As we are still in the early
phase of the global roll out of our key mobile products in several countries around the world, and as we resume research and development and new
engineering efforts, 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. Factors that may affect our operating results include 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, 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 and European markets. Gross profit margins will vary from
product to product and between products and services and the countries in which we launch our products. 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 is often 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 MARCH 31, 2009 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2008
REVENUES: Revenues for the
quarter ended March 31, 2009 were $7,063,200 as compared to $4,125,004 for the quarter ended March 31, 2008. The increase of revenues of $2,938,196 or
71% was mainly due to increased product license revenue 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 technology platform Mobile BoosterTM.
COST OF REVENUES: Cost of
revenues mainly consist of amortization of intangible assets. Cost of revenues for the quarter ended March 31, 2009 was $741,412 as compared to
$200,800 for the quarter ended March 31, 2008. The increase of $540,612 or 269% was primarily due to amortization expense of license
rights.
GROSS MARGIN: Gross margin for
the quarter ended March 31, 2009 was $6,321,788 as compared to $3,924,204 for the quarter ended March 31, 2008. The increase of $2,397,584 or 61% 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 technology platform offset by amortization of license
rights acquired in earlier periods.
GENERAL AND ADMINISTRATIVE:
General and administrative expenses consist of salary for administrative personnel, rent, professional fees and costs associated with employee
benefits, supplies, communications, travel and provision for doubtful accounts. General and administrative expenses for the quarter ended March 31,
2009 were $1,585,173 as compared to $446,932 for the quarter ended March 31, 2008. The increase of $1,138,241 was mainly due to a charge to increase
the allowance for doubtful accounts receivable by approximately $1,095,000, and due to slight increases in legal, staff and office
expenses.
SALES AND MARKETING: Sales and
marketing expenses consist of salary expenses of sales and marketing personnel, costs relating to marketing materials, advertising, trade show related
expense, traveling and public relations activities. Sales and marketing expenses for the quarter ended March 31, 2009 were $491,620 as compared to
$422,635 for the quarter ended March 31, 2008. The increase of $68,985 was primarily due to slight increases in staff and consulting, office and
traveling expenses.
RESEARCH & DEVELOPMENT:
Research and development expenses consist of salary, training, consulting, subcontracting and other expenses incurred to develop and fulfill the design
specifications and productions of the products and services from which we derive our revenues. Research and development expenses for the quarter ended
March 31, 2009 were $858,326 as compared to $523,917 for the quarter ended March 31, 2008.
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The increase of $334,409 was
mainly due to increases of approximately $269,000 in staff and consulting expenses and $75,000 in data hosting and web service.
OTHER EXPENSE/INCOME: Other
(expense)/income for the quarter ended March 31, 2009 was ($159,438) as compared to $88,420 for the quarter ended March 31, 2008. Net expense of $159,438
was mainly due to interest expense of ($30,252) and foreign currency transaction losses of approximately ($129,000) in this quarter comparing to a
gain of approximately $168,000 in the first quarter of 2008.
INCOME FROM OPERATIONS AND NET
INCOME: Income from operations for the quarter ended March 31, 2009 was $3,386,669 as compared to income from operations of $2,530,720 for the quarter
ended March 31, 2008. The income from operations is mainly due to revenue of $7,063,200 from the sale of product licenses for our mobile games, one
time downloads and monthly subscription revenues for 3G games and business application licenses offset by cost of revenue of $741,412 and operational
cost of $2,935,119. Net income for the quarter ended March 31, 2009 was $2,712,231 as compared to net income of 2,493,585 for the quarter ended March
31, 2008. The basic and diluted net income per share for the first quarter of 2009 was $0.06, as compared to $0.06 and $0.05, respectively,
for the quarter ended March 31, 2008.
The difference between the
expected and effective income tax expense recorded for the three-month periods ended March 31, 2009 and 2008, is due primarily to changes in the
valuation allowance on net deferred tax assets.
At March 31, 2009, the
Company’s deferred tax asset which has been fully allowed for, primarily consists of net operating loss carryforwards. The recognition of this net
deferred tax asset is based on the Company’s analysis of past, current and projected financial results of the Company’s operations. Based on
this analysis, management concluded that as of March 31, 2009, the net deferred tax asset is not more likely than not of being realized. If future
taxable income exceeds the level that has been assumed in calculating the deferred tax asset, the valuation allowance could be reduced with a
corresponding credit to income.
At March 31, 2009, the Company
has recorded a current income tax payable of $75,000, which consists of estimated state income taxes and federal alternative minimum
tax.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2009, we had a
working capital surplus of $13,752,016 and stockholders’ equity of $29,969,697.
We have borrowed funds from time
to time in the past from our chief executive officer, Eberhard Schoneburg. As of March 31, 2009, we owed our CEO an aggregate amount of $613,185, as
compared to $737,771 at December 31, 2008. In April and May 2009, our CEO advanced an additional $246,788, including deferred salary of $44,531, to the
Company. The advanced funds bear interest at a rate of 5% per year and are unsecured.
The Company continued to generate
income in the first quarter of 2009, and we expect that cash flows generated from 2009 operations and additional financing through various sources will
be sufficient to fund the Company’s operations, working capital and commitment needs for the next twelve months.
We expect that we will need to
raise additional capital to support our operations and accommodate planned future growth. 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.
In addition, 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 an 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 allowed or for 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
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financial and macroeconomic
conditions could have a significant adverse effect on our sales, collectability of our accounts receivables, profitability and results of
operations.
Recently Issued and Adopted Accounting
Pronouncements
In September 2006, the Financial
Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value
Measurements. SFAS No. 157 establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide
increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require,
estimates of fair market value. SFAS No. 157 also expands financial statement disclosure requirements about a company’s use of fair value
measurements, including the effect of such measures on earnings. In February 2008, the FASB issued Staff Position FAS 157-2, which delayed the
effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The Company adopted Staff Position FAS 157-2 on January 1, 2009. At March 31, 2009, the
Company has no financial assets or liabilities subject to recurring fair value measurements.
SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities, allows entities to voluntarily choose to measure certain financial assets and liabilities at
fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election
date occurs. If the fair value option is elected for an instrument, SFAS No. 159 specifies that unrealized gains and losses for that instrument be
reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding
instruments.
In April 2009, the FASB issued
FSP SFAS No. 107-1 and Accounting Principles Board Opinion (“APB”) 28-1, Interim Disclosures about Fair Value of Financial
Instruments, (FSP 107-1), which will require that the fair value disclosures required for all financial instruments within the scope of SFAS No.
107, Disclosures about Fair Value of Financial Instruments, be included in interim financial statements. This FSP also requires entities to
disclose the method and significant assumptions used to estimate the fair value of financial instruments on an interim and annual basis and to
highlight any changes from prior periods. FSP 107-1 will be effective for interim periods ending after June 15, 2009. The adoption of FSP 107-1 is not
expected to have a material impact on the Company’s consolidated financial statements.
On January 1, 2009, the Company
adopted SFAS No. 141(Revised 2007), Business Combinations, (SFAS No. 141R). SFAS No. 141R provides revised guidance on how acquirers recognize
and measure the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interests, and goodwill acquired in a
business combination. SFAS No. 141R also expands required disclosures surrounding the nature and financial effects of business combinations. Management
believes that the adoption of SFAS 141R will have an impact on the accounting for any future acquisition, if one were to occur. The Company is required
to apply the guidance in SFAS 141R for any future business combinations.
On January 1, 2009, the Company
adopted SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 160 establishes accounting and reporting standards
for a noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary
is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Because all of the
Company’s subsidiaries are wholly-owned by the Company, there are no noncontrolling interests, and as a result, the adoption of this standard had
no effect on the Company’s consolidated financial statements.
On January 1, 2009, the Company
adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133. SFAS No.
161 requires enhanced disclosures about the Company’s derivative and hedging activities. The adoption of SFAS 161 did not have an impact on the
Company’s financial statements.
On January 1, 2009, the Company
adopted the provisions of Emerging Issues Task Force (“EITF”) 07-05, Determining whether an Instrument (or Embedded Feature) Is Indexed to
an Entity’s Own Stock, which provides guidance on determining what types of instruments or embedded features in an instrument held by a
reporting entity
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can be considered indexed to
its own stock for the purpose of evaluating the first criteria of the scope exception in paragraph 11(a) of SFAS 133. The adoption of this EITF did not
have an impact on the Company’s consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
At March 31, 2009, we did not
have any 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 our Principal 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 management, as appropriate to allow timely decisions regarding required disclosure. Based on his evaluation,
our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31,
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.
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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 the Company in Germany in a contractual dispute, in which a claim of approximately $375,000 was made against the Company. A court
hearing is scheduled for September 2009 before the State Court in Berlin. The Company intends to contest this claim and defend itself vigorously and
intends to file a counterclaim for damages of at least $1 million. The Company cannot predict the outcome; however, 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.
ITEM 1A — RISK FACTORS
Not applicable.
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 |
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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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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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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.
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ARTIFICIAL LIFE, INC. |
Date: May 12,
2009 |
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By: /s/ Eberhard Schoneburg
Name: Eberhard Schoneburg
Title: Chief Executive Officer and
Principal Financial Officer |
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