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Red Mile's Financials Paltry, Closure Looming

by Rainier on Feb. 17, 2009 @ 3:37 p.m. PST

Red Mile Entertainment's latest fiscal statement reveals that the publisher is in a bad financial position with barely $341k in cash, which it expects to run out of Mar. 31, 2009. Since its launch, Red Mile has not made any profit and lost $35 million. Last year, a merger with SilverBirch went sour at the last minute, and earlier this month, the Heroes over Europe developer terminated its contract due to non-payment, while co-publisher Atari also backed out. Red Mile is in dire need of $10 million to finish current developments, like Sin City: The Game, or it will be forced to shut down.

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplates continuation of the Company as a going concern. However, the Company has sustained substantial operating losses since inception of $35,186,097 at December 31, 2008, and has predominantly incurred negative cash flows from operations.

The Company is attempting to increase its revolving line of credit with Tiger Paw Capital Corporation. If the Company is unable to substantially increase such line of credit within the next 30 days, the Company will likely cease operations.

If the Company is successful in increasing the revolving line of credit with Tiger Paw Capital Corporation, the Company plans to immediately implement a strategic plan to contribute to meeting the Company's cash flow requirements. Management believes that this plan is capable of removing the threat to continuation of the business during the 12 month period following the most recent balance sheet presented. However, there can be no guarantee or assurance that the Company will be successful in implementing its plan. In particular, failure to raise external capital within the next 30 days will likely cause the Company to cease operations. The Company's strategic financing plan has the following components:

  1. The Company is considering all remedies available under its publishing agreement with its partner for its "Heroes Over Europe" title which may include compensatory damages.
  2. The Company plans to enter into a co-publishing agreement for its licensed Sin City video game which will provide the Company with minimum guarantees on execution of the agreement as well as milestone payments coinciding with the timing of milestone obligations the Company has to its developers.
  3. The Company plans to renegotiate both the amount and timing for payment of many of its current payables and accrued obligations.

Notwithstanding this strategic financing plan, however, we cannot guarantee that the Company will be successful in increasing its revolving line of credit, sustaining a profitable level of operations or raising capital at favorable rates, or at all. The accompanying condensed consolidated financial statements do not include any adjustments that might result from failures to increase the revolving line of credit, sustain profitability or raise capital.

During our second fiscal quarter of 2008, we signed a publishing agreement with Atari for our "Heroes Over Europe" titles under development. Our agreement with Atari provides us with minimum guaranteed payments from Atari in addition to back-end royalty payments.

On February 11, 2009, IR Gurus Pty Ltd., the Company's developer for its "Heroes Over Europe" title, sent the Company a termination notice with respect to the software development and licensing agreement for such title claiming that the Company failed to make a payment under such agreement in the amount of $281,000.

On February 11, 2009, Atari Interactive, Inc., the Company's publishing partner for its "Heroes Over Europe" title, sent the Company a termination notice with respect to the publishing agreement for such title. The Company disputes the grounds for termination. The publishing partner has ceased making milestone payments to the Company which has had a material and adverse effect on the Company's ability to continue operations.

On February 11, 2008, we entered into an uncommitted revolving line of credit agreement with Tiger Paw Capital Corporation, a corporation owned and operated by Mr. Kenny Cheung, a member of the Company's board of directors in the amount of $1,000,000 (the "Line"). The Line is available for working capital requirements. Any amounts drawn on the Line are payable on demand. The Line is an uncommitted obligation where Tiger Paw Capital Corporation may decline to make advances under the Line, or terminate the Line, at any time and for any reason without prior notice to the Company. The Line bears interest at the rate of 10% per annum and is payable to Tiger Paw Capital Corporation on demand. Advances under the Line may be pre-paid without penalty. The Line has a subordinated security interest to all present and future assets of the Company and carries no financial or operating covenants. As of December 31, 2008, we have drawn $500,000 on the Line. We are attempting to increase the Line in order to sustain operations.

On May 7, 2008, we entered into a Temporary Forbearance Agreement with Tiger Paw Capital Corporation whereby Tiger Paw Capital Corporation agreed not to exercise any demand or enforcement rights under the Line until November 7, 2008.

On October 7, 2008, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with SilverBirch Inc., RME Merger Sub Corp., a Delaware corporation and wholly owned subsidiary of SilverBirch Inc. ("Merger Sub"), and Kenny Cheung, as stockholder representative.

On November 5, 2008, we entered into an Amendment to Temporary Forbearance Agreement with Tiger Paw Capital Corporation whereby Tiger Paw Capital Corporation agreed not to exercise any demand or enforcement rights under the Line until the earlier of: (i) the closing date of our merger with and into the subsidiary of SilverBirch Inc.; (ii) fifteen days after the termination of the Merger Agreement with SilverBirch Inc.; (iii) the date of any change of control of Red Mile other than the merger with SilverBirch, Inc.; and (iv) the occurrence of an event of default.

On December 3, 2008, we terminated the Merger Agreement with SilverBirch based on a material breach by SilverBirch of the Merger Agreement. As of December 18, 2008, Tiger Paw Capital Corporation became entitled to exercise its demand and enforcement rights against us under the Line although they have not yet exercised any of its rights.

On May 7, 2008, we entered into a secured credit agreement with SilverBirch Inc., a Canadian publicly traded corporation in the amount of $750,000 Canadian Dollars (the "Facility"). The Facility was made available for development and production of our "Heroes Over Europe" video game and general and administrative purposes. Amounts drawn on the Facility are payable upon the closing or termination of the merger agreement. The Facility bears interest at the rate of 10% per annum and is payable to Lender quarterly in arrears. Advances under the Facility may be pre-paid without penalty.

The Facility carries a first priority security interest in all of our present and future assets in addition to the securities in the capital of our three wholly owned subsidiaries. The Facility contains customary terms and conditions for credit facilities of this type, including restrictions on the Company's ability to incur or guaranty additional indebtedness, create liens, make loans or investments, sell assets, pay dividends or make distributions on, or repurchase, its stock.

In October 2008, we amended the secured credit agreement whereby SilverBirch, Inc. agreed not to exercise any demand or enforcement rights under such agreement until the closing of our merger into their subsidiary.

As previously mentioned, on December 3, 2008, we terminated the Merger Agreement with SilverBirch based on a material breach by SilverBirch Inc. of the Merger Agreement.

On December 30, 2008, we entered into a Standstill Agreement (the "Standstill Agreement") with SilverBirch whereby both parties agreed to forbear and standstill from exercising their respective rights and remedies against each other during the "Standstill Period". Such period commences on December 30, 2008 and ends on the "Standstill Termination Date", the date which is the earlier of:
(i) the date of the payment of the Final Settlement Payment (as such term is defined below); (ii) July 31, 2009; or (iii) the date that SilverBirch gives written notice to us of SilverBirch's election to terminate the Standstill Period in the event we breach or fail to comply with any of the terms of the Standstill Agreement "Early Termination".

Under the Standstill Agreement, we agreed to pay SilverBirch the following amounts in Canadian Dollars in connection with the secured credit loan on the following dates:

  1. $50,000 upon execution of the Standstill Agreement;
  2. $225,000 on the earlier of: (i) our achieving certain development milestones in connection with development of our Heroes Over Europe game and receiving the next co-publishing installment payment from our co-publishing partner; and (ii) February 6, 2009;
  3. $250,000 on the earlier of: (i) Our achieving the next succeeding milestone following the aforementioned milestone and receiving applicable co-publishing installment payment from our co-publishing partner; and (ii) March 20, 2009; and
  4. $75,000 on the earlier of: (i) our signing a publishing agreement in connection with our licensed Sin City Video game; and (ii) July 31, 2009.

Each of the above-referenced payments are referred to as "Settlement Payment Installments" and collectively, the four Settlement Payment Installments are referred to as the "Final Settlement Payment."

We currently need to raise additional capital in order to continue operating our business. We believe our current cash on hand on as of February 10, 2009 of approximately $341,000 will allow us to continue our business operations until the March 31, 2009. If we are unable to increase our credit line or raise new capital, we will likely be unable to continue operations past March 31, 2009.

We anticipate needing an additional $10,000,000 to finance our planned operations over the next 24 to 36 months. We will be unable to complete development of "Heroes Over Europe" and "Sin City: The Game" (working title), or publish any other additional games if we are unable to receive co-publishing advances on both the foregoing titles or raise additional capital through either sale of securities or issuance of debt.

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