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 Apple’s 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.
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.
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.
14
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.
15
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 Company’s 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 Company’s 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
customer’s payment history and its current creditworthiness. If in management’s 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 Company’s 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 customer’s receivable
and also considers the creditworthiness of the customer, the economic conditions of the customer’s 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 Company’s 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 Company’s 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 Company’s 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.
16
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
Company’s consolidated financial statements, as all future references to authoritative accounting literature will be referenced
in accordance with the Codification. As a result of the Company’s 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 company’s balance
sheet. It also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling
company’s income statement. The adoption of this guidance had no impact on the Company’s 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 Company’s 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 Company’s 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 SEC’s 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 Company’s risk factors as
previously disclosed in Item 1A “Risk Factors” in the Company’s 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
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31.1
*
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Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
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31.2*
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Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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32*
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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
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*
Filed herewith
18
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
19