)  
   
94,000
     
83,000
 
Treasury stock of 0 and 4,658,216 shares in 2010 and 2009  
   
0
     
0
 
Total stockholders' (deficit)
   
  (2,575,000
)
   
(2,800,000
)
Total liabilities and stockholders’ (deficit)
 
$
279,000
   
$
197,000
 
 
See accompanying notes.
 
 
3

 
 
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
    2010     2009     2010     2009  
   
 
 
Revenue
  $ 326,000     $ 510,000     $ 916,000     $ 854,000  
Cost of goods sold
    43,000       119,000       113,000       209,000  
Gross profit
    283,000       391,000       803,000       645,000  
                                 
Operating expenses:
                               
Marketing and sales
    38,000       14,000       142,000       57,000  
General and administrative  
    312,000       292,000       975,000       1,480,000  
Product development          
    138,000       78,000       389,000       195,000  
Total operating expenses
    488,000       384,000       1,506,000       1,732,000  
                                 
Operating (loss) income
    (205,000 )     7,000       (703,000 )     (1,087,000 )
                                 
Other income (expense):
                               
Interest expense
    (7,000 )     (9,000 )     (26,000 )     (30,000 )
Other
    (2,000 )     (13,000 )     (66,000 )     65,000  
Total other income (expense)           
    (9,000 )     (22,000 )     (92,000 )     35,000  
                                 
Income before benefit for income taxes
    (214,000 )         (15,000 )     (795,000 )     (1,052,000 )
Benefit for income taxes
    -               0       0  
Net income (loss) available to common stockholders
  $ (214,000 )   $ (15,000 )   $ (795,000 )   $ (1,052,000 )
                                 
Net income (loss) per common share:
                               
Basic
  $       (0.002 )   $ (0.00 )   $ (.007 )   $ (.01 )
Diluted
  $ (0.002 )   $ (0.00 )   $ (.007 )   $ (.01 )
                                 
Shares used in calculating net income (loss) per common share:
                               
Basic
    122,662,000       112,415,000           108,133,000       109,259,000  
Diluted 
    122,662,000       112,415,000       108,133,000       109,259,000  
 
See accompanying notes.
 
 
4

 
 
INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF  CHANGES IN CASH FLOWS
(Unaudited)
 
   
NINE MONTHS ENDED SEPTEMBER 30,
 
    2010     2009  
Cash flows from operating activities:
           
Net (loss) income
  $ (795,000 )   $ (1,052,000 )
Adjustments to reconcile net (loss) income to cash (used) provided by operating activities:
               
Depreciation and amortization
    12,000       11,000  
Issuance of options and warrants
    27,000       657,000  
Changes in operating assets and liabilities:
               
Trade receivables, net
    (46,000 )     (28,000 )
Deposits
    (5,000 )     2,000  
Prepaid expenses
    8,000       6,000  
Other current assets, net
    (2,000 )     (1,000 )
Inventory
    (15,000 )     (54,000 )
Accounts payable and accrued expenses
    221,000       215,000  
Note payable officers and directors
    14,000       75,000  
Deferred revenue
    (159,000 )     100,000  
Accumulated other comprehensive income
    11,000       (3,000 )
Net cash provided by (used in) operating activities
    (729,000 )     (72,000 )
 
               
Cash flows from investing activities:
               
Purchase of fixed assets
    (15,000 )     (3,000 )
Net cash used in investing activities
    (15,000 )     (3,000 )
 
               
Cash flows from (used in) financing activities:
               
Payment on notes payable
    (214,000 )     0  
Sale of  common stock
    982,000       148,000  
Net cash provided by (used in) financing activities
  $ 768,000       148,000  
                 
Increase (decrease) in cash
    24,000       73,000  
Cash, beginning of period
  $ 1,000       (24,000 )
Cash, end of period
  $ 25,000     $ 49,000  
                 
Supplemental cash flow information:
               
Issuance of common stock for partial reduction of Note Payable Officer
  $ 0     $ 61,000  
Issuance of common stock for liquidation of Convertible Note Payable
  $ 0     $ 53,000  
Acquisition of intellectual property for the exchange of common stock
  $ 0     $ 126,000  
 
See accompanying notes.
 
 
5

 
 
Interplay Entertainment and Subsidiaries
Notes to Consolidated Condensed Financial Statements
Three and Nine Months Ended September 30, 2010
(Unaudited)
 
Note 1.  Basis of Presentation  
 
The accompanying unaudited condensed consolidated financial statements of Interplay Entertainment Corp.  (which we refer to as the “Company” in these Notes) and its subsidiaries reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the results for the interim period in accordance with instructions for Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements.  The results of operations for the current interim period are not necessarily indicative of results to be expected for the current year or any other period.  The balance sheet at December 31, 2009 has been derived from the audited consolidated financial statements at that date, but does not include all information and footnotes required by GAAP for complete financial statements.  
 
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 as filed with the U.S. Securities and Exchange Commission (“SEC”).  
 
Factors Affecting Future Performance and Going Concern Status
 
The Company’s independent public accountant included a “going concern” explanatory paragraph in his audit report on the December 31, 2009 consolidated financial statements which were prepared assuming that the Company will continue as a going concern.  
 
The Company continues to seek external sources of funding including, but not limited to, a private placement or public offering of the Company’s capital stock, the sale of selected assets, the licensing of certain product rights in selected territories, selected distribution agreements, and/or other strategic transactions sufficient to provide short-term funding, and potentially achieve the Company’s long-term strategic objectives.  Although the Company has had some success in licensing certain of its products in the past, no assurance can be given that the Company will do so in the future.
 
The Company expects that it will need to obtain additional financing or income.  However, no assurance can be given that alternative sources of funding can be obtained on acceptable terms, or at all.  These conditions, combined with the Company’s historical operating losses and its deficits in stockholders’ equity and working capital, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets and liabilities that might result from the outcome of this uncertainty.
 
Litigation
 
On September 8, 2009 Bethesda Softworks LLC filed a Complaint for Declaratory Judgment, Preliminary Injunction and Other Relief against the Company in the United  States  District  Court for the District of Maryland.  Bethesda seeks to terminate the rights Interplay holds to sell and develop certain FALLOUT(r)-branded video games, including an MMOG.  Interplay  disputes all claims raised by Bethesda and has answered the lawsuit and asserted Counter-Claims,  including claims for Breach of Contract,  Rescission,  Accounting and  Declaratory  Relief seeking an award of damages and other relief.  Interplay also seeks a declaration from the Court that it has not infringed upon the  FALLOUT(R)  mark  and  that it has  satisfied  the  terms  of  the Trademark Licensing Agreement related to Interplay's production of a FALLOUT(R) massively-multiplayer online  game.  The Court denied Bethesda's Motion for Preliminary Injunction on December 10, 2009.  Interplay will continue to defend its rights and pursue its Counter-Claims against Bethesda.
 
On September 24, 2010, the Company initiated a lawsuit against TopWare Interactive, Inc., in the United States District Court for the Central District of California over TopWare's infringement of the Company's Battle Chess trademark.  The Company's lawsuit alleges various violations of federal trademark laws, as well as state claims for unfair competition.  The Court granted a preliminary injunction against TopWare, precluding further use of Battle Chess or any confusingly similar title by TopWare, its officers, directors, employees, attorneys, affiliated companies, and anyone acting in concert with them.  Interplay will continue to enforce its intellectual property rights against potential infringement.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Significant estimates made in preparing the condensed consolidated financial statements include, among others, sales returns and allowances, channel exposure and long-lived assets, and certain accrued liabilities included amounts related to litigation.
 
Principles of Consolidation
 
The accompanying consolidated financial statements include the accounts of Interplay Entertainment Corp. and its wholly-owned subsidiaries, Interplay Productions Limited (U.K.), Interplay OEM, Inc., Interplay Co., Ltd., (Japan) the business of which was closed during the 4th quarter 2006 (immaterial to consolidated results) and Games On-line.  All significant inter-company accounts and transactions have been eliminated.
 
 
6

 
 
Interplay Entertainment and Subsidiaries
Notes to Consolidated Condensed Financial Statements
Three and Nine Months Ended September 30, 2010
(Unaudited)
 
Note 2.  Note Payable to Officer and Directors
 
The Company issued on October 2, 2006 to the following officer and directors, Herve Caen, Eric Caen and Michel Welter conditional demand notes which have since become demand notes (due to the change in control resulting from Financial Planning and Development SA’s acquisition of approximately 56% of the Company’s outstanding stock) bearing a 5% annual interest rate. The demand notes were issued for the earned but unpaid directors’ fees to Herve Caen for $50,000, to Eric Caen for $50,000, to Michel Welter for $85,000, and for earned but unpaid salary to Herve Caen in the amount of $500,000.  For the nine months ended 2010 Herve Caen was repaid $158,000. A total of $287,000 in principal and interest remains outstanding under the demand notes as of September  30, 2010.  Interest accrued on the demand notes as of September 30, 2010 was $14,000.
 
Note 3.  Advances from Distributors and Licensee which are Considered Deferred Income  
 
Non-refundable but recoupable advances received by the Company for future distribution and license rights as of September 30, 2010 amounted to $606,000.
 
Note 4.  Segment and Geographical Information     
 
The Company operates in one principal business segment, which is managed primarily from the Company’s U.S. headquarters.  
 
Net revenues by geographic regions were as follows:
 
   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
North America
        180       55%         406       80%       543       59%     $ 680       80%  
International
    146       45%       104       20%           373       41%       174       20%  
    $   326       100%     $ 510       100%     $   916       100%     $ 854       100%  
 
Note 5.  Employee Stock Options
 
Stock-Based Compensation  
 
The Company accounts for stock based compensation costs at fair value for all share-based payments, including stock options and restricted stock awards.
 
At September 30, 2010, the Company has one stock-based employee compensation plan. Stock-based employee compensation cost approximated $9,000 and $27,000  as reflected in the net loss for the quarter and nine months ended September 30, 2010.  No employee stock options were granted during the quarter ended September 30, 2010.  
 
Note 6.  Sale of Common Stock
 
On March 17, 2010 the Company sold to Dotcorp Asset Management 11,625,000 shares of Common Stock of the Company (including 4,658,216 existing shares previously held by the Company as treasury stock) and issued a warrant to purchase 7,500,000 shares of Common Stock of the Company for a total consideration of $982,650.  The warrant has a term of four years, an exercise price of $0.10 and is immediately exercisable. Such shares and warrant were issued, and any underlying shares of Common Stock would be issued, in a private placement exempt from registration pursuant to section 4(2) of the Securities Act of 1933.
 
 
7

 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Cautionary Statement  
 
Interplay Entertainment Corp., which we refer to in this Report as "we," "us," or "our," is a developer, publisher and licensor of interactive entertainment software and intellectual properties for both core gamers and the mass market. The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended December 31, 2009, as amended, and presumes that readers have access to, and will have read, the “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K, as amended.  
 
This Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and such forward-looking statements are subject to the safe harbors created thereby.  For this purpose, any statements contained in this Form 10-Q, except for historical information, may be deemed to be forward-looking statements.  Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "estimate" or "continue" or the negative or other variations thereof or comparable terminology are intended to help identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. 
 
The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties, as well as on certain assumptions.  For example, any statements regarding future cash flow, revenue or expense expectations, including those forward-looking statements in “Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations”, financing activities, future cash flows, cash constraints, sales or mergers and cost reduction measures are forward-looking statements and there can be no assurance that we will effect any or all of these objectives in the future. Specifically, the forward-looking statements in this Item 2 assume that we will continue as a going concern.  Risks and Uncertainties that may affect our future results are discussed in more detail in the section titled “Risk Factors” in Item 1A of part II of this Form  10-Q.  Assumptions relating to our forward-looking statements involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control.  Although we believe that the assumptions underlying the forward-looking statements are reasonable, our industry, business and operations are subject to substantial risks, and the inclusion of such information should not be regarded as a representation by management that any particular objective or plans will be achieved.  In addition, risks, uncertainties and assumptions change as events or circumstances change.  We disclaim any obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-Q with the SEC or otherwise to revise or update any oral or written forward-looking statement that may be made from time to time by us or on our behalf.
 
Management's Discussion of Critical Accounting Policies
 
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including, among others, those related to revenue recognition, prepaid licenses and royalties and software development costs. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
 
8

 
 
Results of Operations
 
The following table sets forth certain selected consolidated statements of operations data, segment data and platform data for the periods indicated in dollars and as a percentage of total net revenues:
 
  INTERPLAY ENTERTAINMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
   
Three months ended September 30
   
Nine months ended September 30
 
   
2010
   
2009
   
2010
   
2009
 
 
(Dollars in thousands)
 
                                                 
         
% of Net
         
% of Net
         
% of Net
         
% of Net
 
   
Amount
   
Revenues
   
Amount
   
Revenue
   
Amount
   
Revenues
   
Amount
   
Revenue
 
Revenues
  $  326       100 %   $ 510       100 %   $ 916       100 %   $ 854       100 %
                                                                 
Cost of goods sold
    43       13 %     119       23 %     113       12 %     209       24 %
                                                                 
Gross Profit
    283       87 %     391       77 %   $ 803       88 %     645       76 %
                                                                 
Operating Expenses :
                                                               
                                                                 
Marketing and sales
    38       12 %     14       3 %     142       16 %     57       7 %
                                                                 
General and administrative     312       96     292       57     975       106     1,480       173
                                                                 
Product Development
    138       42 %     78       15 %     389       42 %     195       23 %
                                                                 
Total operating expenses
    488       150 %     384       75 %     1,506       164 %     1,732       203 %
                                                                 
Operating income (loss)
    (205 )     -63 %     7       2 %   $ (703 )     -76 %     (1,087 )     -127 %
                                                                 
Other income (expenses):
                                                               
                                                                 
Other income (expenses)
    (9 )     -2 %     (22 )     -4 %     (92 )     -10 %     35       4 %
                                                                 
Income taxes
    -       -       -       -       -       -       -       -  
                                                                 
Net income (loss)
    (214 )     -65 %   $ (15 )     -2 %   $ (795 )     -86 %   $ (1,052 )     -123 %
                                                                 
Net revenues by geographic region:
                                                               
                                                                 
North America
    180       55 %     406       80 %     543       59 %     680       80 %
                                                                 
International
    146       45 %     104       20 %     373       41 %     174       20 %
                                                                 
    $ 326       100 %   $ 510       100 %   $ 916       100 %   $ 854       100 %
                                                                 
Net revenue by platform:
                                                               
                                                                 
Personal computers
  $ 145       45 %     495       97 %     479       53 %     781       91 %
                                                                 
Video Game Console
    109       33 %     15       3 %     214       23 %     73       9 %
                                                                 
Mobile Platforms
    27       8 %     0       0       101       11 %     0       0  
                                                                 
OEM, royalty and licensing
    45       14 %     0       0 %     122       13 %     -       0 %
                                                                 
    $ 326       100 %   $ 510       100 %   $ 916       100 %   $ 854       100 %
 
 
9

 
 
North American, International and OEM, Royalty and Licensing Net Revenues
 
Geographically, our net revenues, for the three and nine months ended September 30, 2010 and 2009 break down as follows: (in thousands)
 
Three Months Ended September 30
 
2010
   
2009
   
Change
   
% Change
 
North America
  $ 180     $ 406     $ (226 )     (56 %)
International
    146       104       42       40 %
Net Revenues
  $ 326     $ 510     $ (184 )     (36 %)
 
Nine Months Ended September 30
 
2010
   
2009
   
Change
   
% Change
 
North America
  $ 543     $ 680     $ (137 )     (20 %)
International
    373       174       199       114 %
Net Revenues
  $ 916     $ 854     $ 62       7 %
 
Net revenues for the three months ended September 30, 2010 were $326,000, a decrease of 36% compared to the same period in 2009.  This resulted from a 56% decrease in North American net revenues, and a 40% increase in International net revenues. 
 
Net revenues for the nine months ended September 30, 2010 were $916,000, an increase of 7% compared to the same period in 2009 this increase was driven by retail distribution and electronic distribution of back catalog games.  This increase resulted from a 20% decrease in North American net revenues, and a 114% increase in International net revenues.  
 
North American net revenues for the three months ended September 30, 2010 were $180,000. The decrease in North American net revenues in 2010 was mainly due to a 56% decrease in back catalog sales.
 
North American net revenues for the nine months ended September 30, 2010 were $543,000. The decrease in North American net revenues in 2010 was mainly due to a 20% decrease in retail distribution and electronic distribution of back catalog games.
 
International net revenues for the three months ended September 30, 2010 were $146,000.  The increase in International net revenues for the three months ended September 30, 2010 was mainly due to a 40% increase in electronic distribution of back catalog games.
 
International net revenues for the nine months ended September 30, 2010 were $373,000. The increase in International net revenue for the nine months ended September 30, 2010 was mainly due to a 114% increase in electronic distribution of back catalog games..
 
 
10

 
 
Platform Net Revenues
 
Our platform net revenues, for the three and nine months ended September 30, 2010 and 2009 break down as follows: (in thousands)
 
Three Months Ended September 30
 
2010
   
2009
   
Change
   
% Change
 
Personal Computer
  $ 145     $ 495     $ (350 )     (71 %)
Video Game Console
    109       15       94       626 %
Mobile Platforms
    27       0       27       100 %
OEM, Royalty & Licensing
    45       0       45       100 %
Net Revenues
  $ 326     $ 510     $ (184 )     (36 %)
 
Nine Months Ended September 30
 
2010
   
2009
   
Change
   
% Change
 
Personal Computer
  $ 479     $ 781     $ (302 )     (38 %)
Video Game Console
    214       73       141       193 %
Mobile Platforms
    101       0       101       100 %
OEM, Royalty & Licensing
    122       0       122       100 %
Net Revenues
  $ 916     $ 854     $ 62       7 %
 
PC net revenues for the three months ended September 30, 2010 were $145,000, a decrease of 71% compared to the same period in 2009.  The decrease in PC net revenues in 2010 was primarily due to decrease of back catalog sales. 
 
Video game console net revenues were $109,000, an increase of 626% for the three months ended September 30, 2010 compared to the same period in 2009, due to the royalties earned from electronic distribution of back catalog titles.
 
Mobile  revenues earned were $27,000 for the three months ended September 30, 2010. Mobile revenues were not earned during the same period in 2009.
 
OEM, royalty and licensing net revenues for the three months ended September 30, 2010 were $45,000, an increase of $100% compared to the same period in 2009, due to the royalties earned from electronic distribution of back catalog titles. 
 
PC net revenues for the nine months ended September 30, 2010 were $479,000, a decrease of 38% compared to the same period in 2009.  The decrease in PC net revenues in the nine months ended September 30, 2010 was due to a decrease by retail distribution and electronic distribution of back catalog games.
 
Video Game console net revenues were $214,000, an increase of 193% for the nine months ended September 30, 2010 compared to the same period in 2009, mainly due to the royalties earned from electronic distribution of back catalog titles.
 
Mobile  revenues earned were $101,000 for the nine months ended September 30, 2010. Mobile revenues were not earned during the same period in 2009.
 
OEM, royalty and licensing net revenues for the nine months ended September 30, 2010 were $122,000, an increase of $100% compared to the same period in 2009, due to the royalties earned from electronic distribution of back catalog titles. 
 
 
11

 
 
Cost of Goods Sold Gross Profit Margin
 
Our net revenues, cost of goods sold and gross margin for the three and nine months ended September 30, 2010 and 2009 breakdown as follows: (in thousands)
 
Three Months Ended September 30
 
2010
   
2009
   
Change
   
% Change
 
Net Revenues
  $ 326     $ 510     $ (184 )     (36 %)
Cost of Goods Sold
    43       119       76       64 %
Gross Profit Margin
  $ 283     $ 391     $ (108 )     (28 %)
 
Nine Months Ended September 30
 
2010
   
2009
   
Change
   
% Change
 
Net Revenues
  $ 916     $ 854     $ 62       7 %
Cost of Goods Sold
    113       209       96       46 %
Gross Profit Margin
  $ 803     $ 645     $ 158       24 %
 
Three Months Ended September 30
 
2010
   
2009
   
Change
 
Net Revenues
    100 %     100 %     0 %
Cost of Goods Sold
    13 %     23 %     (10 %)
Gross Profit Margin
    87 %     77 %     10 %
 
 
12

 
 
Nine Months Ended September 30
 
2010
   
2009
   
Change
 
Net Revenues
    100 %     100 %     0 %
Cost of Goods Sold
    12 %     24 %     (12 %)
Gross Profit Margin
    88 %     76 %     12 %
 
Cost of goods sold related to PC and video game console net revenues represents the manufacturing and related costs of interactive entertainment software products, including costs of media, manuals, duplication, packaging materials, assembly, freight and royalties paid to developers, licensors and hardware manufacturers.  Cost of goods sold related to royalty-based net revenues primarily represents third party licensing fees and royalties paid by us.  Typically, cost of goods sold as a percentage of net revenues for video game console products is higher than cost of goods sold as a percentage of net revenues for PC based products due to the relatively higher manufacturing and royalty costs associated with video game console and affiliate label products.  We evaluate the likelihood of future realization of prepaid royalties and license fees quarterly, on a product-by-product basis, and charge the cost of goods sold for any amounts that we deem unlikely to realize through future product sales.

Our cost of goods sold decreased 64% to $43,000 in the three months ended September 30, 2010 compared to the same period in 2009 mainly due to a higher percentage of royalty based net revenues in 2010 as compared to 2009.
 
Our cost of goods sold decreased 46% to $113,000 in the nine months ended September 30, 2010 compared to the same period in 2009 mainly due to a higher percentage of royalty based net revenues in 2010 as compared to 2009.
 
Our gross margin increased to 87% for the three months ended September 30, 2010 from 77% in the comparable period in 2009.
 
Our gross margin increased to 88% for the nine months ended September 30, 2010 period from 76% in the comparable 2009.  
 
 
13

 
 
Marketing and Sales
 
Our marketing and sales expense for the three and nine months ended September 30, 2010 and 2009 breakdown as follows: (in thousands)
 
Marketing and Sales
 
2010
   
2009
   
Change
   
% Change
 
Three Months Ended September 30
  $ 38     $ 14     $ 24       171 %
Nine Months Ended September 30
  $ 142     $ 57     $ 85       149 %
 
Marketing and sales expenses primarily consist of advertising and retail marketing support, sales commissions, marketing and sales personnel, customer support services and other related operating expenses.
 
Marketing and sales expenses for the three months ended September 30, 2010 were $38,000  a 171% increase compared to the 2009 period. The increase in marketing and sales expenses was primarily due to  sales commissions incurred under various distribution agreements paid in connection with retail and electronic distribution of back catalog games.
 
Marketing and sales expenses for the nine months ended September 30, 2010 were $142,000 a 149% increase compared to the 2009 period. The increase in marketing and sales expenses was primarily due to  sales commissions incurred under various distribution agreements paid in connection with retail and electronic distribution of back catalog games.
 
General and Administrative
 
Our general and administrative expense for the three and nine months ended September 30, 2010 and 2009 breakdown as follows: (in thousands)
 
General and Administrative
 
2010
   
2009
   
Change
   
% Change
 
Three Months Ended September 30
  $ 312     $ 292     $ 20       7 %
Nine Months Ended September 30
  $ 975     $ 1,480     $ (505 )     (34 %)
 
 
14

 
 
General and administrative expenses primarily consist of administrative personnel expenses, facilities costs, professional fees, stock option compensation, bad debt expenses and other related operating expenses. 
 
General and administrative expenses for the three months ended September 30, 2010 were $312,000, a 7% increase as compared to the same period in 2009.
 
General and administrative expenses for the nine months ended September 30, 2010 were $975,000,  a 34% decrease as compared to the same period in 2009. The significant component of the decrease resulted from stock option compensation of $635,000 incurred in 2009.   
 
Our Product Development expense for the three and nine months ended September 30, 2010 and 2009 breakdown as follows: (in thousands)
 
Product Development
 
2010
   
2009
   
Change
   
% Change
 
Three Months Ended September 30
  $ 138     $ 78     $ 60       76 %
Nine Months Ended September 30
  $ 389     $ 195     $ 194       99 %
 
Product development expenses for the three months ended September 30, 2010 were $138,000, a 76% increase as compared to the same period in 2009.
 
Product development expenses for the nine months ended September 30, 2010 were $389,000, a 99% increase as compared to the same period in 2009.  
 
This increase is mainly due to an increase in product development staffing.
 
Other Expense (Income), Net
 
Our other expense (income) for the three and nine months ended September 30, 2010 and 2009 breakdown as follows: (in thousands)
 
Other Income (Expenses)
 
2010
   
2009
   
Change
   
% Change
 
Three Months Ended September 30
  $ (9 )   $ (27 )   $ 13       N/A  
Nine Months Ended  September 30
  $ (92 )   $ 35     $ (127 )     N/A  
 
 
15

 
 
Other income (expenses) for the three months ended September 30, 2010 was $9,000 and consists primarily of interest expense on debt in the amount of $6,000, foreign currency exchange transactions loss of $2,000, and additional miscellaneous adjustments of  $1,000.
 
Other income (expenses) for the nine months ended September 30, 2010 was $92,000 and consists primarily of interest expense on debt in the amount of $26,000, foreign currency exchange transactions losses of $9,000, and other nonrecurring settlement of $15,000 prior year under accrued expenses of $30,000 and additional miscellaneous adjustments of $12,000.
 
Liquidity and Capital Resources
 
As of September 30, 2010, we had a working capital deficit of approximately $2,614,000, and our cash balance was approximately $25,000.  
 
During 2007 we sold 'Fallout' to a third party and entered into, subject to satisfaction of various conditions, a license which could allow us to create, develop and exploit a 'Fallout' Massively Multiplayer Online Game (MMOG). We plan to exploit the license to create the 'Fallout' MMOG.
 
We have contracted with Masthead Studios to fund the development of a MMOG, code named "Project: V13." As a part of the agreement, the game utilizes Masthead's proprietary tools and MMOG technology developed for Masthead's "Earthrise" project.

We are leveraging our portfolio of gaming properties through sequels and various development and publishing arrangements. We are developing sequels to some of our most successful games, including Battle Chess, Clayfighter, Earthworm Jim, Dark Alliance, Descent, MDK2 and Stonekeep. We have reinitiated our in-house game development studio, and have hired game developers. We have obtained distribution rights to Prehistorik Man and Legendary Wars: T-Rex Rumble for Nintendo DSi.  We have instituted a new publishing program, Interplay Discovery (TM), to help us identify, evaluate, publish and distribute original video game titles created by independent developers from around the world.  We have already launched the first two products under the Interplay Discovery (TM) program. 
 
We have entered into a Game Production Agreement with Interactive Game Group which provides for the financing of game development under certain conditions.
 
 
16

 
 
We continue to seek external sources of funding, including but not limited to, incurring debt, the selling of assets or securities, licensing of certain product rights in selected territories, selected distribution agreements, and/or other strategic transactions sufficient to provide short-term funding, and achieve our long-term strategic objectives.
 
If we do not receive sufficient financing or income we may (i) liquidate assets, (ii) sell the company (iii) seek protection from our creditors including the filing of voluntary bankruptcy or being the subject of involuntary bankruptcy, and/or (iv) continue operations, but incur material harm to our business, operations or financial conditions. These conditions, combined with our historical operating losses and our deficits in stockholders' equity and working capital, raise substantial doubt about our ability to continue as a going concern.
 
Our primary capital needs have historically been working capital requirements necessary to fund our operations. Our operating activities used cash of  $729,000 and financing activities generated cash of $768,000 during the nine months ended September 30, 2010.
 
We entered into various licensing agreements during the nine months ended September 30, 2010 under which we licensed others to exploit games that we have intellectual property rights to. We expect to enter into similar license arrangements to generate cash for the Company’s operations during the remainder of the fiscal year.
 
We sold common stock of the Company to a private investor during the three months ended March 31, 2010.
 
Off Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements under which we have obligations under a guaranteed contract that has any of the characteristics identified in the accounting codification. . We do not have any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets. We also do not have any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument. We have no obligations, including a contingent obligation arising out of a variable interest in an unconsolidated entity that is held by, and material to, us, where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with us.
 
Contractual Obligations
 
The following table summarizes certain of our contractual obligations under non-cancelable contracts primarily lease commitments on our office space at September 30, 2010, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands).
 
Contractual Obligations
 
Total
   
Less than
1 year
   
1 - 3
years
   
3 - 5
years
   
More than
5 years
 
Lease Commitments (1)
    260       36       224       0       0  
 
(1)  The Company also has a lease commitment in Irvine for our development studio offices through March 31, 2011. The Company has a lease commitment for its corporate offices through October 2012. The Company also has a lease commitment at the French representation office through February 28, 2011 with an option for an additional 3 years.
 
 
17

 
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk  
 
We do not have any derivative financial instruments as of September 30, 2010. However, we are exposed to certain market risks arising from transactions in the normal course of business, principally the risk associated with foreign currency fluctuations. We do not hedge our interest rate risk, or our risk associated with foreign currency fluctuations.
 
INTEREST RATE RISK
 
 Currently, we do not have a line of credit.  
 
FOREIGN CURRENCY RISK
 
Our earnings are affected by fluctuations in the value of our foreign subsidiary's functional currency, and by fluctuations in the value of the functional currency of our foreign receivables.
 
We recognized losses of $9,000 and $10,000 during the nine months ended September 30, 2010 and 2009 respectively, primarily in connection with foreign exchange fluctuations in the timing of payments received on accounts receivable or payments made on accounts payable in foreign currencies. 
 
Item 4T. Controls and Procedures  
 
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer, and interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and interim Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, in ensuring that information required to be disclosed is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and in timely alerting him to material information required to be included in this report.
 
There were no changes made in our internal controls over financial reporting that occurred during the quarter ended September 30, 2010 that have materially affected or are reasonably likely to materially affect these controls.  
 
Our management, including the Chief Executive Officer  and Interim Chief  Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material errors. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  
 
 
18

 
 
Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations on all internal control systems, our internal control system can provide only reasonable assurance of achieving its objectives and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, and/or by management override of the control. The design of any system of internal control is also based in part upon certain assumptions about the likelihood of future events, and there can be no absolute assurance but only reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in circumstances, and/or the degree of compliance with the policies and procedures may deteriorate.
 
PART II - OTHER INFORMATION
 
Item 1A.     RISK FACTORS
 
There have been no material changes to the risk factors disclosed in Item 1A to Part 1 of our form 10-K for the fiscal year ended December 31, 2009.
 
Item 2.       Legal Proceedings
 
The Company may be involved in various legal proceedings, claims, and litigation arising in the ordinary course of business, including disputes arising over the ownership of intellectual property rights and collection matters.  In the opinion of management, the outcome of known routine claims will not have a material adverse effect on the Company’s business, financial condition, or results of operations.
 
On September 8, 2009 Bethesda Softworks LLC filed a Complaint for Declaratory Judgment, Preliminary Injunction and Other Relief against the Company in the United  States  District  Court for the District of Maryland.  Bethesda seeks to terminate the rights Interplay holds to sell and develop certain FALLOUT(r)-branded video games, including an MMOG.  Interplay  disputes all claims raised by Bethesda and has answered the lawsuit and asserted Counter-Claims,  including claims for Breach of Contract,  Tortious  Interference with Prospective Economic Advantage, Rescission,  Accounting and  Declaratory  Relief seeking an award of damages and other relief.  Interplay also seeks a declaration from the Court that it has not infringed upon the  FALLOUT(R)  mark  and  that it has  satisfied  the  terms  of  the Trademark Licensing Agreement related to Interplay's production of a FALLOUT(R) massively-multiplayer online  game.  The Court denied Bethesda's  Motion for Preliminary Injunction on December 10, 2009.  Interplay will continue to defend its rights and pursue its Counter-Claims against Bethesda.  
 
 
19

 
 
On September 24, 2010, the Company initiated a lawsuit against TopWare Interactive, Inc., in the United States District Court for the Central District of California over TopWare's infringement of the Company's Battle Chess trademark.  The Company's lawsuit alleges various violations of federal trademark laws, as well as state claims for unfair competition.  The Court granted a preliminary injunction against TopWare, precluding further use of Battle Chess or any confusingly similar title by TopWare, its officers, directors, employees, attorneys, affiliated companies, and anyone acting in concert with them.  Interplay will continue to enforce its intellectual property rights against potential infringement. 
 
The Company received notices from the Internal Revenue Service (“IRS”) that it owes approximately $311,000 in payroll taxes, payroll tax penalties, and interest for unpaid and late payment of payroll taxes for the years 2008,  2009 and 2010 which has been accrued as of September 30, 2010.  The Company is in the process of negotiating a payment plan with the Internal Revenue Service.
 
The Company received notice from the Franchise Tax Board that it owes approximately $12,000 in franchise tax , interest and penalties for the tax year ending 2008 which has been accrued as of September 30, 2010. The Company has established a payment plan with the Franchise Tax Board.
 
The Company received notice from the California Employment Development Department (EDD) that it owes approximately $ 46,000 in payroll tax contributions, interest and penalties for the tax years ending 2008, 2009 and 2010 which has been accrued as of September 30, 2010.  The Company is in the process of negotiating a payment plan with the EDD.
 
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of security holders during the three month period ending September 30, 2010.  
 
Item 6.       Exhibits
 
(a) Exhibits - The following exhibits, other than exhibit 32.1 which is being furnished herewith, are filed as part of this report:
 
Exhibit Number
Exhibit Title
   
31.1
Certificate of Hervé Caen, Chief Executive Officer of Interplay Entertainment Corp. pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended.
   
31.2
Certificate of Hervé Caen, Interim Chief Financial Officer of Interplay Entertainment Corp. pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended.
   
32.1
Certificate of Hervé Caen, Chief Executive Officer and Interim Chief Financial Officer of Interplay Entertainment Corp. pursuant to Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended.
 
 
20

 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
INTERPLAY ENTERTAINMENT CORP.
   
       
Date: November 19, 2010
By:
/s/ Hervé Caen
 
   
Hervé Caen
 
   
Chief Executive Officer and
Interim Chief Financial Officer
(Principal Executive and
Financial and Accounting Officer)
 
 
 
 
21