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Share Name | Share Symbol | Market | Type |
---|---|---|---|
Artificial Life Inc (CE) | USOTC:ALIF | OTCMarkets | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 0.0001 | 0.00 | 01:00:00 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to _____________
Commission file number 000-25075
ARTIFICIAL LIFE, INC.
(Exact name of registrant as specified in its charter)
Delaware |
04-3253298 |
(State of incorporation) |
(I.R.S. Employer Identification No.) |
520 Broadway, Suite 350 Santa Monica, CA 90401 U.S.A. |
(Address of principal executive offices) |
(310) 496-4288
(Issuers telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the issuer: (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 [X] No [_]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for 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, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of October 31, 2009 there were 57,309,858 shares of Common Stock, $.01 par value per share, outstanding.
1
ARTIFICIAL LIFE, INC.
INDEX OF INFORMATION CONTAINED IN FORM 10-Q FOR THE
QUARTER ENDED SEPTEMBER 30, 2009
PAGE
PART I-FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008
3
Condensed Consolidated Statements of Operations and Comprehensive Income for the
Three Months and Nine Months Ended September 30, 2009 and 2008 (unaudited)
4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2009 and 2008 (unaudited)
6
Notes to Condensed Consolidated Financial Statements (unaudited)
7
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
12
Item 3 Quantitative and Qualitative Disclosure About Market Risk
18
Item 4 Controls and Procedures
18
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
19
Item 1A Risk Factors
19
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
19
Item 3 Defaults Upon Senior Securities
19
Item 4 Submission of Matters to a Vote of Security Holders
19
Item 5 Other Information
19
Item 6 Exhibits
19
Signatures
20
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARTIFICIAL LIFE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2009
December 31, 2008
-----------------------
-----------------------
(unaudited)
Current assets:
Cash
$
175,023
$
1,430,578
Accounts receivable, net
27,379,991
13,859,315
Prepaid expenses and other
696,228
914,372
Deferred tax asset
-
500,000
----------------
----------------
Total current assets
28,251,242
16,704,265
----------------
----------------
Fixed assets, net
1,808,247
3,140,067
----------------
----------------
License rights, net
15,250,107
9,617,198
Prepaid expenses, deposits and other assets
2,005,513
828,943
----------------
----------------
17,255,620
10,446,141
----------------
----------------
$
47,315,109
$
30,290,473
=========
=========
LIABILITIES AND STOCKHOLDERS EQUITY
Accounts payable
$
5,346,399
$
669,745
Accrued expenses and other
618,496
472,813
Income tax payable
187,000
60,000
Note payable officer/stockholder
981,877
737,771
Notes payable
1,000,000
1,000,000
----------------
----------------
Total liabilities (all current)
8,133,772
2,940,329
----------------
----------------
Stockholders equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized,
no shares issued and outstanding
Common stock, $.01 par value; 130,000,000 shares authorized,
-
-
50,422,073 shares issued and outstanding as of September 30, 2009 and
47,724,132 shares issued and outstanding as of December 31, 2008
504,221
477,241
Additional paid-in capital
53,820,682
51,708,712
Notes receivable from stockholders
(19,577)
(19,577)
Accumulated deficit
(15,296,285)
(24,686,144)
Accumulated other comprehensive income (loss)
172,296
(130,088)
----------------
----------------
Total stockholders equity
39,181,337
27,350,144
----------------
---------------
$
47,315,109
$
30,290,473
=========
=========
See accompanying notes to unaudited condensed consolidated financial statements.
m
3
ARTIFICIAL LIFE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(UNAUDITED)
Three-month Period Ended
Nine-month Period Ended
September 30,
September 30,
-------------
-------------
-------------
-------------
2009
2008
2009
2008
Revenues:
Software license revenue
$8,722,381
$5,835,733
$23,351,979
$
15,430,034
Reseller license revenue
-
769,800
-
769,800
Application services and other revenue
1,100
23,064
12,671
35,237
--------------
--------------
--------------
-------------
8,723,481
6,628,597
23,364,650
16,235,071
--------------
--------------
--------------
-------------
Cost of revenues:
Cost of software license revenue
1,676,575
892,258
3,493,825
1,704,384
Cost of application services and other
revenue
56,223
31,092
77,992
88,812
--------------
--------------
--------------
-------------
1,732,798
923,350
3,571,817
1,793,196
--------------
--------------
--------------
-------------
Gross Profit
6,990,683
5,705,247
19,792,833
14,441,875
--------------
--------------
--------------
-------------
Operating expenses:
General and administrative
1,750,366
451,518
4,726,579
1,480,310
Research and development
1,015,483
928,487
2,798,120
2,279,160
Sales and marketing
474,066
740,696
2,006,594
1,676,952
--------------
--------------
--------------
--------------
Total operating expenses
3,239,915
2,120,701
9,531,293
5,436,422
--------------
--------------
--------------
--------------
Income from operations
3,750,768
3,584,546
10,261,540
9,005,453
--------------
--------------
--------------
--------------
Other income (expenses):
Interest income and other
219,761
533
329,264
4,492
Interest expense
(39,356)
(64,661)
(105,836)
(162,722)
Foreign currency transaction (losses) gains
(55,749)
(35,368)
(468,109)
323,037
--------------
--------------
--------------
--------------
124,656
(99,496)
(244,681)
164,807
--------------
--------------
--------------
--------------
Income before income taxes
3,875,424
3,485,050
10,016,859
9,170,260
Income tax benefit (expense)
31,000
-
(627,000)
(501,310)
--------------
--------------
--------------
--------------
Net income
3,906,424
3,485,050
9,389,859
8,668,950
Foreign currency translation adjustment
163,366
(126,116)
302,384
(72,816)
--------------
--------------
--------------
--------------
Comprehensive income
$
4,069,790
$
3,358,934
$
9,692,243
$
8,596,134
=========
=========
=========
=========
4
Net income per share
Basic
$
0.08
$
0.07
$
0.19
$
0.19
=========
=========
=========
=========
Diluted
$
0.08
$
0.07
$
0.19
$
0.18
=========
=========
=========
=========
Weighted average shares outstanding
Basic
50,261,571
47,615,002
48,803,709
45,983,219
=========
=========
=========
=========
Diluted
50,302,915
49,454,372
48,916,809
48,254,906
=========
=========
=========
=========
See accompanying notes to unaudited condensed consolidated financial statements.
5
ARTIFICIAL LIFE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine-month Period Ended
September 30,
----------------------
2009
2008
------------------ ----------------
Cash flows from operating activities:
Net income
$
9,389,859
$
8,668,950
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization
3,125,255
1,132,005
Write down of fixed assets and license rights
1,794,999
-
Deferred income tax expense
500,000
59,635
Amortization of discount on notes payable
-
66,000
Provision for losses on doubtful accounts receivable
2,623,162
2,469
Foreign currency transaction losses (gains)
468,109
(323,037)
Interest expense accrued on notes payable officer / stockholder
25,099
7,727
Salary accrued to officer / stockholder
223,442
20,361
Changes in operating assets and liabilities:
Increase in restricted cash
-
(165,000)
Increase in accounts receivable
(22,587,338)
(4,775,893)
Increase in prepaid expenses, deposits and other assets
(958,426)
(932,718)
Increase (decrease) in accounts payable, accrued expenses and other
2,200,057
(413,635)
Increase in income tax payable
127,000
441,675
-----------------
-----------------
Net cash (used in) provided by operating activities
(3,068,782)
3,788,539
-----------------
-----------------
Cash flows from investing activities:
Purchase of fixed assets
(90,853)
(180,960)
Purchase of license rights
(280,869)
(9,639,981)
Deposits on fixed assets
-
(2,871,800)
-----------------
-----------------
Net cash used in investing activities
(371,722)
(12,692,741)
-----------------
-----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock
2,072,950
5,596,602
Advances under note payable to officer / stockholder
202,257
-
Repayment of note payable to officer / stockholder
(206,692)
(303,736)
-----------------
-----------------
Net cash provided by financing activities
2,068,515
5,292,866
-----------------
-----------------
Net decrease in cash
(1,371,989)
(3,611,336)
Cash, beginning of period
1,430,578
6,210,435
Effect of exchange rate changes on cash
116,434
95,948
-----------------
-----------------
Cash, end of period
$
175,023
$
2,695,047
==========
==========
Supplemental disclosure of non-cash activities:
Purchase of license rights and related increase in
accounts payable
$
9,131,779
$
320,786
==========
==========
Issuance of common stock and warrants in satisfaction of
accounts payable
$
66,000
$
-
==========
==========
See accompanying notes to unaudited condensed consolidated financial statements.
6
ARTIFICIAL LIFE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Artificial Life, Inc. (the Company) have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for a complete financial statement presentation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as follows:
Artificial Life Asia Limited, located in Hong Kong, supports Artificial Life in its customer service and game development.
Artificial Life Europe GmbH , located in Berlin, Germany; formed in January 2007 to concentrate on customer service and support activities of sales and marketing expansion in European, Middle Eastern and African (EMEA) markets.
Artificial Life Japan Ltd. , located in Tokyo, Japan; acquired by the Company in July 2007 for support activities of sales and marketing expansion in Japanese markets.
Artificial Life America, Inc. , located in Los Angeles, California; formed in August 2008 to support U.S. customers and focus on design and creative direction for game development.
Artificial Life Ventures, Inc., Artificial Life USA, Inc., and Artificial Life Mobile Computing, Inc., all non-operating, inactive subsidiaries in 2009 and 2008.
All significant inter-company balances and transactions have been eliminated in consolidation.
Operating results for the nine months ended September 30, 2009, are not necessarily indicative of results that may be expected for the year ending December 31, 2009. Amounts at December 31, 2008, are derived from the Companys audited consolidated financial statements. For further information, refer to the audited consolidated financial statements and notes thereto included in the Companys annual Report on Form 10-K for the year ended December 31, 2008.
The financial information included in this report has been prepared in conformity with the accounting policies reflected in the financial statements included in the Companys Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Recently issued and adopted accounting standards
In June 2009, the Financial Accounting Standards Board (FASB) approved the FASB Accounting Standards Codification (the Codification) as the single source of authoritative non-governmental generally accepted accounting principles (GAAP). All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the Securities and Exchange Commission (SEC), have been superseded by the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification has become nonauthoritative. The Codification did not change GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database. The Codification is effective for interim or annual periods ending after September 15, 2009, and impacts the Companys consolidated financial statements, as all future references to authoritative accounting literature will be referenced in accordance with the Codification. As a result of the Companys implementation of the Codification during the quarter ended September 30, 2009, previous references to new accounting standards and literature are no longer applicable.
On January 1, 2009, the Company adopted new guidance issued by the FASB related to the accounting for business combinations and related disclosures. This new guidance addresses the recognition and accounting for identifiable assets acquired, liabilities assumed, and noncontrolling interests in business combinations. The guidance also establishes expanded disclosure requirements for business combinations. The guidance was effective for the Company on January 1, 2009, and the Company will apply this new guidance prospectively to all business combinations subsequent to January 1, 2009.
On January 1, 2009, the Company adopted new guidance issued by the FASB related to the accounting for noncontrolling interests in consolidated financial statements. This guidance establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance requires that noncontrolling interests in subsidiaries be reported in the equity section of the controlling companys balance sheet. It also changes the manner in which the net income of the
7
subsidiary is reported and disclosed in the controlling companys income statement. The adoption of this guidance had no impact on the Companys consolidated financial statements.
In April 2009, the FASB issued new accounting guidance related to interim disclosures about the fair values of financial instruments. This guidance requires disclosures about the fair value of financial instruments whenever a public company issues financial information for interim reporting periods. This guidance is effective for interim reporting periods ending after June 15, 2009. The Company adopted this guidance upon its issuance, and it had no material impact on the Companys consolidated financial statements (Note 9).
In June 2009, the FASB issued new accounting guidance related to the accounting and disclosures of subsequent events. This guidance incorporates the subsequent events guidance contained in the auditing standards literature into authoritative accounting literature. It also requires entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds with the release of their financial statements. This guidance is effective for all interim and annual periods ending after June 15, 2009. The Company adopted this guidance upon its issuance and it had no material impact on the Companys consolidated financial statements (Note10).
Reclassifications:
Certain amounts reported in the 2008 interim financial statements have been reclassified to conform to the 2009 presentation.
2.
STOCK-BASED EMPLOYEE COMPENSATION
At January 1, 2009, all outstanding options and warrants issued to employees were fully vested and exercisable. There were no stock options granted during the nine-month periods ended September 30, 2009 and 2008. At September 30, 2009, the Company had outstanding options to purchase 2,065,000 shares of common stock under its stock option plan, issued to employees as follows:
Weighted average exercise price
$0.88
Aggregate intrinsic value
$237,600
Weighted average remaining contractual term
0.24 year
At September 30, 2009, the Company had outstanding warrants to purchase 700,000 shares of common stock issued to employees as follows:
Weighted average exercise price
$0.83
Aggregate intrinsic value
$77,000
Weighted average remaining contractual term
0.18 year
3.
CUSTOMER CONCENTRATION
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company extends credit to its customers in the normal course of business and generally does not require collateral. Due to the global financial crisis and general market conditions, in 2009 the Company has granted extended payment terms (up to 180 days) to certain customers. The Company assesses the probability of collection from each customer at the outset of the arrangement based on a number of factors, including the customers payment history and its current creditworthiness. If in managements judgment collection is not probable, the Company does not record revenue until the uncertainty is removed.
Management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. The allowance for doubtful accounts of $2,095,000 at September 30, 2009, and $731,500 at December 31, 2008, is the Companys best estimate of the amount of probable credit losses in existing accounts receivable. Management reviews the allowance for doubtful accounts each reporting period based on a detailed analysis of accounts receivable. In the analysis, management primarily considers the age of the customers receivable, and also considers the creditworthiness of the customer, the economic conditions of the customers industry, general economic conditions and trends, and the business relationship and history with its clients, among other factors. If any of these factors change, the Company may also change its original estimates, which could impact the level of the Companys future allowance for doubtful accounts. If judgments regarding the collectability of accounts receivable were incorrect, adjustments to the allowance may be required, which would reduce profitability. Since the Companys accounts receivable are often concentrated in a relatively few number of customers, a significant
8
change in the liquidity or financial position of any one of these customers could have a material adverse effect on the Companys financial statements. During the nine months ended September 30, 2009, the Company entered into agreements with certain of its customers to offset accounts receivable of approximately $6.4 million from these customers with accounts payable for the same amount to these customers. The offset of these receivables and payables represents a legal right of setoff pursuant to applicable accounting standards.
At September 30, 2009, the Company had 90 telecom carriers, resellers, distributors and general corporate customers compared to 70 such customers at December 31, 2008, and 59 such customers at September 30, 2008. For the three-month and nine-month periods ended September 30, 2009, resellers and distributors represented approximately 78% and 68% of the Companys revenues, respectively.
For the three-month period ended September 30, 2009, the Company had three customers that represented approximately 48%, 30% and 19% of the Companys revenues, respectively. For the three-month period ended September 30, 2008, the Company had two customers that represented approximately 44% and 33% of the Companys revenues, respectively. For the nine-month period ended September 30, 2009, the Company had four customers that represented approximately 56%, 12%, 11% and 11% of the Companys revenues, respectively. For the nine-month period ended September 30, 2008, the Company had three customers that represented approximately 54%, 14% and 13% of the Companys revenues, respectively.
At September 30, 2009, accounts receivable were due from 57 customers. Of these, three customers accounted for approximately 68%, 9% and 9% of the accounts receivable, respectively. At September 30, 2009, 24% and 56% of accounts receivable were aged within 30 days and 91 to 120 days, respectively. At September 30, 2009, the average age of accounts receivable from all customers was 115 days as compared to 83 days at December 31, 2008. The average age of receivables from the Companys three largest customers at September 30, 2009, was 167 days.
4.
NET INCOME PER SHARE
Basic net income per share is calculated based on the weighted average number of common shares outstanding for the three and nine month periods ended September 30, 2009 and 2008. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options and warrants, and are determined using the treasury stock method. The following table sets forth the computation of fully diluted shares for the three months and nine months ended September 30, 2009 and 2008.
Three-month period ended
Nine-month period ended
September 30,
September 30,
----------------
----------------
----------------
----------------
2009
2008
2009
2008
Shares used in basic per share calculation
50,261,571
47,615,002
48,803,709
45,983,219
Effect of dilutive securities:
Options
25,725
1,027,255
69,910
1,146,549
Warrants
15,619
812,115
43,190
1,125,138
----------------
----------------
----------------
----------------
Shares used in dilutive per share calculation
50,302,915
49,454,372
48,916,809
48,254,906
=========
=========
=========
=========
5.
INCOME TAXES
The difference between the expected and effective income tax expense recorded for the nine-month periods ended September 30, 2009 and 2008, is due primarily to changes in the valuation allowance on net deferred tax assets and the expected utilization of available net operating loss carryforwards.
At September 30, 2009, the Company has recorded a current income tax payable of $187,000, which consists of estimated state income taxes and U.S. federal alternative minimum tax.
9
6.
CONTINGENCIES
From time to time, legal proceedings or disputes arise in the normal course of business. The Company monitors and reviews these matters and maintains accruals where appropriate.
In September 2008, an action was brought against Artificial Life Europe GmbH in Germany in a contractual dispute, in which a claim of approximately $375,000 was made against the Company. A court hearing was held in September 2009, before the State Court in Berlin, and the Court recommended a settlement. While the Company cannot predict the outcome of the matter and is in negotiation for a settlement, the Company believes that the final outcome of this matter will not have a material adverse impact on its financial position or results of operation.
7.
NOTES PAYABLE
Note payable officer/stockholder:
The Company has a revolving note payable to its chief executive officer for advances made by him to the Company, as well as deferred salary and bonus. The note bears interest at 5%, and is repayable upon demand. On August 10 2009, the Board of Directors of the Company approved a loan agreement that was executed by the Company and the chief executive officer under which the note payable is secured by the assets of the Company. Activity on the note payable to the chief executive officer during the nine months ended September 30, 2009 and 2008, was as follows:
2009
2008
Beginning balance, January 1
$737,771
$751,860
Advances
202,257
-
Repayments
(206,692)
(303,736)
Accrued salary and bonus
223,442
20,361
Accrued interest
25,099
7,727
-----------
-----------
Ending balance, September 30
$981,877
$476,212
=======
=======
Notes payable:
The Company has promissory notes payable to two non-related party stockholders for an aggregate principal amount of $1,000,000. These notes are unsecured, bear an annual interest rate of 10%, and matured on December 31, 2008. The notes are due on demand, and the holders may convert the notes and any unpaid interest accumulated thereon into shares of common stock at a conversion price of $2.50 per share. The Company determined that the notes did not have any beneficial conversion feature, as the conversion exercise price exceeded the market price of the Companys common stock.
8.
STOCKHOLDERS EQUITY
During the nine-month period ended September 30, 2009, the Company issued 2,697,941 shares of common stock along with warrants to purchase an additional 1,549,779 shares of common stock for cash of $2,072,950. As part of the transaction, 100,000 shares and warrants to purchase 100,000 shares were issued in satisfaction of $66,000 of accounts payable. This private placement was made to nine institutional and four individual accredited investors. In connection with this transaction, the Company retained a selling agent, to whom it paid a commission approximately of $172,000. The warrants have a two-year term with exercise prices ranging from $0.80 to $1.25 per share and are immediately exercisable.
In October 2009, the Company sold 6,447,491 shares of its common stock, at $1.00 per share, for aggregate consideration of $6,447,491. The issuance of these shares was made pursuant to terms of a Securities Purchase Agreement (the SPA) with a U.S. company (the Purchaser). The SPA was entered into in conjunction with the execution of a collaboration agreement (the Alliance Agreement), in which the Company and the Purchaser have agreed to collaborate on various technological projects, as defined. Proceeds from the sale of shares are to be used for general business purposes, including those business purposes outlined and defined in the Alliance Agreement. The SPA provides for certain pre-emptive rights in contemplation of a future issuance of the Companys common stock, in which under certain circumstances, as defined, the Purchaser has the right to purchase a proportionate number of shares necessary to maintain its defined percentage ownership.
In October 2009, the Company also sold, in three additional private placements, 440,294 shares of common stock for $423,000.
10
9.
FAIR VALUE MEASUREMENTS
Accounting standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact, and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non performance.
Accounting standards have established a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Accounting standards have established three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
At September 30, 2009, the Company has no financial assets or liabilities subject to recurring fair value measurements.
The Company's financial instruments include cash, accounts receivable, accounts payable, and notes payable. Management estimates that the carrying amounts of the non-related party financial instruments approximate their fair values due to their short-term nature. The fair value of the related party notes payable is not practicable to estimate due to the related party nature of the underlying transactions.
10.
SUBSEQUENT EVENTS
In October 2009, the Company entered into a new, two-year lease for its existing Hong Kong office space, which will expire in December 2011. The new lease requires a monthly payment of approximately $18,000.
The Companys management has evaluated events through November 9, 2009, for consideration as a subsequent event to be included in its September 30, 2009, consolidated financial statements issued November 9, 2009.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following Management's Discussion and Analysis is intended to help the reader understand our results of operations and financial condition and is provided as a supplement to, and should be read in conjunction with our financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains, in addition to historical statements, forward-looking statements that involve risks and uncertainties. Our actual future results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the factors discussed in the section titled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008. Any forward-looking statement speaks only as of the date on which such statement is made and we do not intend to update any such forward-looking statements.
Overview
In the third quarter of 2009, we sold over 3,853,000 of our mobile 3G and Java games globally, primarily to resellers, aggregators and hand set manufacturers. The sales include one time downloads, end user subscriptions via operator decks, off-deck sales, bulk reseller packages and pre-installation licenses for cell phones.
Our iPhone games have been downloaded an aggregate of more than 4.6 million times. As of October 31, 2009, we have produced and released 21 games for the iPhone and iPod touch during the last 12 months. So far, the best selling game was downloaded close to 1.8 million times, the second best over 1.4 million times and the third best over 0.55 million times. The average
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number of downloads per game was about 0.22 million.
Despite the large amount of games available on the Apple App Store, 20 (or 95%) of our games have climbed up to the Top 100 most downloaded rank or higher; 17 games have been ranked in the Top 50; 15 in the Top 10 downloads; and 11 games have achieved Top 5 or higher. The best games have reached Top 10 download rankings in 56 countries, i.e. 73% of all countries in which the iPhone is officially sold. 8 of our games have even hit rank 1 in 23 countries.
13 of the produced games are based on licensed and branded intellectual property from a variety of licensors, and 8 games are based on Artificial Lifes proprietary IP. The games have been sold into 72 countries worldwide. The top 5 countries in terms of numbers of downloads for our products are: United States, United Kingdom, Germany, Australia and France (with 45.93%, 12.08%, 5.38%, 3.88% and 3.64% of sales respectively).
12 games have stayed in the Top 100 for over 30 days, 8 games for over 90 days and 6 for over 180 days. The longest continuous Top 100 ranked game has been in the ranks for over 300 days.
The best performing game categories were motor sports and racing games as well as cartoon based games in which 10 of our games have achieved rankings in the Top 10.
The number of iPhone game downloads is approximately equivalent to 37.8% of the overall number of games sold by the Company so far in 2009. The development time for a high quality iPhone game was on average 3 to 4 months.
Significant events during the third quarter of 2009 include the following:
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In July 2009, we signed a technology licensing and production agreement with the Berlin Organising Committee 2009 GmbH (BOC 2009 GmbH) to implement MoPA-TV™, the Company’s innovative cross platform technology, at the 12th IAAF World Championships in Athletics Berlin 2009™ to entertain the audience in the Olympiastadion Berlin and at event sites in the City of Berlin.
·
In July 2009, Starz Digital Media, revealed plans to jointly develop the official "Spartacus: Blood and Sand" mobile game designed for iPhone and iPod touch with the Company. The game will utilize the touch screens and motion sensitive features of the popular mobile devices and bring to life the action, violence and sex soon to be seen in the series.
·
In August 2009, we signed a two-year exclusive development and distribution agreement with Red Bull Racing to produce an official racing game on the iPhone and iPod touch platform, featuring Red Bull Racings Formula One cars and drivers. The game is tentatively scheduled for release in the fourth quarter of 2009.
·
In August 2009, we announced a collaboration with RDF Digital USA to produce an interactive animated TV show entitled Sleuths. Implementing our innovative MoPA-TV™ system, Sleuths will be the first television show in the United States to let audiences become part of the storyline.
·
In August 2009, we launched the iSink U iPhone game.
·
In August 2009, we announced our strategic decision to expand our business activities in China. All iPhone and iPod touch games and applications of the Company will be translated into simplified Chinese and launched in China as soon as possible. In addition, the Company will create new and specially tailored iPhone & iPod applications for the Chinese market.
·
In September 2009, we launched Pandorum, the official movie game for the upcoming horror film of the same name from Overture Films, on the iPhone and iPod touch platform.
·
In September 2009, we launched the BMW Sauber F1 Team Racing 09, our first racing title features the current BMW Sauber F1 Team for the 2009 season, on the iPhone and iPod touch platform. This is the second collaboration between BMW and Artificial Life developing iPhone applications.
·
In September 2009, we signed an agreement with Robbie Williams, the multi-BRIT-Award-winning music artist, to launch an iPhone game application featuring Robbie Williams new music from the forthcoming album Reality Killed the Video Star and incorporate cutting edge 3D game play of the rally driving game genre. The launch date of the title is tentatively scheduled for the fourth quarter of 2009, pending approval. The artist is releasing the application in parallel to the new album, which features the music and key visual theme of the record.
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·
In September 2009, we announced our strategic decision to expand our non-gaming related mobile activities through the launch of our first healthcare application for the iPhone, an intelligent mobile diabetes monitoring system. The application is tentatively scheduled for release in the fourth quarter of 2009.
·
In September 2009, we released the VfB Stuttgart 2009/10, the official mobile game for the traditional soccer club in the German League. The game is already available on designated channels in Germany, Switzerland and Austria.
During the nine months ended September 30, 2009, we continued to market and expand the distribution of our products in Europe, Asia and the United States by entering into various strategic relationships. Our products are now sold in over 100 countries through resellers and telecom partners and in over 65 countries through Apples App Store/iTunes distribution platform.
In addition to marketing our current products, we continue to focus on developing more new iPhone/iPod Touch and Smart Phone products, such as real time 3D/3G games and massive multi-player mobile games. We are also in ongoing talks with global media and major global brands to license additional appealing content and intellectual property.
Even though several of our new products and services have successfully been launched in several countries, there can be no guarantee that these new products and services will contribute substantially to our future revenues or will continue to be successful.
As of September 30, 2009, we had total assets of $47,315,109 and total liabilities of $8,133,772. As of September 30, 2009, current assets were $28,251,242 as compared to $16,704,265 at December 31, 2008, and current liabilities were $8,133,772 as compared to $2,940,329 at December 31, 2008.
We had 64 full time employees as of September 30, 2009. We also hire temporary staff, external consultants and interns to support our operations.
As we are still in the early phase of the global roll out of our key mobile products in several countries around the world, results of operations to date may not be indicative of our future results of operations. Moreover, we expect to experience significant fluctuations in our future operating results due to a variety of factors including the speed of the expansion of the 3G mobile markets, the general market acceptance of our products, our ability to sell and license our third party intellectual property, the increasing diversity and number of mobile phone handset types, the amount of software consulting we undertake in the future, our success in creating and entering into strategic alliances, our mix of product and service sales, our response to competitive pressure, our ability to attract and retain qualified personnel, and our ability to execute our business strategy in the Asian, European and American markets. Gross profit margins will vary from product to product between products and services and among the countries in which our products are sold. In addition, our sales mix may vary from period to period and our gross margins will fluctuate accordingly.
In addition, the stability of our earnings is also heavily influenced by macroeconomic factors. As the economy improves or worsens, our business may be similarly impacted. Macroeconomic factors, such as the current conditions in the debt markets, have impacted and will continue to impact our business. At this time, we view the direction of the economy to be uncertain, which does not allow us a high degree of certainty in predicting our earnings.
Results of Operations
Three months ended September 30, 2009 Compared to three months ended September 30, 2008
REVENUES: Revenues for the quarter ended September 30, 2009 were $8,723,481 as compared to $6,628,597 for the quarter ended September 30, 2008. The increase in revenues of $2,094,884, or 32% was mainly due to increased (a) product license revenue from mobile games, one-time downloads, (b) monthly subscription revenues for 3G games derived from mobile operators, bulk resellers and hand set distributors and (c) license revenues from the sale of our mobile diabetes and mobile property solutions.
COST OF REVENUES: Cost of revenues mainly consisted of amortization of intangible assets (license rights). Cost of revenues for the quarter ended September 30, 2009 was $1,732,798 as compared to $923,350 for the quarter ended September 30, 2008. The increase of $809,448, or 88%, was primarily due to the increased amortization of certain license rights of approximately $560,000.
GROSS MARGIN: Gross margin for the quarter ended September 30, 2009 was $6,990,683 as compared to $5,705,247 for the quarter ended September 30, 2008. The increase of $1,285,436, or 23%, was mainly due to increased product license income from mobile games, one-time downloads and monthly subscription revenues for 3G games derived from mobile operators, bulk resellers and hand set distributors and a global license deal for the sale of our mobile diabetes and mobile property solutions offset by amortization of license rights acquired in earlier periods.
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GENERAL AND ADMINISTRATIVE: General and administrative expenses consisted of salaries of administrative personnel, rent, professional fees and costs associated with employee benefits, supplies, communications and travel. General and administrative expenses for the quarter ended September 30, 2009 were $1,750,366 as compared to $451,518 for the quarter ended September 30, 2008. The increase of $1,298,848, or 288%, was mainly due to the increased depreciation of fixed assets approximately of $1,235,000.
RESEARCH AND DEVELOPMENT: Research and development expenses consisted of salary, training, consulting, subcontracting and other expenses incurred to develop and fulfill the design specifications and production of the products and services from which we derive our revenues. Research and development expenses for the quarter ended September 30, 2009 were $1,015,483 as compared to $928,487 for the quarter ended September 30, 2008. The increase of $86,996, or 9%, was mainly due to increased internet expenses.
SALES AND MARKETING: Sales and marketing expenses consisted of salaries of sales and marketing personnel and costs relating to marketing materials, advertising, trade shows, traveling and public relations activities. Sales and marketing expenses for the quarter ended September 30, 2009 were $474,066 as compared to $740,696 for the quarter ended September 30, 2008. The decrease of $266,630, or 36%, was primarily due to reductions in expenses related to marketing, telecommunications and sub-contracting expenses.
OTHER EXPENSE/INCOME: Other income for the quarter ended September 30, 2009 totaled $124,656, as compared to other expenses of $99,496 for the quarter ended September 30, 2008. The other income of $124,656 was mainly due to late payment charge income of $219,761, offset by interest expense of $39,356 and foreign currency transaction losses of approximately $55,749 in this quarter compared to income of approximately $533 in the third quarter of 2008.
INCOME FROM OPERATIONS AND NET INCOME: Income from operations for the quarter ended September 30, 2009 was $3,750,768 as compared to income from operations of $3,584,546 for the quarter ended September 30, 2008. Income from operations was mainly due to revenue of $8,723,481 from the sale of product licenses for our mobile games and technology licenses, which was offset by costs of revenue of $1,732,798 and operational costs of $3,239,915. Net income for the quarter ended September 30, 2009 was $3,875,424, compared to net income of $3,485,050 for the quarter ended September 30, 2008. Basic and diluted net income per share for the quarter ended September 30, 2009 and 2008 was $0.08 and $0.07, respectively.
Nine Months Ended September 30, 2009 Compared with Nine Months Ended September 30, 2008
REVENUES: Revenues for the nine months ended September 30, 2009 were $23,364,650 as compared to $16,235,071 for the nine months ended September 30, 2008. The increase of revenues of $7,129,579, or 44% was mainly due to increased (a) product license revenue from mobile game one-time downloads, (b) monthly subscription revenues for 3G games derived from mobile operators, bulk resellers and hand set distributors and (c) license revenues from the sale of our mobile diabetes and mobile property solutions and our technology platform Mobile Booster™.
COST OF REVENUES: Cost of revenues mainly consist of amortization of intangible assets (license rights). Cost of revenues for the nine month ended September 30, 2009 was $3,571,817 as compared to $1,793,196 for the nine months ended September 30, 2008. The increase of $1,778,621, or 99%, was primarily due to the amortized expense of license rights including an increased amortization of certain license rights of approximately $560,000.
GROSS MARGIN: Gross margin for the nine month ended September 30, 2009 was $19,792,833 as compared to $14,441,875 for the nine months ended September 30, 2008. The increase of $5,350,958, or 37%, was mainly due to increased product license income from mobile games, one-time downloads and monthly subscription revenues for 3G games derived from mobile operators, bulk resellers and hand set distributors and a global license deal for the sale of our mobile diabetes and mobile property solutions and our technology platform Mobile Booster™, offset by amortization of license rights acquired in earlier periods.
GENERAL AND ADMINISTRATIVE: General and administrative expenses consisted of salaries of administrative personnel, rent, professional fees and costs associated with employee benefits, supplies, communications, travel and the provision for doubtful accounts receivable. General and administrative expenses for the nine months ended September 30, 2009 were $4,726,579 as compared to $1,480,310 for the nine months ended September 30, 2008. The increase of $3,246,269, or 219%, was mainly due to a 2009 provision for doubtful accounts receivable of approximately $2.1 million and increased depreciation of fixed assets approximately of $1,235,000.
RESEARCH AND DEVELOPMENT: Research and development expenses consisted of salary, training, consulting, subcontracting and other expenses incurred to develop and fulfill the design specifications and production of the products and services from which we derive our revenues. Research and development expenses for the nine months ended September 30, 2009 were $2,798,120 as compared to $2,279,160 for the nine months ended September 30, 2008. The increase of $518,960 or 23%, was mainly due to increased consulting and telecommunication expenses.
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SALES AND MARKETING: Sales and marketing expenses consisted of salary expenses for sales and marketing personnel and costs relating to marketing materials, advertising, trade shows, traveling and public relations activities. Sales and marketing expenses for the nine months ended September 30, 2009 were $2,006,594 as compared to $1,676,952 for the nine months ended September 30, 2008. The increase of $329,642, or 20%, was primarily due to increased allowances for doubtful accounts.
OTHER EXPENSE/INCOME: Other expenses for the nine months ended September 30, 2009 totaled $244,681, as compared to other income of $164,807 for the nine months ended September 30, 2008. The other expenses of $244,681 were mainly due to interest income of $329,264, interest expense of $105,836 and foreign currency transaction losses of approximately $468,109 for the nine months ended September 30, 2009 comparing to a gain of $164,807 (primarily resulting from foreign currency transaction gains) for the nine months ended September 30, 2008.
INCOME FROM OPERATIONS AND NET INCOME: Income from operations for the nine months ended September 30, 2009 was $10,261,540 as compared to income from operations of $9,005,453 for the nine months ended September 30, 2008. Income from operations is mainly due to revenue of $23,364,650 from the sale of product licenses for our mobile games, one-time downloads and monthly subscription revenues for 3G games and technology licenses, offset by costs of revenue of $3,571,817 and operational costs of $9,531,293. Net income for the nine months ended September 30, 2009 was $9,389,859 as compared to net income of $8,668,950 for the nine months ended September 30, 2008. Basic net income per share for the nine months ended September 30, 2009 and 2008 was $0.19. Diluted net income per share for the nine months ended September 30, 2009 was $0.19, as compared to $0.18 for the nine months ended September 30, 2008.
The difference between the expected and effective income tax expense recorded for the nine-month periods ended September 30, 2009 and 2008, is due primarily to changes in the valuation allowance on net deferred tax assets and the expected utilization of available net operating loss carry forwards.
At September 30, 2009, the Company has recorded a current income tax payable of $187,000, which consists of estimated state income taxes and U.S. federal alternative minimum tax.
CASH FLOW SUMMARY
Our cash flows from operating, investing and financing activities, as reflected in the consolidated statements of cash flows for the nine-month periods ended September 30, 2009 and 2008, are summarized as follows:
2009
2008
Cash provided by (used in):
Operating activities
$(3,068,782)
$3,788,539
Investing activities
(371,722)
(12,692,741)
Financing activities
2,068,515
5,292,866
Effect of exchange rate changes on cash
116,434
95,948
---------------
-----------------
Net decrease in cash, considering effect of exchange rate changes on cash
$(1,255,555)
$(3,515,388)
=========
==========
Cash used in operating activities was $3,068,782 for the nine months ended September 30, 2009, which was an increase of $6,857,321 compared to the nine months ended September 30, 2008. This increase in cash used was due to the increase in the accounts receivable balance compared to the prior period and granting certain customers extended payment terms (up to 180 days), offset by an increase of net income, non-cash depreciation and amortization, the provision for losses on doubtful accounts receivable, foreign currency transaction loss and accounts payable, accrued expenses and other.
Cash used in investing activities was $371,722 for the nine months ended September 30, 2009, which was a decrease of $12,321,019 compared to the nine months ended September 30, 2008. This increase was primarily due to decreased cash expenditures relating to license rights and fixed assets.
Cash provided by financing activities was $2,068,515 for the nine months ended September 30, 2009, which was a decrease of $3,224,351 compared to the nine months ended September 30, 2008. This decrease was due to the issuance of common stock and warrants at a comparably lower price during the nine months ended September 30, 2009, compared to the prior period.
Liquidity and Capital Resources
As of September 30, 2009, we had a working capital surplus of $20,117,470 and stockholders' equity of $39,181,337.
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Through September 30, 2009, we completed a private placement raising total cash proceeds of $2,072,950 through the issuance of 2,697,941 shares of common stock to a number of investors. As part of this placement, one party received 100,000 shares and warrants to purchase 100,000 shares in satisfaction of $66,000 of accounts payable.
In October 2009, the Company sold 6,447,491 shares of its common stock at a price of $1 per share, for aggregate consideration of $6,447,491. We are also in discussions with other potential investors about investments for the fourth quarter of 2009. However, there can be no guarantees that such funds will be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to expand or continue our business as desired and operating results may be adversely affected. Debt financing will increase expenses and must be repaid regardless of operating results. Equity financing could result in a substantial dilution to existing stockholders.
We have borrowed funds from time to time in the past from our chief executive officer, Eberhard Schoneburg. As of September 30, 2009, we owed Mr. Schoneburg an aggregate amount of $981,877, as compared to $737,771 at December 31, 2008. During the three months ended September 30, 2009, Mr. Schoneburg advanced deferred salary of $111,328 to the Company. The advanced funds bear interest at a rate of 5% per year and are secured by the assets of the Company.
We expect that cash flow to be generated from remaining 2009 and 2010 operations and additional financing through various sources will be sufficient to fund the Companys operations, working capital and commitment needs for the next 12 months.
Economic conditions in the United States and in foreign markets in which we operate could substantially affect our sales and profitability and our cash position and collection of accounts receivable. Economic activity in the United States and throughout much of the world has undergone a sudden, sharp economic downturn in 2008 and 2009 following the housing downturn and subprime lending collapse in the United States and globally. Global credit and capital markets have experienced unprecedented volatility and disruption. Business credit and liquidity have tightened in much of the world. Some of our suppliers and customers may face credit issues and could experience cash flow problems and other financial hardships. These factors have had a substantial impact on the timeliness of receivable collections from our customers. The Company cannot predict at this point in time how this situation will develop and whether accounts receivable may need to be written off in the coming quarters.
Changes in governmental banking, monetary and fiscal policies to restore liquidity and increase credit availability may not be effective in alleviating the global economic declines. It is difficult to determine the breadth and duration of the economic and financial market problems and the many ways in which they may affect our suppliers, customers and our business in general. Nonetheless, continuation or further worsening of these difficult financial and macroeconomic conditions could have a significant adverse effect on our sales, collectability of our accounts receivables, profitability and results of operations.
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company extends credit to its customers in the normal course of business and generally does not require collateral.
The Companys standard payment terms are normally within 90 days. In 2009, the Company has provided extended payment terms (up to 180 days) to certain customers. The Company assesses the probability of collection from each customer at the outset of the arrangement based on a number of factors, including the customers payment history and its current creditworthiness. If in managements judgment collection of a fee is not probable, the Company does not record revenue until the uncertainty is removed.
Management performs ongoing credit evaluations, and the Company maintains an allowance for potential credit losses based upon its loss history and its aging analysis. The allowance for doubtful accounts of $2,095,000 at September 30, 2009, and $731,500 at December 31, 2008, is the Companys best estimate of the amount of probable credit losses in existing accounts receivable. Management reviews the allowance for doubtful accounts each reporting period based on a detailed analysis of accounts receivable. In the analysis, management primarily considers the age of the customers receivable and also considers the creditworthiness of the customer, the economic conditions of the customers industry, the general economic conditions and trends and the business relationship and history with its clients among other factors. If any of these factors change, the Company may also change its original estimates, which could impact the level of the Companys future allowance for doubtful accounts. If judgments regarding the collectability of accounts receivable were incorrect, adjustments to the allowance may be required, which would reduce profitability. Since the Companys accounts receivable are often concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse effect on the Companys financial statements. During the nine months ended September 30, 2009, the Company entered into agreements with certain of its customers to offset accounts receivable of approximately $6.4 million from these customers with accounts payable for the same amount to these customers. The offset of these receivables and payables represents a legal right of setoff pursuant to applicable accounting standards.
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Recently Issued and Adopted Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) approved the FASB Accounting Standards Codification (the Codification) as the single source of authoritative nongovernmental generally accepted accounting principles (GAAP). All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the Securities and Exchange Commission (SEC), have been superseded by the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification has become nonauthoritative. The Codification did not change GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database. The Codification is effective for interim or annual periods ending after September 15, 2009, and impacts the Companys consolidated financial statements, as all future references to authoritative accounting literature will be referenced in accordance with the Codification. As a result of the Companys implementation of the Codification during the quarter ended September 30, 2009, previous references to new accounting standards and literature are no longer applicable.
On January 1, 2009, the Company adopted new guidance issued by the FASB related to the accounting for business combinations and related disclosures. This new guidance addresses the recognition and accounting for identifiable assets acquired, liabilities assumed, and noncontrolling interests in business combinations. The guidance also establishes expanded disclosure requirements for business combinations. The guidance was effective for the Company on January 1, 2009, and the Company will apply this new guidance prospectively to all business combinations subsequent to January 1, 2009.
On January 1, 2009, the Company adopted new guidance issued by the FASB related to the accounting for noncontrolling interests in consolidated financial statements. This guidance establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance requires that noncontrolling interests in subsidiaries be reported in the equity section of the controlling companys balance sheet. It also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling companys income statement. The adoption of this guidance had no impact on the Companys consolidated financial statements.
In April 2009, the FASB issued new accounting guidance related to interim disclosures about the fair values of financial instruments. This guidance requires disclosures about the fair value of financial instruments whenever a public company issues financial information for interim reporting periods. This guidance is effective for interim reporting periods ending after June 15, 2009. The Company adopted this guidance upon its issuance, and it had no material impact on the Companys consolidated financial statements.
In June 2009, the FASB issued new accounting guidance related to the accounting and disclosures of subsequent events. This guidance incorporates the subsequent events guidance contained in the auditing standards literature into authoritative accounting literature. It also requires entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds with the release of their financial statements. This guidance is effective for all interim and annual periods ending after June 15, 2009. The Company adopted this guidance upon its issuance and it had no material impact on the Companys consolidated financial statements.
Off-Balance Sheet Arrangements
At September 30, 2009, we did not have any material off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
(a)
Evaluation of Disclosure Controls. Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our
17
management, as appropriate to allow timely decisions regarding required disclosure. Based on his evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2009.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
(b) Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our management team will continue to evaluate our internal control over financial reporting throughout 2009 as we implement our Sarbanes Oxley testing methodologies.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
From time to time, legal proceedings or disputes arise in the normal course of business. The Company monitors and reviews these matters and maintains accruals where appropriate.
In September 2008, an action was brought against Artificial Life Europe GmbH in Germany in a contractual dispute, in which a claim of approximately $375,000 was made against the Company. A court hearing was held in September 2009 before the State Court in Berlin and the court recommended a settlement. While the Company cannot predict the outcome of the matter and is in negotiation for a settlement, the Company does not believe that the final outcome will have a material adverse impact on its financial position or results of operations.
ITEM 1A RISK FACTORS
There have been no material changes to the Companys risk factors as previously disclosed in Item 1A Risk Factors in the Companys Form 10-K for the fiscal year ended December 31, 2008.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6 - EXHIBITS
31.1 * |
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
31.2* |
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
32* |
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
*
Filed herewith
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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.
ARTIFICIAL LIFE, INC.
Date: November 9, 2009
By: /s/ Eberhard Schoneburg
Name: Eberhard Schoneburg
Title: Chief Executive Officer and
Chief Financial Officer
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