UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Amendment No. 1)
(Mark One)
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER ________________________________
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
(Name of small business issuer in its charter)
| UTAH | | 87-0386790 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
612 Santa Monica Blvd., Santa Monica, CA 90401
(Address of principal executive offices) (Zip Code)
Issuer's telephone Number: (310) 260-6150
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.001 par value
Indicate by check mark if the registrant is a well-knopwn seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. o
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 o
Indicate by checkmark if disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filed, 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
| ¨ | Accelerated filer | ¨ |
| Non-accelerated filer | | 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 o No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the average bid and asked price of such common equity as of April 10, 2008, was $2,757,498.84.
As of April 10, 2008, the issuer had 51,189,065 outstanding shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-KSB/A (this “Amendment”) amends the Annual Report of Conspiracy Entertainment Holdings, Inc.. (the “Company”) on Form 10-KSB for the year ended December 31, 2007, as filed with the Securities and change Commission on April 15, 2008 (the "Original Filing"). This Amendment is being filed for the purpose to correct the accounting treatment of embedded derivatives and warrant liabilities in connection with our convertible debt previously issued and related disclosures to the accompanying financial statements as described in Note 14 to the financial statements.
We have not updated the information contained herein for events occurring subsequent to April 15, 2008, the filing date of the Original Filing.
TABLE OF CONTENTS
| | | | | Page | |
| PART I | | | | | |
| | | | | | |
| Item 1. | | Description of Business | | | 1 | |
| Item 1A | | Risk Factors | | | 6 | |
| Item 1B | | Unresolved Staff Comments | | | 7 | |
| Item 2. | | Description of Property | | | 7 | |
| Item 3. | | Legal Proceedings | | | 7 | |
| Item 4. | | Submission of Matters to a Vote of Security Holders | | | 7 | |
| | | | | | | |
| PART II | | | | | | |
| | | | | | | |
| Item 5. | | Market for Common Equity and Related Stockholder Matters | | | 8 | |
| Item 6. | | Selected Financial Data | | | 9 | |
| Item 7. | | Management's Discussion and Analysis of Financial Condition and Results of Operation | | | 9 | |
| Item 7A | | Quantitative and Qualitative Disclosures About Market Risk | | | 14 | |
| Item 8. | | Financial Statements and Supplementary Data | | | 14 | |
| Item 9. | | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure | | | 14 | |
| Item 9A(T). | | Controls and Procedures | | | 14 | |
| Item 9B. | | Other Information | | | 14 | |
| | | | | | | |
| PART III | | | | | | |
| | | | | | | |
| Item 10. | | Directors, Executive Officers and Corporate Governance | | | 14 | |
| Item 11. | | Executive Compensation | | | 15 | |
| Item 12. | | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | | | 16 | |
| Item 13. | | Certain Relationship and Related Transactions, and Director Independence | | | 16 | |
| Item 14. | | Principal Accountant Fees and Services | | | 17 | |
| | | | | | | |
| PART IV | | | | | | |
| | | | | | | |
| Item 15 | | Exhibits | | | 17 | |
| | | | | | | |
| SIGNATURES | | | 20 | |
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
We develop, publish and market interactive entertainment software. We currently publish titles for many popular interactive entertainment hardware platforms, such as Sony's PlayStation, Nintendo 64 and Nintendo's Game Boy Color and Game Boy Advance as well as the next generation hardware platforms such as Sony's PlayStation 2, Sony's PSP, Nintendo GameCube, Nintendo's DS, Microsoft's Xbox, and also for the PC. On June 21, 2005, we entered into an agreement with Bravado International to establish cellular celebrity fan clubs for launch in 2006. In late 2005, we decided to publish movies for the Sony PSP on the UMD format. We believe that by diversifying and adding mobile content and publishing UMD movies, we will be even better prepared to succeed and less reliant on publishing only video games.
We were incorporated under the laws of the State of Utah on July 29, 1982 as Strategic Recovery Corporation, with the purpose of investing in real and personal property and buying and selling strategic metals. As Strategic Recovery Corporation, we participated in various projects including developing and marketing an Olympic Commemorative Book and participation in a gold project in Columbia, South America.
After determining that market prices were declining and the market was becoming increasingly more competitive with low profit margins, we determined to change our business focus and on February 16, 1987, we entered into a merger agreement with Lance, Inc. Prior to the merger, Lance, Inc. owned a software program used to assist managers of HUD qualified projects to complete the proper forms and reports to maintain HUD qualification for rental payments. Under the Certificate of Merger, we were the surviving corporation and subsequent to the merger we changed our name to Lance, Inc. After the merger we intended to distribute software applications to assist managers of HUD qualified projects to complete required forms and reports to maintain HUD qualification for rental payments. This project eventually failed and we ceased operations until May 29, 2003, when we entered into a Share Exchange Agreement with Conspiracy Entertainment Corporation and its stockholders.
Pursuant to the Share Exchange Agreement, we acquired all of the issued and outstanding common stock of Conspiracy Entertainment Corporation in exchange for 21,552,900 shares of our common stock. Based on the closing price of our common stock on May 29, 2003 of $0.002, the dollar value of the merger was approximately $43,106. We entered into the Share Exchange Agreement to acquire Conspiracy Entertainment Corporation because our management believed the acquisition was an attractive business venture and because our prior operations had failed. Conspiracy Entertainment Corporation and its stockholders entered into the Share Exchange Agreement in order to provide the stockholders increased liquidity and to provide the business greater access to capital markets. Conspiracy Entertainment Corporation was formed on November 21, 1997 under the laws of the State of California. Conspiracy Entertainment Corporation originally operated as a licensing agent specializing in purchasing and selling entertainment licenses suitable for video game publishers. In 2001, Conspiracy Entertainment Corporation became an approved publisher of video game software with Nintendo and with Sony Computer Entertainment, and then in 2002, the company became an approved Microsoft publisher. After closing of the Share Exchange Agreement, we changed our name to Conspiracy Entertainment Holdings, Inc. and began developing, publishing and marketing interactive entertainment software.
The share exchange with Conspiracy Entertainment Corporation and its shareholders was recorded as a reverse acquisition using the purchase method of business combination. In a reverse acquisition all accounting history becomes that of the accounting acquirer. Since Conspiracy Entertainment Corporation was the accounting acquirer, all historical information in the accompanying financial statements prior to the acquisition is that of Conspiracy Entertainment Corporation.
In early 2004, we formed Conspiracy Entertainment Europe, Ltd., a United Kingdom corporation. We currently own a 51% interest in Conspiracy Entertainment Europe. Conspiracy Entertainment Europe was formed with the purpose of eventually obtaining publishing license agreements for European regions and eventually distributing our products throughout Europe. In March 2006, we sold our interest in Conspiracy Entertainment Europe, Ltd.
PUBLISHING
Our business is primarily focused on developing, publishing and marketing interactive entertainment software. We have entered into publishing agreements with publishers of interactive entertainment hardware platforms. These agreements are for non-exclusive licenses, both for the rights to publish and to develop titles for their hardware platforms. These agreements are the foundation for our business. We must maintain a license to develop and publish titles for each hardware platform. Each license specifies the territory to which it applies, and licenses range from multi-national distribution to approval on a title-by-title basis. Our existing hardware platform licenses for Sony's PlayStation, PlayStation 2, PlayStation Portable (PSP), Nintendo's Game Boy Advance and Game Boy DS, Microsoft's Xbox, and our license for Nintendo Wii require that we obtain approval for publication of new titles on a title-by-title basis. As a result, the number of titles we are able to publish for these hardware platforms and our ability to time the release of titles is dependent upon decisions made by third party publishers.
On August 28, 2000, we entered into a licensed publisher agreement with Sony Computer Entertainment America, Inc. Under the agreement, Sony Computer Entertainment granted us a non-exclusive license to publish, develop, have manufactured, market, distribute and sell software for Sony's computer entertainment system, PlayStation 2, in the United States and Canada. The term of the license agreement was until March 31, 2003, but automatically extends for additional one-year terms thereafter, unless either party provides the other with written notice of its election not to so extend on or before January 31 of the applicable year. We are required to have the software that we develop under the agreement manufactured by a manufacturing facility designated by Sony Computer Entertainment. We are required to pay Sony Computer Entertainment a royalty fee for each unit of the licensed products that is manufactured. The royalty fee ranges from $1.00 per unit to over $7.00 per unit, based on the initial wholesale price of the product. If there is no satisfactory evidence to support the wholesale price, the royalty rate is $7 per unit.
On September 28, 2000, we entered into a publisher license agreement with Microsoft Corporation to develop and/or publish software products running on the Xbox game system and license proprietary materials from Microsoft. When we develop a concept for a game for the Xbox system, we are required to submit to Microsoft a written and completed concept submission form that includes details of the proposed game. Microsoft then evaluates the proposed game and, if approved, we deliver to Microsoft a beta version of the game which includes all of the games features, along with disclosure about any hidden characters, cheats, "eater eggs," bonus video and audio, and similar elements included in the beta version and/or intended to be included in the final release version of the game. When the game title is complete, we deliver to Microsoft the proposed final release version that is ready for manufacture and commercial distribution. Microsoft playtests the beta version and proposed final release version of each game title and Microsoft provides us written comments regarding the results. We are required to comply with any requests by Microsoft to improve a game based on playtests. We are required to retain only authorized software replicators that are certified and approved by Microsoft for replication (manufacture) of games that run on Xbox. For each finished product unit manufactured, we must pay Microsoft royalties in accordance with the agreement. The royalty fee ranges from $1.00 per unit to over $7.00 per unit, based on the initial wholesale price of the product.
On October 2, 2000, we entered into a licensed publisher agreement with Sony Computer Entertainment America, Inc. Under the agreement, Sony Computer Entertainment granted us a non-exclusive license to publish, have manufactured, market, distribute and sell software for Sony's CD-based interactive console, PlayStation, in the United States, Canada and Mexico. Unless earlier terminated, the license is effective for four years. On September 11, 2004, this agreement was extended for another four years. Sony Computer Entertainment manufactures the software that we develop under the agreement. We are required to pay Sony Computer Entertainment a royalty fee for each unit of the licensed products that is manufactured. The royalty fee ranges from $1.00 per unit to over $7.00 per unit, based on the initial wholesale price of the product. If there is no satisfactory evidence to support the wholesale price, the royalty rate is $7 per unit. .
On November 9, 2001, we entered into a license agreement with Nintendo of America Inc. to develop, have manufactured, advertise, market and sell video game software for play on the Game Boy Advance system in countries within the Western hemisphere and their respective territories and possessions. The term of the agreement is for three years. Upon completion of a game, we deliver a prototype to Nintendo of America where it is tested and, if approved, we place purchase orders for the game from Nintendo of America for distribution to end consumers. The purchase price and minimum order quantities for the licensed products are set forth in Nintendo of America's then current price schedule which is in effect from time to time. The purchase price includes the cost of manufacturing together with a royalty for the use of the intellectual property rights. The royalty generally ranges from $1.00 per unit to over $7.00 per unit, based on the initial wholesale price of the product. .
In December 2004, we entered into a license agreement with Nintendo of America Inc. to develop, have manufactured, advertise, market and sell video game software for play on the Nintendo DS system in countries within the Western hemisphere and their respective territories and possessions. The term of the agreement is for three years. Upon completion of a game, we deliver a prototype to Nintendo of America where it is tested and, if approved, we place purchase orders for the game from Nintendo of America for distribution to end consumers. The purchase price and minimum order quantities for the licensed products are set forth in Nintendo of America's then current price schedule which is in effect from time to time. Unless otherwise specifically provided for, the purchase price includes the cost of manufacturing a single game disc, together with a royalty for the use of the intellectual property rights. The royalty generally ranges from $1.00 per unit to over $7.00 per unit, based on the initial wholesale price of the product. .
In February 2005, we entered into a licensed publisher agreement with Sony Computer Entertainment America, Inc. Under the agreement, Sony Computer Entertainment granted us a non-exclusive license to publish, have manufactured, market, distribute and sell software for Sony's handheld PSP, in the United States, Canada and Mexico. Unless earlier terminated, the license is effective for four years. Sony Computer Entertainment manufactures the software that we develop under the agreement. We are required to pay Sony Computer Entertainment a royalty fee for each unit of the licensed products that is manufactured. The royalty fee ranges from $1.00 per unit to over $7.00 per unit, based on the initial wholesale price of the product. If there is no satisfactory evidence to support the wholesale price, the royalty rate is $7 per unit. .
In November 2006, we entered into a license agreement with Nintendo of America Inc. to develop, have manufactured, advertise, market and sell video game software for play on the Nintendo Wii system in countries within the Western hemisphere and their respective territories and possessions. Upon completion of a game, we deliver a prototype to Nintendo of America where it is tested and, if approved, we place purchase orders for the game from Nintendo of America for distribution to end consumers. The purchase price and minimum order quantities for the licensed products are set forth in Nintendo of America's then current price schedule which is in effect from time to time. Unless otherwise specifically provided for, the purchase price includes the cost of manufacturing a single game disc, together with a royalty for the use of the intellectual property rights. The unit cost generally ranges from $5.50 per unit to over $9.00 per unit, based on the initial wholesale price of the product.
ENTERTAINMENT LICENSING
While we are primarily a publisher of interactive entertainment software, on occasion an entertainment licensing opportunity may become available to us. We do not allocate a budget for entertainment licensing revenue; rather, if we purchase a license it is generally for the purpose of attaching ourselves as the publisher of the software. Because revenue from entertainment licensing has fluctuated greatly in the past, it is not generally determinable what percentage of our business entertainment licensing represents. We have entered into strategic license arrangements with entertainment and media companies that have developed well-known characters and brands and that are producing properties that are expected to form the basis for future products. Our agreements with licensors and developers generally require us to make advance royalty payments.
On February 26, 2007, we entered into an agreement with Data Design Interactive for the North American publishing rights to 10 Nintendo Wii titles. The agreement called for signature payments to be made for each title and subsequent payments to be made upon receipt of manufacturing approval. As of April 15, 2008, 9 of the 10 titles have been approved for manufacturing and sold through distribution.
On March 22, 2007, we entered into an agreement with Gamesproducer Ltd for the North American publishing rights for Power Play Pool on the Nintendo DS platform. This agreement called for a signature payment and another payment upon receipt of manufacturing approval. The product was approved for manufacturing and sold during the year ended December 31, 2007.
On April 1, 2007, we entered into an agreement with Neko Entertainment S.R.L. for the North American publishing rights to Cocoto Kart Racer on the Nintendo DS platform and Cocoto Fishing Master on the PlayStation 2 platform. This agreement called for a signature payment and another payment upon receipt of manufacturing approval. The products were both approved for manufacturing and sold during the year ended December 31, 2007.
On May 25, 2007, we entered into an agreement with 10tacle Studios AG for the North American publishing rights to Panzer Tactics on the Nintendo DS platform. This agreement called for a signature payment and 3 other milestone payments to made upon various stages of completion. The product was approved for manufacturing and sold during the year ended December 31, 2007.
On August 22, 2007, we entered into an agreement with RTL Games GmbH for the North American publishing rights for Winter Sports on both the Nintendo Wii and PlayStation 2 platforms, Biathlon on the PlayStation 2 platform, and Crash Time on the Xbox 360 platform. Both Winter Sports products were approved for manufacturing and sold during the year ended December 31, 2007. We released Biathlon in the first quarter of 2008 and hope to release Crashtime in the second quarter 2008.
DEVELOPMENT
We design and develop our titles primarily through third parties with whom we have relationships. We typically select these independent third-party developers based on their expertise in developing products in a specific category and use the same developer to produce the same game for multiple platforms. We contract with the third-party developers for specific or multiple titles. We do not currently have any contracts for the design or development of any titles since we do not have any new titles in development. The development cycle for a new title typically ranges from 24 to 36 months and products are sold to mass merchandisers and through outsourced distributors. The majority of our products are completed within six to eight months. We complete the products in a short period of time since we obtain video games that are partially complete or we obtain foreign language video games published by foreign manufacturers that are completed. Partially complete refers to projects that may have been cancelled by another publisher or sold by a publisher who is no longer solvent. It is often times more efficient to revive such a project instead of starting anew. All of our products are manufactured by third parties. In order to maintain protection over their hardware technologies, publishers of hardware platforms generally specify or control the manufacturing of the finished products. We deliver the master materials to the licensor or its approved replicator, which then manufactures the finished goods and delivers them to us and/or our warehouse facility for distribution to our customers.
We also develop and market foreign game titles that have been successfully released in other countries to make them suitable for production in the United States. This process is generally shorter in time and allows us to quickly market these products. For every game the process of making foreign titles suitable for production in the United States is different. Some games only require language translations and packaging edits. These games would require translators to localize the games, and marketing firms to modify the packaging. Other games require additional features to be added to the games in order to make them compatible with the formats they will be published on. These would require the assistance of the original developers or additional developers to add the necessary content or modifications. In some instances, a decision is made to make the entire game more "Americanized" or appealing to the United States customers we intend to reach. These games would require translators, marketing firms, and the help of the existing developer and sometimes additional developers. Generally these products are released at "budget" pricing, taking advantage of impulse buyers in retail outlets. "Budget" pricing means selling games at reduced prices from full retail prices. The normal course for publishers is to release "new" games at full retail price, and subsequently reduce the price gradually to meet demand. In many instances the shelf life for these games is 4-6 months. Our approach is to release the game at an already reduced price, hoping to attract "impulse" buys. Since these games have generally already been released in other markets, they are not considered "new" and cannot command the full retail pricing. By releasing these products at a budget price we hope to generate both large unit sales, as well as long term sales via reorders.
OUR BUSINESS STRATEGY
Our objective is to become a leading independent developer and publisher of interactive entertainment software. With our ability to license popular titles, develop quality content with third-party developers and distribute titles through our distribution channels, we anticipate growth opportunities during the next major growth cycle of the interactive entertainment industry which includes the Nintendo DS, Sony PlayStation Portable, Nintendo Wii formats as well as the Microsoft Xbox 360 and Sony PlayStation 3 platforms. We also strive to become a leader in "budget" title publishing. To further our objectives, we:
WORK INTERNALLY AND WITH THIRD-PARTY GAME DEVELOPERS. We design and develop our products both internally and through our informal relationships with third-party game developers. Titles are created around our licenses with third party developers and our own proprietary content. This model allows us to create game ideas utilizing the latest technologies and consumer trends and enables us to better manage production efforts in a cost-effective manner.
PLAN TO TAKE DIRECT CONTROL OVER DISTRIBUTION CHANNELS. Our sales and marketing efforts are designed to broaden product distribution and increase the penetration of our products. Currently, our titles are sold to many mass merchandisers such as Toys "R" Us, Target, Kmart, Wal-Mart and Best Buy through distributors such as SVG and Universal. In 2007, distribution by SVG Distribution represented approximately 94% of our revenues. It is not determinable who and what amount of these revenues that different retail outlets represent. We do not have formal written distribution agreements with any distributors. In the long-term, we plan to take more direct control of the sales marketing and distribution process by establishing our own direct distribution and sales organization.
Our current distribution channels guarantee units of sales since we sell to distributors on a minimum unit basis, guarantee receipt of cash in advance of manufacturing since distributors are required to pay for manufacturing of the product, and guarantee payment regardless of subsequent sales to consumers. While our current distribution method presents minimal risk, we do not believe it is the most profitable method of distribution.
Once our capital resources increase and our product line becomes more established, we plan to take direct control of the marketing and distribution aspects of our business for the following reasons:
1. More "face" time with retailers. Often, distributors represent many product lines to the buyers of retail chains and the unique features of our games may not be presented as well as we can present them ourselves. We believe this would increase our sales revenue.
2. Increased profitability. Without third party distributors involved we believe our profit margins will increase since we will distribute directly to the retailers, thus eliminating the higher prices we have to sell product to distributors for their subsequent resale.
ENTER INTERNATIONAL MARKETS. In early 2004 we founded Conspiracy Entertainment Europe, Ltd., a United Kingdom corporation, and we own 51% of this entity. The other 49% of Conspiracy Entertainment Europe is owned by Michael Hayward. Conspiracy Entertainment Europe's operations are consolidated with our financial statements included at the end of this prospectus. The primary goal of founding a European subsidiary was to obtain publishing license agreements with Sony for PS2 and PSP for European regions, and to establish distribution channels for our products in Europe. We expected Conspiracy Entertainment Europe to enter into publishing license agreements by the end of the fiscal year ending December 31, 2005. Conspiracy Entertainment Europe was to be our sole European presence and therefore would require multiple distribution channels, for each European country we eventually choose to sell our product. The size of the European market is approximately 80% of the United States market, providing an incremental revenue growth opportunity for direct distribution of our interactive titles. However this plan was never realized. In December 2005, we sold our 51% investment in Conspiracy Entertainment Europe, Ltd, and We are have decided to seeking exclusive distribution (similar to our U.S. operations) instead of having a physical presence in Europe. With the advance of technology we feel that we can do this effectively via email communications and periodic trips to Europe in lieu of having to support a physical location. We believe this will save us considerably moving forward. In 2006 we licensed two products to European distributors and although we did not generate any European revenue in 2007 look to generate revenues from additional titles via exclusive distribution in 2008 and moving forward.
MAINTAIN HARDWARE PLATFORM FLEXIBILITY. We develop products for most hardware platforms that are currently available. In addition, if and when it is profitable to do so, we release popular game titles for use on multiple platforms. We work with hardware companies to coordinate the release of new titles with the launch of next generation hardware platforms for which those titles are designed. In coordinating the release of new titles, we work with hardware companies to obtain development tools required to program software which will operate on the new hardware platforms. In addition, we continually submit games for concept approval as well as various other milestone approvals to insure the final product is suitable and accepted by the hardware company when completed and ready for manufacturing.
OUR PRODUCT DEVELOPMENT STRATEGY
We have secured orders to pre-sell a number of our interactive entertainment titles. We plan to use the following product development strategy to develop consistent quality titles for future release:
DEVELOP NEW TITLES FOR 2008/2009. Over the next several years, we plan to transition from licensing and subcontracting the development of our products to internal development. Because of the 24-36 month development cycle for new titles, our products for 2008/2009 will be developed through our existing license agreements.
INCREASINGLY CREATE CONSPIRACY ENTERTAINMENT-GENERATED TITLES. We expect that within the next several years approximately 50% of our released titles will come from in-house generated concepts and ideas, versus licensing and subcontracting our development. We believe that increased intellectual property content enhances the value of our business and will permit greater control and improved profit margins. With internal development, we are able to immediately understand the status of projects and we are able to control the work done and make changes and improvements quickly. The costs of internal development are considerable, as first Executive Producers, Producers, Product Managers, Artists, Designers and Programmers would need to be hired. Continual training would be necessary to keep everyone up to date with the latest technology. Additional hardware and office space would also be needed to maintain the development `team.' We plan to focus on developing titles that target specific segments of the interactive entertainment industry. We identify popular properties that we believe have the potential to become successful titles, evaluate the demographic segment that the titles are most likely to appeal to and begin the development process. In this way, we believe we are able to develop titles with brand name recognition that appeal to targeted segments of the interactive entertainment software market.
COMPETITION
The interactive entertainment software industry is intensely competitive and is characterized by the frequent introduction of new hardware platforms and titles. We are a small publisher that represents less than 1% of the video game publishing market. Our competitors vary in size from small companies to large corporations, including the manufacturers of the hardware platforms. We must obtain a license from and compete with hardware platform manufacturers in order to develop and sell titles for their respective platforms. Each hardware platform manufacturer is the largest publisher and seller of software products for its own hardware platforms. As a result of their commanding market positions, these manufacturers generally have better bargaining positions with respect to retail pricing, shelf space and purchases than do any of their licensees.
In addition to the hardware platform manufacturers, we compete with other interactive entertainment software companies. Significant competitors include Acclaim Entertainment, Inc., Activision, Inc., Bandai America Incorporated, Capcom USA, Inc., Eidos PLC, Electronic Arts Inc., Infogrames, Inc., Interplay Entertainment Corp., Konami Corporation of America, Inc., Midway Games Inc., Namco Ltd., Sega Enterprises, Inc. (USA), Take-Two Interactive Software, Inc., THQ, Inc., BAM Entertainment, Ubi Soft Entertainment, Vivendi Universal S.A. and The 3DO Company. Many of these competitors are large corporations that have significantly greater financial, marketing, personnel and product development resources than us. Due to these greater resources, certain of these competitors are able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies, pay higher fees to licensors of desirable motion picture, television, sports and character properties and pay more to third-party software developers than we can.
We believe that we are able to successfully compete with regard to the principal factors of the interactive entertainment software industry, including product features, brand name recognition, rights to properties, access to distribution channels, product quality and ease of use, price, marketing support, independent product reviews and quality of customer service. However, any significant increase in the development, marketing and sales efforts of our competitors could harm our business. With respect to product features, any game released must meet the specific guidelines set forth by the first party hardware manufacturers. To date we have released products on almost every hardware platform available. With respect to brand name recognition, our product line has been established as a quality budget product line by SVG Distribution who specifically requested we package certain budget titles with distinctive artwork designating the products as a "Premium Value Product," or "PVP." With respect to rights to properties, we have outbid and earned the licensing rights to many licenses including, but not limited to, Tiny Toons, Animaniacs, and The Jeff Corwin Experience. With respect to access to distribution channels, we have sold products to some major industry distributors including, but not limited to, SVG Distribution, Jack of All Games, Vivendi/Universal, and Encore. With respect to product quality, we have received first party approval for all games released and we have won awards at the annual E3 Trade Show including, but not limited to, Best Action Game (Enclave), Best Xbox Game (Enclave) and Best Technology (Stretch Panic). Our games are all accompanied by complete detailed operating manuals consistent with those of our competitors, which make the games easy to use. Although the majority of our games are budget priced, occasionally we retail at full market price, but we always maintain flexibility to reduce the price quickly if warranted by consumer demand. As to marketing support, we have advertised our games in all of the major trade magazines, attended the annual E3 Trade Show and we participate with retailers' promotional campaigns. We have received many excellent game reviews in all of the top trade magazines as well as some non conventional magazines such as Maxim. For customer service, instead of hiring an outside company, we have selected to work with our distributors and our internal staff who know the product best, to address customer service matters.
EMPLOYEES
As of March 31, 2008, we had five full time employees and two full time consultants. We intend to hire additional full-time and part-time employees as needed. We retain independent contractors from time to time to provide various services, primarily in connection with our software development, sales activities. marketing and packaging, and other specific needs as they arise. None of our employees are covered by a collective bargaining agreement. We consider our relations with our employees to be good.
ITEM 1A. RISK FACTORS
You should consider each of the following risk factors and any other information set forth in this Form 10-KSB the Company’s and the other Company's reports filed with the Securities and Exchange Commission ("SEC"), including the Company's financial statements and related notes, in evaluating the Company's business and prospects. The risks and uncertainties described below are not the only ones that impact on the Company's operations and business. Additional risks and uncertainties not presently known to the Company, or that the Company currently considers immaterial, may also impair its business or operations. If any of the following risks actually occur, the Company's business and financial condition, results or prospects could be harmed.
WE HAVE HISTORICALLY INCURRED SIGNIFICANT LOSSES AND OUR FINANCIAL SITUATION CREATES DOUBT WHETHER WE WILL CONTINUE AS A GOING CONCERN
For the year ended December 31, 2007 we incurred net income of $3,073,458 compared to a net losses of $6,645,900 for the year-ended December 31, 2006. As of December 31, 2007, we had a working capital deficiency of $10,610,597 and an accumulated deficit of $11,686,396. There are no assurances that we will be able to achieve a level of revenues adequate to generate sufficient cash flow from operations or obtain additional financing through private placements, public offerings and/or bank financing necessary to support our working capital requirements. To the extent that funds generated from any private placements, public offerings and/or bank financing are insufficient, we will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on acceptable terms. These conditions raise substantial doubt about our ability to continue as a going concern. If adequate working capital is not available we may be forced to discontinue operations, which would cause investors to lose their entire investment.
OUR INDEPENDENT AUDITORS HAVE EXPRESSED DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN. IF WE DO NOT CONTINUE AS A GOING CONCERN, INVESTORS WILL LOSE THEIR ENTIRE INVESTMENT.
In their report dated April 11, 2008, our independent auditors have expressed doubt about our ability to continue as a going concern. Our ability to continue as a going concern is an issue raised as a result of ongoing operating losses and a lack of financing commitments then in place to meet expected cash requirements. Our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities, increasing sales or obtaining loans and grants from various financial institutions where possible. If we do not continue as a going concern, investors will lose their entire investment.
THE SUCCESS OF OUR BUSINESS IS HIGHLY DEPENDENT ON BEING ABLE TO PREDICT WHICH NEW VIDEOGAME PLATFORMS WILL BE SUCCESSFUL, AND ON THE MARKET ACCEPTANCE AND TIMELY RELEASE OF THOSE PLATFORMS. IF WE DO NOT ACCURATELY PREDICT WHICH NEW VIDEOGAME PLATFORMS WILL BE SUCCESSFUL, OUR FINANCIAL PERFORMANCE WILL BE MATERIALLY ADVERSELY AFFECTED.
We derive most of our revenue from the sale of products for play on videogame platforms manufactured by third parties, such as Nintendo Wii. Therefore, the success of our products is driven in large part by the success of new videogame hardware systems and our ability to accurately predict which platforms will be most successful in the marketplace. We must make product development decisions and commit significant resources well in advance of the anticipated introduction of a new platform. A new platform for which we are developing products may be delayed, may not succeed or may have a shorter life cycle than anticipated. If the platforms for which we are developing products are not released when anticipated or do not attain wide market acceptance, our revenue growth will suffer, we may be unable to fully recover the resources we have committed, and our financial performance will be harmed.
OUR BUSINESS IS BOTH SEASONAL AND CYCLICAL. IF WE FAIL TO DELIVER OUR PRODUCTS AT THE RIGHT TIMES, OUR SALES WILL SUFFER.
Our business is highly seasonal, with the highest levels of consumer demand, and a significant percentage of our revenue, occurring in the December quarter. If we miss this key selling period, due to product delays or delayed introduction of a new platform for which we have developed products, our sales will suffer disproportionately. Our industry is also cyclical. Videogame platforms have historically had a life cycle of four to six years. As one group of platforms is reaching the end of its cycle and new platforms are emerging, consumers often defer game software purchases until the new platforms are available, causing sales to decline. This decline may not be offset by increased sales of products for the new platform. If we fail to deliver our products at the right times, our sales will suffer.
INTELLECTUAL PROPERTY CLAIMS MAY INCREASE OUR PRODUCT COSTS, WHICH WOULD CAUSE OUR BUSINESS AND FINANCIAL CONDITION TO SUFFER.
Many patents have been issued that may apply to widely used game technologies. Additionally, infringement claims under many recently issued patents are now being asserted against Internet implementations of existing games. If such claims are asserted against us, our business and financial condition may be materially adversely affected. In the event that there is a determination that we have infringed a third-party patent, we could incur significant monetary liability and be prevented from using the rights in the future.
TECHNOLOGY CHANGES RAPIDLY IN OUR BUSINESS, AND IF WE FAIL TO ANTICIPATE NEW TECHNOLOGIES, THE QUALITY, TIMELINESS AND COMPETITIVENESS OF OUR PRODUCTS WILL SUFFER.
Rapid technology changes in our industry require us to anticipate, sometimes years in advance, which technologies our products must take advantage of in order to make them competitive in the market at the time they are released. Therefore, we usually start our product development with a range of technical development goals that we hope to be able to achieve. We may not be able to achieve these goals, or our competition may be able to achieve them more quickly than we can. In either case, our products may be technologically inferior to competitive products, or less appealing to consumers, or both. If we cannot achieve our technology goals within the original development schedule of our products, then we may delay products until these technology goals can be achieved, which may delay or reduce revenue and increase our development expenses. Alternatively, we may increase the resources employed in research and development in an attempt to accelerate our development of new technologies, either to preserve our product launch schedule or to keep up with our competition, which would increase our development expenses and adversely affect our operations and financial condition.
OUR PLATFORM LICENSORS ARE OUR CHIEF COMPETITORS AND FREQUENTLY CONTROL THE MANUFACTURING OF AND/OR ACCESS TO OUR VIDEOGAME PRODUCTS. IF THEY DO NOT APPROVE OUR PRODUCTS, WE WILL BE UNABLE TO SHIP TO OUR CUSTOMERS.
Our agreements with hardware licensors (such as Sony for the PlayStation 2, Microsoft for the Xbox and Nintendo for the Nintendo GameCube and Wii) typically give significant control to the licensor over the approval and manufacturing of our products, which could, in certain circumstances, leave us unable to get our products approved, manufactured and shipped to customers. In most events, control of the approval and manufacturing process by the platform licensors increases both our manufacturing lead times and costs as compared to those we can achieve independently. While we believe that our relationships with our hardware licensors are currently good, the potential for these licensors to delay or refuse to approve or manufacture our products exists. Such occurrences would harm our business and our financial performance.
THE NON-EXCLUSIVE NATURE OF LICENSE AGREEMENTS WITH PUBLISHERS OF INTERACTIVE ENTERTAINMENT HARDWARE PLATFORMS REDUCES BARRIERS TO ENTRY IN OUR INDUSTRY AND INCREASES COMPETITION.
We compete with numerous public and private publishers of interactive software game titles including, but not limited to Acclaim Entertainment, Inc., Activision, Inc., Bandai America Incorporated, Capcom USA, Inc., Eidos PLC, Electronic Arts Inc., Infogrames, Inc., Interplay Entertainment Corp., Konami Corporation of America, Inc., Midway Games Inc., Namco Ltd., Sega Enterprises, Inc. (USA), Take-Two Interactive Software, Inc., THQ, Inc., BAM Entertainment, Ubi Soft Entertainment, Vivendi Universal S.A. and The 3DO Company. Because there are many publishers of game titles, license agreements with hardware licensors (such as Sony, Microsoft and Nintendo) are typically non-exclusive agreements. The non-exclusive nature of these license agreements reduces barriers to entry and further exacerbates the intense competitive nature of the interactive entertainment software industry.
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUTSTANDING CONVERTIBLE DEBENTURES AND WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of April 10, 2008, we had 51,189,065 shares of common stock issued and outstanding. There are 61,250,000 shares of the Company’s common stock that are issuable upon conversion of outstanding convertible debentures and exercise of outstanding warrants and as liquidated damages in connection with such convertible debentures and warrants. All of these shares may be sold without restriction. The sale of these shares may adversely affect the market price of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
N/A
ITEM 2. DESCRIPTION OF PROPERTY.
We maintain an office located at 612 Santa Monica Blvd., Santa Monica, California. We occupy approximately 1,900 square feet of office space at this location under a lease that initially expired on April 30, 2006. On April 25, 2006 we agreed to a three year extension on the lease.
On January 22, 2008 we signed a lease for the adjacent property to our 612 Santa Monica Blvd. location which will expire on the same day as our lease at 612 Santa Moica Blvd.,, April 30, 2009. The new space is approximately 1,850 square feet of office space.
ITEM 3. LEGAL PROCEEDINGS.
Except as discussed below, we are not currently a party to, nor are any of our property currently the subject of, any pending legal proceeding. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
We withhold 10% of all foreign sales intended to be remitted to the Internal Revenue Service. As of December 31, 2005 and 2004 the Company withheld $175,770 and $136,080, respectively. As of March 31, 2006, we had not remitted any of the 2001 through 2004 withholdings to the IRS which is most likely subject to penalties and interest. To date, we have not been audited or invoiced by the Internal Revenue Service. There is currently an informal arrangements in place for payment of these withholdings and we are complying with this agreement. The amount due at December 31 2007 is included in accounts payable and accrued expenses in the balance sheet.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
Our common stock is quoted on the Over-The-Counter Bulletin Board under the symbol CPYE.OB. For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. The below prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.
| | | Fiscal 2007 | | | Fiscal 2006 | |
| Fiscal Quarter | | High | | | Low | | | High | | | Low | |
| First Quarter ended March 31 | | $ | 0.032 | | | $ | 0.012 | | | $ | 0.03 | | | $ | 0.01 | |
| Second Quarter ended June 30 | | $ | 0.045 | | | $ | 0.02 | | | $ | 0.03 | | | $ | 0.01 | |
| Third Quarter ended September 30 | | $ | 0.065 | | | $ | 0.02 | | | $ | 0.045 | | | $ | 0.006 | |
| Fourth Quarter ended December 31 | | $ | 0.069 | | | $ | 0.032 | | | $ | 0.047 | | | $ | 0.006 | |
Holders
As of April 10, 2008, we had 51,189,065 shares of common stock outstanding and held by approximately 441 stockholders of record. The transfer agent of our common stock is Madison Stock Transfer, Inc.
Dividends
We have not previously declared or paid any dividends on our common stock and we do not anticipate declaring any dividends in the foreseeable future. There are no restrictions in our articles of incorporation or bylaws that restrict us from declaring dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table shows information with respect to each equity compensation plan under which the Company's common stock is authorized for issuance as of the fiscal year ended December 31, 2007.
EQUITY COMPENSATION PLAN INFORMATION
| Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| | | (a) | | (b) | | (c) | |
| Equity compensation plans approved by security holders | | | -0- | | -0- | | | -0- | |
| Equity compensation plans not approved by security holders | | | -0- | | -0- | | | -0- | |
| Total | | | -0- | | -0- | | | -0- | |
Recent Sales of Unregistered Securities
On March 30, 2007, the Company entered into a subscription agreement (the “Agreement”) with accredited investors (the “Investors”) for the sale of $80,000 15% Secured Convertible Notes (the “Notes”), less expenses of $12,500.
The Notes bear interest at 15% and mature on August 1, 2007. The Notes will be convertible at the option of the holder at any time into shares of common stock, at an initial conversion price equal to the lesser of $0.02 per share or seventy percent (70%) of the average of the three lowest closing bid prices for the Company's common stock as reported by Bloomberg L.P. for the thirty trading days preceding the date the Note holders gives the Company notice of its conversion. The conversion price is subject to adjustment for subsequent lower price issuances by the Company, as well as customary adjustments provisions for stock splits, combinations, dividends and the like.
The full principal amount of the Notes is due upon default under the terms of Notes. The Notes are secured by all of the assets of the Company.
The securities were offered and sold to the Investor in a private placement transaction made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506 promulgated thereunder. In August 2006, the Company sold an aggregate of $247,000 principal amount of 15% secured convertible notes (the "Notes") and received $247,000 in payment for the sale of the Notes, less expenses of $4,000. This transaction was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder.
There were no unregistered sales of equity sellings during the fiscal year ended December 31, 2007. However on July 9, 2007, the Company entered into a subscription agreement with accredited for the sale of $200,000 15% Secured Convertible Notes, less expenses of $35,000.
The Notes bear interest at 15% and mature on August 1, 2008. The Notes will be convertible at the option of the holder at any time into shares of common stock, at an initial conversion price equal to the lesser of $0.02 per share or seventy percent (70%) of the average of the three lowest closing bid prices for the Company's common stock as reported by Bloomberg L.P. for the thirty trading days preceding the date the Note holders gives the Company notice of its conversion. The conversion price is subject to adjustment for subsequent lower price issuances by the Company, as well as customary adjustments provisions for stock splits, combinations, dividends and the like.
The full principal amount of the Notes is due upon default under the terms of Notes. The Notes are secured by all of the assets of the Company.
As of the date hereof, the Company is obligated on $200,000 face amount of Notes issued to the Investors. The Notes are a debt obligation arising other than in the ordinary course of business which constitute a direct financial obligation of the Company.
The securities were offered and sold to the Investor in a private placement transaction made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506 promulgated thereunder.
ITEM 6. SELECTED FINANCIAL DATA
N/A
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
The information in this annual report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations.
The following discussion and analysis should be read in conjunction with the financial statements of Conspiracy Entertainment Holdings, Inc., included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006
For the fiscal year ended December 31, 2007 we had total revenue of $8,791,131 compared to revenue of $803,493 for the fiscal year ended December 31, 2006. The major components of revenues are flat fee revenue, product sales and license revenue. Flat fee revenue represents revenues generated on a flat fee basis or obtaining manufacturing approval for specific products, product sales represent revenues for products manufactured and sold to distributors. License revenue represents license fees earned for the sale of certain products under certain licenses to third parties. We occasionally enter into such license agreements if management determines that it is in our best interest to sell rights to a particular product to a third party, rather than publishing the product our self. For the period ended December 31, 2007 we earned $0 in license revenue as compared to $182,500 license revenue earned in 2006. License revenue in 2006 consisted of revenues generated for products licensed to EUR. Product sales for the period ended December 31, 2007 was $5,516,131 as compared to $620,993 for the period ended December 31, 2006. The increase in product sales revenue of $4,895,139, or 788%, is the result of our releasing 14 new titles. We also generated $3,275,000 in flat fee revenue for the year ending December 31, 2007 as compared to $0 for the year ending December 31, 2006.
The below table provides a comparison of the nature and source of our revenue for the periods indicated.
| | | Fiscal Year Ended | |
| | | December 31, 2006 | | | December 31, 2007 | |
| Number of New Titles Released | | | 9 | | | | 14 | |
| Number of Titles Reordered | | | 2 | | | | 1 | |
| Average Price Per Title | | $ | 4.97 | | | $ | 6.70 | |
| Revenue From Internally Developed Titles | | $ | 290,000 | | | $ | 0 | |
| Partially Complete Sales | | | 0 | | | | 0 | |
| Translated Sales | | $ | 330,993 | | | $ | 5,516,131 | |
| License Revenue | | $ | 182,500 | | | $ | 0 | |
| Other Revenue (packaging) | | $ | 0 | | | $ | 3,275,000 | |
The major components of cost of sales are production costs and license/development costs. Productions costs are the manufacturing costs of the games we sell and are generally proportional to the number of units manufactured. These costs include manufacturing of the software, packaging and assembly fees. License/development costs are the costs of having the product created, translated, or developed. They include, but are not limited to, translations fees for translating foreign game titles that we re-release in the United States. For the period ended December 31, 2007, we had license/development costs of $1,954,393 as compared to $431, 287 for period ending December 31, 2006. The increase in license/development costs of $1,523,106 or 353.2% was primarily the result of higher sales. However, due to our ability to negotiate flat fee development fees (especially for Winter Sports on the Nintendo Wii) the percentage of development cost in relation to sales was lower for the period ending December 31, 2007 as compared to the period ending December 31, 2006.
Gross profit totaled $2,142,983 for the fiscal year ended December 31, 2007 as compared to gross profit of $99,038 for the fiscal year ended December 31, 2006, an increase of $2,043,944 or 2064%. Gross profit as a percentage of sales for the fiscal year ended December 31, 2007 was 24% as compared to gross profit as a percentage of sales of 12% for the fiscal year ended December 31, 2006. The increase in our gross profit percentage is a result of the company releasing 14 new titles including Winter Sports on the Nintendo Wii format which generated a higher than normal ($7.50 per unit) royalty.
Total operating expenses in each of the fiscal years ended December 31, 2007 and December 31, 2006 were comprised of selling, general and administrative expenses. Operating expenses for the fiscal years ended December 31, 2007 and 2006 were $2,014,776 and $1,135,667 respectively, which constituted a increase of $879,109, or 77%. The increase in operating expenses is attributable to increases in Professional Fees of $574,628 or 618% to $667,549 for the fiscal year ended December 31, 2007, attributable to consulting fees paid to an individual responsible for securing the RTL, Neko, and Data Design agreements on behalf of the Company. Selling, General and Administrative Fees for the fiscal years ended December 31, 2007 and 2006 were $882,800 and $563,310 respectively. The increase of $319,490 or 57% was primarily due to three major factors, in 2007 we incurred $101,520 in bad debt which was a result of the company terminating its mobile fan clubs, an increase in Entertainment of $29,299 or 92% which was required due to the substantial increase in sales activity, an increase in Marketing of $305,967 or 411% which was also required due to the substantial amount of Marketing required to assist with the distribution of product as well as the increased IR activity. We continue to make a strong effort in saving money and reducing expenses whenever possible.
Other income/expense is income and expense not related to the buying or selling of games and or licenses or income obtained for services not generally part of the company's normal operation. For the period ending December 31, 2007 we incurred Other Income of $2,945,252 compared to Other Expense of $5,609,272 for the period ending December 31, 2006 an increase of $8,554,524. The increase in income is related to our financing agreements with our investors (interest expense and financing expense) and also consists of a significant Gain on valuation of derivative liability for the period ending December 31, 2007 of $3,398,517 as compared to loss of $5,350,680 for the year ending December 31, 2006.
Our net gain was $3,073,458 in the fiscal year ended December 31, 2007 compared to a net loss of $6,645,900 in the fiscal year ended December 31, 2006 a combined result of larger revenue and gross profits and increase in general and administrative expenses and the substantial increase in Gain on valuation of derivative liabilites of $8,749,197 which was unrelated to our operations.
SEASONALITY AND OTHER TRENDS
The interactive entertainment software industry is a seasonal and cyclical industry. The majority of sales are generated in the fourth quarter of each year due to the winter holiday, followed by the first quarter of each year which consists of sales to those who received new video game platforms over the winter holiday. If we miss this key selling period, due to product delays or delayed introduction of a new platform for which we have developed products, our sales will suffer disproportionately. Second and third quarter sales generally drop off considerably unless new products are introduced. Introducing new products during this period however do not do as well as products introduced in either the fourth or first quarters.
The interactive entertainment software industry is also cyclical. Videogame platforms have historically had a life cycle of four to six years. As one group of platforms is reaching the end of its cycle and new platforms are emerging, consumers often defer game software purchases until the new platforms are available, causing sales to decline. This decline may not be offset by increased sales of products for the new platform.
RESEARCH AND DEVELOPMENT
We did not spend any money on research and development during the fiscal years ended December 31, 2007 and 2006.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of December 31, 2007:
| | | Payments due by period |
| | | | | | Less than | | | | More |
| Contractual Obligations | | Total | | | One Year | | Years 1-2 | | than 2 years |
| Notes Payable | | $ | 2,452,158 | | | $ | 2,452,158 | | | | | |
| Operating Lease Obligations | | $ | 147,845 | | | $ | 116,611 | | | $ | 31,234 | | |
| License Fee Obligations | | $ | 60,000 | | | $ | 60,000 | | | | | | |
| Total | | $ | 2,660,003 | | | $ | 2,628,769 | | | $ | 31,234 | | |
In March 2007, we entered into a convertible debenture in the amount of $80,000.
In July 2007, we entered into a convertible debenture in the amount of $200,000, as of 12/31/2007 net of discount, the balance owed is $90,537.
In August 2006, we entered into a convertible notes agreement totaling $247,000. The notes if called would be payable February 2007.
On August 5, 2005 and August 8, 2005, two accredited investors loaned us an aggregate of $223,600 in gross proceeds in exchange for two notes payable. The notes bear no interest and were due February 1, 2006. As of 12/31/07 the balance due is $194,092.
On February 9, 2005, we entered into three convertible notes payable agreements totaling $650,000, and
in September and October 2004, we entered into two convertible notes payable agreements totaling $1.1 million. The balance due as of 12/31/2007 is $1,690,400. To date, these notes are past due and have not been called.
In August 2003, we obtained an unsecured loan from an individual in the amount of $355,000 including interest. We have a remaining balance of $150,128 and plan to pay off the entire balance in the year 2008.
We currently lease office space at 612 Santa Monica Boulevard in Santa Monica, California. Beginning March 1 2008 we have leased the space directly adjacent to 612 Santa Monica Boulevard. Through the remainder of the lease term, our minimum lease payments are as follows:
| 2008 | | $ | 116,611 | |
| 2009 | | $ | 31,234 | |
Our license agreement with Discovery for "The Jeff Corwin Experience" requires payments of the remaining $80,000 to be paid in full during the year 2005. Although we have only made $20,000 in payments during 2006, we are looking into our options on how to best handle this matter and plan to pay the balance in full by the end of 2007.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2007, our cash balance was $539,990, as compared to $24,976 at December 31, 2006. Total current assets at December 31, 2007 were $927,385, as compared to $334,390 at December 31, 2006. We currently plan to use the cash balance and cash generated from operations for increasing our working capital reserves and, along with additional debt financing, for new product development, securing new licenses, building up inventory, hiring more sales staff and funding advertising and marketing. Management believes that the current cash on hand and additional cash expected from operations in fiscal 2008 will be sufficient to cover our working capital requirements for fiscal 2008. The Company reached this conclusion by recognizing that a major portion ($2,107,937) of our debt is attributed to convertible notes payable, which we expect to be converted into shares, Deferred Revenue ($1,326,653) will be reclassified as revenue upon the completion of the current projects in development, and Derivative Liability ($3,582,501) would be the amount of cash required should our investors call in our outstanding loans. We do not believe will happen anytime in the near future. We have informally negotiated with the IRS to pay down our Payroll Taxes liability in the amount of $10,000 per month and since this 10k we have negotiated with an individual to waive the unpaid portion of notes payable in the amount of $110,128. The Company is negotiating with several other parties to waive portions of our debt, or to pay the debt with the issuance of company stock including Deferred Compensation ($533,010). In addition, based on our schedule of development for the remainder of the year, we anticipate an increase in sales, profitability and cash receipts in 2008 which will allow the Company to continue to pay down our working capital requirements and help avoid additional need for working capital.
For the year ended December 31, 2007 net cash used in operating activities was $1,775,798, compared to net cash used in operating activities of -$148,213 for the period ended December 31, 2006. The change in net cash provided by operating activities of $1,924,011 was primarily the result of our Net Gain for the fiscal year ended December 31, 2007 of $3,073,458 which was considerably higher than the Net Loss of $6,645,900 for 2006. In addition we realized a smaller amortization on discount of our notes of $509,534, and a significant net change in derivative liability of $8,284,197, as well as a decrease of $536,533 in Accounts Receivable which were offset against the increase in profitability and an increase in advances received (deferred revenue) of $1,291,705.
For the year ended December 31, 2007 net cash used in investing activities totaled - -$1,518,284, compared to net cash used in investing activities of -$142,127 for the year ended December 31, 2006. The increase of $1,376,157 is due to increase of $ 1,376,157 in cash paid for acquisition of products and licenses in the fiscal year ended December 31, 2007.
For the period ended December 31, 2007 net cash provided by financing activities totaled $257,500, compared to net cash provided by financing activities of $315,316 for the period ended December 31, 2006. The decrease of net cash provided by financing activities of $57,816 was primarily the result of us obtaining $150,000 in proceeds from notes payable for the period ending December 31, 2006 as compared to $0 for the period ended December 31, 2007.
Our accounts receivable at December 31, 2007 was $110,195, as compared to $305,002 at December 31, 2006. No substantial orders being placed toward the end of the fiscal year, nor any significant late paying customers.
As of December 31, 2007 we had a working capital deficiency of $10,610,597. A major portion of our debt is attributed to consulting fees, attorney fees, deferred compensation, notes payable, convertible notes payable and payroll taxes payable. Despite increasing Accounts Receivable in the fiscal year ended December 31, 2007, we also increased our debt by receiving Advances from our customers, accruing additional interest for our recent fundings, and increased the convertible notes payable adjustments. We plan to continue to reduce these debts with proceeds generated from normal operational cash flow as well as the issuance of company stock.
The current portion of long-term debt at December 31, 2007 consisted of $0 as opposed to $0 at December 31 2006. We paid off the entire long term debt balance by year-end 2005 and had no new additional long term agreements in 2007.
As of December 31, 2007, we owed payroll taxes to the IRS in the amount of $405,732 as compared to $245,088 as of December 31, 2006. The increase is due to payroll taxes due as of December 31, 2007 to be paid during 2008.
At December 31, 2007 and December 31, 2006 we had no bank debt.
FINANCING NEEDS
We expect our capital requirements to increase over the next several years as we continue to develop new products, increase marketing and administration infrastructure, and embark on in-house business capabilities and facilities. Our future liquidity and capital funding requirements will depend on numerous factors, including, but not limited to, the cost and hiring and training production personnel who will produce our titles, the cost of hiring and training additional sales and marketing personnel to promote our products, and the cost of hiring and training administrative staff to support current management. We anticipate that we may require additional financing to expand our operations over the next twelve months. We cannot guarantee that we will be able to obtain any additional financing or that such additional financing, if available, will be on terms and conditions acceptable to us. The inability to obtain additional financing should it be required will restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our marketing and development plans.
On August 11, 2006, we sold an aggregate of $247,000 principal amount of 15% secured convertible notes to two accredited institutional investors for gross proceeds totaling $247,000 less expenses of $4,000.
On March 30, 2007, we sold an aggregate of $80,000 principal amount of 15% secured convertible notes to two accredited institutional investors for gross proceeds of $80,000 less expenses of $12,500.
On July 7, 2007, we sold an aggregate of $200,000 principal amount of 15% secured convertible notes to two accredited institutional investors for gross proceeds of $200,000 less expenses of $35,000.
We currently have outstanding 35,000,000 Class A Warrants and 35,000,000 Class B Warrants with exercise prices of the lower of $0.02 per share or 70% of the average five lowest closing bid prices of our Common Stock for the 30 trading days prior to the conversion date. Exercise of all of these warrants would provide gross proceeds of $8,750,000. However, at recent market prices of our common stock, none of these warrants are in the money. Thus, if the market price of our common stock does not increase and warrant holders do not exercise their warrants, we may be required to seek additional debt or equity financing. If additional financing is required and we cannot obtain additional financing in sufficient amounts or on acceptable terms when needed, our financial condition and operating results will be materially adversely affected.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT MANAGEMENT ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts, long-lived assets, and deferred taxes. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.
REVENUE RECOGNITION
We recognize revenue in accordance with current generally accepted accounting principles. Revenue recognition requirements require us to make significant judgments and estimates which may be difficult and complex. We make determinations regarding revenue that is recognized in the current period and the revenue that will be deferred. This is performed through judgment and estimates with regard to the software and related services to be provided to our customers. Our assumptions and judgments regarding revenue recognition could differ from actual events.
Funds received in advance of software completion are recorded as a liability and deferred until the products are completed and delivered.
We utilize the completed contract method of revenue recognition as opposed to the percentage-of-completion method of revenue recognition for substantially all of our products since the majority of our products are completed within six to eight months. We complete the products in a short period of time since we obtain video game software code that may be partially complete and/or we obtain foreign language video game software code that is published by foreign manufacturers that are completed and we develop and market them in the United States.
License revenue is generated when we sell an acquired license to another publisher to develop and sell. Revenues are recorded when the royalty payments are received from that publisher subsequent to sale of the product.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments where applicable. The majority of the Company’s sales are done through exclusive distribution which requires advance payments from the distributor. If payments are not received, product will not be published. This eliminates the need for allowance for doubtful accounts for the majority of the Company’s receivables. However the Company regularly reviews the adequacy of its accounts receivable allowance for all sales not made under the explained scenario, and after considering the size of the accounts receivable balance, each customer's expected ability to pay and our collection history with each customer an allowance is established if deemed necessary by the Company’s findings. The Company reviews significant invoices that are past due to determine if an allowance is appropriate based on the risk category using the factors described above. In addition, the Company maintains a general reserve for certain invoices by applying a percentage based on the age category. The Company also monitors its accounts receivable for concentration to any one customer, industry or geographic region. The allowance for doubtful accounts represents the Company’s best estimate, but changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. As of December 31, 2007, the allowance for doubtful accounts holds a balance of $62,500 representing receivables which have been deemed uncollectible. In response to the Staff’s comment, the Company intends to revise its discussion of Critical Accounting Policies and Significant Management Estimates to reflect the balance of the allowance for doubtful accounts as of December 31, 2007.
VALUATION OF LONG-LIVED INTANGIBLE ASSETS INCLUDING CAPITALIZED DEVELOPMENT COSTS AND LICENSES
Capitalized development costs include payments made to independent software developers under development agreements, as well as direct costs incurred for internally developed products.
We account for software development costs in accordance with SFAS No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Software development costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a product encompasses both technical design documentation and game design documentation. The accumulation of appropriate costs as a capitalized, long-term asset involves significant judgment and estimates of employee time spent on individual software projects. The accumulation and timing of costs recorded and amortized may differ from actual results.
Our long-lived assets consist primarily of capitalized development costs and licenses. We review such long-lived assets, including certain identifiable intangibles, for impairment whenever events or changes in circumstances indicate that we will not be able to recover the asset's carrying amount in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Such events or circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business or asset, a significant decrease in the benefits realized from the software products, difficulty and delays in sales or a significant change in the operations of the use of an asset.
Recoverability of long-lived assets by comparison of the carrying amount of an asset to estimated undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds its fair value.
Capitalized development costs and licenses, net of accumulated amortization, totaled $1,621,930 at December 31, 2007. Factors we consider important which could trigger an impairment review include, but are not limited to, significant under-performance relative to expected historical or projected future operating results, significant changes in the manner of our use of our assets or the strategy for our overall business or significant negative economic trends. If this evaluation indicates that the value of an intangible asset may be impaired, an assessment of the recoverability of the net carrying value of the asset over its remaining useful life is made. If this assessment indicates that an intangible asset is not recoverable, based on the estimated undiscounted future cash flows or other comparable market valuations, of the entity or technology acquired over the remaining amortization period, the net carrying value of the related intangible asset will be reduced to fair value and the remaining amortization period may be adjusted. Any such impairment charge could be significant and could have a material adverse effect on our reported financial statements.
INCOME TAXES
We account for income taxes under SFAS No. 109, "Accounting for Income Taxes," which involves the evaluation of a number of factors concerning the realizability of our deferred tax assets. In concluding that a valuation allowance is required to be applied to certain deferred tax assets, we considered such factors as our history of operating losses, our uncertainty as to the projected long-term operating results, and the nature of our deferred tax assets. Although our operating plans assume taxable and operating income in future periods, our evaluation of all of the available evidence in assessing the realizability of the deferred tax assets indicated that such plans were not considered sufficient to overcome the available negative evidence. The possible future reversal of the valuation allowance will result in future income statement benefit to the extent the valuation allowance was applied to deferred tax assets generated through ongoing operations. To the extent the valuation allowance relates to deferred tax assets generated through stock compensation deductions, the possible future reversal of such valuation allowance will result in a credit to additional paid-in capital and will not result in future income statement benefit.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
N/A
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All financial information required by this Item is attached hereto at the end of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A(T). CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our internal controls over financial reporting and our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (1) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure; and (2) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.
There was no change in our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The deficiencies in our internal controls over financial reporting and our disclosure controls and procedures are related to the limited financial backgrounds of our management and a lack of segregation of duties due to the size of our accounting department. When our financial position improves, we intend to hire additional personnel to remedy such deficiencies.
This annual report does not include an attestation report of the Company’s registered accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following table sets forth the names and ages of the members of our Board of Directors and our executive officers and the positions held by each.
| Name | | Age | | Position |
| Sirus Ahmadi | | 38 | | Chief Executive Officer and Director |
| Keith Tanaka | | 45 | | Chief Financial Officer, Principal Accounting Officer, Secretary and Director |
SIRUS AHMADI, Chief Executive Officer and Director. Mr. Ahmadi has been our Chief Executive Officer and a Director since August 2003. Prior to joining us, Mr. Ahmadi was the President and Chief Executive Officer of Conspiracy Entertainment Corporation since 1997. Mr. Ahmadi is currently a member of the Board of Directors of Giant Mobile Corporation, a wireless gaming company.
KEITH TANAKA, Chief Financial Officer, Principal Accounting Officer, Secretary and Director. Mr. Tanaka has been our Chief Financial Officer, Principal Accounting Officer, Secretary and a Director since August 2003. Prior to joining us, Mr. Tanaka was the Controller and Chief Financial Officer of Conspiracy Entertainment Corporation since 2000. Before joining Conspiracy Entertainment Corporation, he was an independent consultant for Conspiracy Entertainment Corporation since 1997. As a consultant for Conspiracy Entertainment Corporation, Mr. Tanaka's roles consisted of providing advice and direction and operations support in the areas of accounting, computer hardware and operations. Mr. Tanaka is currently a member of the Board of Directors of Giant Mobile Corporation, a wireless gaming company.
All directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. There are no agreements with respect to the election of directors. We do not compensate our directors. Officers are appointed annually by the Board of Directors and each executive officer serves at the discretion of the Board of Directors. The Company does not have any standing committees at this time.
No director, Officer, affiliate or promoter of the Company has, within the past five years, filed any bankruptcy petition, been convicted in or been the subject of any pending criminal proceedings, or is any such person the subject or any order, judgment or decree involving the violation of any state or federal securities laws.
AUDIT COMMITTEE
We do not have a separately designated standing audit committee, or a committee performing similar functions, nor do not have an audit committee financial expert, as that term is defined in Item 401 of Regulation S-B. The Board of Directors acts as our audit committee. Keith Tanaka a member of the board of director’s would otherwise qualify as an Audit Committee Expert. Mr. Tanaka is not an independent director.
CODE OF ETHICS
We have adopted a Code of Ethics and Business Conduct for Officers, Directors and Employees that applies to all of our officers, directors and employees. The Code of Ethics is filed as Exhibit 14.1 to our annual report on Form 10-KSB for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on April 15, 2005. Upon request, we will provide to any person without charge a copy of our Code of Ethics. Any such request should be made to Attn: Keith Tanaka, Conspiracy Entertainment Holdings, Inc., 612 Santa Monica Blvd., Santa Monica, CA 90401. Our telephone number is (310) 260-6150.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who beneficially own more than ten percent of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of change in ownership of common stock and other equity securities of our company. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(e) during the fiscal year ended December 31, 2007, and Forms 5 and amendments thereto furnished to us with respect to the fiscal year ended December 31, 2007, we believe that during the fiscal year ended December 31, 2007, our executive officers, directors and all persons who own more than ten percent of a registered class of our equity securities complied with all Section 16(a) filing requirements except as described below:
A Form 4 was filed on February 15, 2008 for the sales of common stock by Sirus Ahmadi in transactions conducted on January 15, 2008 and January 23, 2008.
A From 4 was filed on March 28, 2008 for the sales of common stock by Sirus Ahmadi in transactions conducted on January 25, 2008, January 28, 2008, January 29, 2008, February 25, 2008 and February 26, 2008.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the aggregate cash compensation paid during the two years ended December 31, 2007, 2006 and 2005 to our Chief Executive Officer, and our two most highly compensated executive officers, other than the Chief Executive Officer. No other officers or directors received annual compensation in excess of $100,000 during the last three fiscal years.
| SUMMARY COMPENSATION TABLE |
Name and Principle Position | | Year | | Salary ($) | | Bonus ($) | | Stock Awards ($) | | Option Awards ($) | | Non-Equity Incentive Plan Compensation ($) | | Nonqualified Deferred Compensation Earnings ($) | | All Other Compensation ($) | | Total ($) | |
Sirus Ahmadi - CEO | | | 2005 2006 | | | 324,000
238,500 | | | | | | | | | | | | | | | | | | | | | 324,000
238,500 | |
| | | | 2007 | | | 279,500 | | | | | | | | | | | | | | | | | | | | | 279,500 | (1) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Keith Tanaka, Chief Financial Officer | | | 2005
2006 | | | 134,000
134,000 | | | | | | | | | | | | | | | | | | | | | 134,000
134,000 | |
| | | | 2007 | | | 143,200 | | | | | | | | | | | | | | | | | | | | | 143,200 | (2) |
(1) During the years ended December 31, 2006 and 2005 $174,200 and $319,000, respectively, of Mr. Ahmadi’s salary was deferred.
(2) During the year ended December 31, 2006 and 2005 $0 and $54,957, respectively, of Mr. Tanaka’s salary was deferred.
Executive Employment Agreements
On January 1, 2002, we entered into three-year employment agreements with Sirus Ahmadi, our Chief Executive Officer, and Keith Tanaka, our Chief Financial Officer, providing for annual salaries of $324,000, plus benefits, and $134,400, plus benefits, respectively. In addition, per the agreements, each employee is entitled to a corporate vehicle monthly allowance of $800 and $500, respectively. Mr. Tanaka is also entitled to 10% of our total issued and outstanding common shares as of the date of the agreement. Although the employment agreements both expired as of December 31, 2004, we continue to compensate both Sirus Ahmadi and Keith Tanaka under the terms of their prior agreement with the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information regarding the beneficial ownership of our common stock as of April 10, 2008. The information in this table provides the ownership information for:
| · | each person known by us to be the beneficial owner of more than 5% of our common stock; |
| · | each of our executive officers; and |
| · | our executive officers and directors as a group. |
Beneficial ownership has been determined in accordance with the rules and regulations of the SEC and includes voting or investment power with respect to the shares. Unless otherwise indicated, the persons named in the table below have sole voting and investment power with respect to the number of shares indicated as beneficially owned by them.
| | | | | Percentage of | |
| | | Common Stock | | Common Stock | |
| Name of Beneficial Owner (1) | | Beneficially Owned (2) | | Before Offering (2) | |
Sirus Ahmadi | | | 14,779,131 | | 28.9 | % |
| Keith Tanaka | | | 2,155,290 | | 4.2 | % |
| All Directors and Executive Officers as a Group (2 persons) | | | 16,934,421 | | 33.1 | % |
(1) The address of the listed beneficial owners is c/o Conspiracy Entertainment Holdings, Inc., 612 Santa Monica Blvd., Santa Monica, California 90401
(2) Applicable percentage ownership is based on 51,189,065 shares of common stock outstanding as of April 10, 2008, together with securities exercisable or convertible into shares of common stock within 60 days of April 10, 2008 for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of April 10, 2008 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE
We did not enter into any transactions with related persons, promoters or control persons in the fiscal year 2007 other than as described in this Item.
In 2004, we entered into an agreement with Giant Mobile Corporation, a wireless content provider, to perform consulting services. We provided consultant services with regard to establishment of business, introduction to developers and entertainment license agents, assisted with the initial accounting and computer network establishment and Keith Tanaka, our Chief Financial Officer, Principal Accounting Officer, Secretary and a director, and Sirus Ahmadi, our Chief Executive Officer and a director, were appointed non-paid board positions with the company. Messrs. Tanaka and Ahmadi currently remain directors of Giant Mobile Corporation. By performing these services, we earned $50,000 in consulting revenues as well as the opportunity to gain knowledge in the mobile gaming industry.
On June 15, 2002, we entered into a development agreement with one of our shareholders, ELO Interactive, for the development of Marble Master (PS One). The owner of ELO Interactive owned 11.43% of our common stock on June 15, 2002, while we were a private company. As of March 31, 2005, the owner of ELO Interactive owned 6.73% of our common stock. The development agreement terminated pursuant to its terms on December 31, 2002 after Marble Master was approved for manufacturing. As of March 31, 2005, we had $3,501 of accounts payable due to ELO Interactive pursuant to the development agreement, which is included in "Accounts Payable - Related Party" in the accompanying balance sheets.
Board Determination of Independence
Messrs. Ahmadi and Tanaka are each not “independent” as that term is defined by the National Association of Securities Dealers Automated Quotations (“NASDAQ”).
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The aggregate fees billed for professional services rendered by our principal accountants for the audit of our financial statements, for the reviews of the financial statements included in our annual report on Form 10-KSB, and for other services normally provided in connection with statutory filings were $31,500 and $26,700 for the years ended December 31, 2007 and December 31, 2006, respectively.
Tax Fees
The aggregate fees billed for professional services rendered by our principal accountants for tax compliance, tax advice, and tax planning were $1,500 and $2,800 for the years ended December 31, 2007 and December 31, 2006, respectively. The services for which such fees were paid consisted of tax return preparation.
All Other Fees
We did not incur any fees for other professional services rendered by our principal accountants during the years ended December 31, 2007 and December 31, 2006.
Audit Committee Pre-Approval Policies and Procedures
Our Board of Directors acts as our audit committee, and consults with respect to audit policy, choice of auditors, and approval of out of the ordinary financial transactions.
ITEM 15. EXHIBITS.
Exhibit Number | | Description |
| 4.1 | | Securities Purchase Agreement dated as of August 31, 2004 (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on September 3, 2004) |
| | | |
| 4.2 | | Form of Convertible Debenture (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on September 3, 2004) |
| | | |
| 4.3 | | Form of Class A Warrant (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on September 3, 2004) |
| | | |
| 4.4 | | Form of Class B Warrant (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on September 3, 2004) |
| | | |
| 4.5 | | Form of Registration Rights Agreement (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on September 3, 2004) |
| | | |
| 4.6 | | Form of Security Interest Agreement (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on September 3, 2004) |
| 4.7 | | Supplement No. 1, dated as of September 28, 2004, between the Company and Whalehaven Capital Fund Limited, to Securities Purchase Agreement, dated as of August 31, 2004 (Incorporated by reference to Form 10-QSB, filed with the Securities and Exchange Commission on November 16, 2004) |
| | | |
| 4.8 | | $50,000 principal amount 5% Secured Convertible Debenture issued to Whalehaven Capital Fund Limited (Incorporated by reference to Form 10-QSB, filed with the Securities and Exchange Commission on November 16, 2004) |
| | | |
| 4.9 | | Class A Common Stock Purchase Warrant issued to Whalehaven Capital Fund Limited (Incorporated by reference to Form 10-QSB, filed with the Securities and Exchange Commission on November 16, 2004) |
| | | |
| 4.10 | | Class B Common Stock Purchase Warrant issued to Whalehaven Capital Fund Limited (Incorporated by reference to Form 10-QSB, filed with the Securities and Exchange Commission on November 16, 2004) |
| | | |
| 4.11 | | Common Stock Purchase Warrant issued to Scott Mac Caughern exercisable at $0.20 per share (Incorporated by reference to Amendment No. 1 to the Company's registration statement on Form SB-2 (File No. 333-120773) filed with the Securities and Exchange Commission on July 7, 2005) |
| | | |
| 4.12 | | Common Stock Purchase Warrant issued to Scott Mac Caughern exercisable at $0.40 per share (Incorporated by reference to Amendment No. 1 to the Company's registration statement on Form SB-2 (File No. 333-120773) filed with the Securities and Exchange Commission on July 7, 2005) |
| | | |
| 4.13 | | Securities Purchase Agreement, dated as of January 31, 2005 (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on February 15, 2005) |
| | | |
| 4.14 | | Form of Convertible Debenture, dated as of February 9, 2005 (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on February 15, 2005) |
| | | |
| 4.15 | | Form of Warrant, dated as of February 9, 2005 (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on February 15, 2005) |
| | | |
| 4.16 | | Form of Registration Rights Agreement, dated as of January 31, 2005 (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on February 15, 2005) |
| | | |
| 4.17 | | Form of Security Interest Agreement, dated as of January 31, 2005 (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on February 15, 2005) |
| | | |
| 4.18 | | Joint Escrow Instructions in connection with the Securities Purchase Agreement dated as of January 31, 2005 (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on February 15, 2005) |
| | | |
| 4.19 | | Form of promissory note due February 1, 2006 (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on August 22, 2005) |
| 4.20 | | Amendment, Modification and Consent to Transaction Documents Agreement dated August 8, 2005 among Conspiracy Entertainment Holdings, Inc. and the Lenders under certain Securities Purchase Agreements with the Company dated as of August 31, 2004 and January 31 2005 (Incorporated by reference to Form 8-K, filed with the Securities and Exchange Commission on August 22, 2005) |
| | | |
| 4.21 | | Second Agreement, Modification and Consent to Transaction Documents Agreement, dated August 11,2006 (Incorporated by reference to Form 8-K, Filed with the Securities and Exchange Commission on August 17, 2006) |
| | | |
| 4.22 | | Form of Secured Convertible Note (Incorporated by reference to Form 8-K, Filed with the Securities and Exchange Commission on August 17, 2006) |
| | | |
| 4.23 | | Form of Secured Convertible Note (Incorporated by reference to Form 8-K, Filed with the Securities and Exchange Commission on April 5, 2007) |
| | | |
| 4.24 | | Subscription Agreement (Incorporated by reference to Form 8-K, Filed with the Securities and Exchange Commission on April 5, 2007) |
| | | |
| 16.1 | | Letter from HJ & Associates, L.L.C., dated June 22, 2005, on change in certifying accountant (Incorporated by reference to Amendment No. 1 to the Company's registration statement on Form SB-2 (File No. 333-120773) filed with the Securities and Exchange Commission on July 7, 2005) |
| | | |
| 16.2 | | Letter from Singer Lewak Greenbaum & Goldstein LLP, dated June 7, 2005, on change in certifying accountant (Incorporated by reference to Amendment No. 1 to the Company's registration statement on Form SB-2 (File No. 333-120773) filed with the Securities and Exchange Commission on July 7, 2005) |
| | | |
| 21.1 | | Subsidiaries of the Company (Incorporated by reference to the Company's registration statement on Form SB-2 (File No. 333-120773) filed with the Securities and Exchange Commission on November 24, 2004) |
| | | |
| 31.1 | | Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act |
| | | |
| 31.2 | | Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act |
| | | |
| 32.1 | | Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code |
| | | |
| 32.2 | | Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code |
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | CONSPIRACY ENTERTAINMENT HOLDINGS, INC |
| | | |
| Dated: January 9, 2009 | By: | /s/ Sirus Ahmadi | |
| | Sirus Ahmadi |
| | Chief Executive Officer |
| | | |
| Dated: January 9, 2009 | By: | /s/ Keith Tanaka | |
| | Keith Tanaka |
| | Chief Financial Officer and Principal Accounting Officer |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| SIGNATURE | | TITLE | | DATE |
| | | | | |
| /s/ Sirus Ahmadi | | Chief Executive Officer and Director | | January 9, 2009 |
| Sirus Ahmadi | | | | |
| | | | | |
| /s/ Keith Tanaka | | Chief Financial Officer, Principal | | January 9, 2009 |
| Keith Tanaka | | Accounting Officer, Secretary and Director | | |
CONTENTS
| Report of Independent Registered Public Accounting Firm | F-2 |
| | |
| Consolidated Balance Sheets | F-3 |
| | |
| Consolidated Statements of Operations | F-5 |
| | |
| Consolidated Statements of Stockholders’ Deficit | F-7 |
| | |
| Consolidated Statements of Cash Flows | F-8 |
| | |
| Notes to the Consolidated Financial Statements | F-10 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Shareholders
Conspiracy Entertainment Holdings, Inc.
Santa Monica, California
We have audited the accompanying balance sheets of Conspiracy Entertainment Holdings, Inc. as of December 31, 2007 and 2006, and the related statements of operations, stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Conspiracy Entertainment Holdings, Inc. as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company had an accumulated deficit, negative working capital, and a net loss which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 15 to the financial statements, management discovered various errors in recording embedded derivatives on convertible debt, adjusting derivatives to fair market value and recording liquidating damages under registration rights agreements associated with debt. Also capital provided from a joint venture partner was reclassified from minority interest to a reduction in deferred cost. The effects the financial statements are described in Note 15. Accordingly, the financial statements have been restated to correct the errors.
/S/
Chisholm, Bierwolf & Nilson, LLC
Bountiful, Utah
March 5, 2008 except for Notes 1,2,3,4,7,8,9,11,13 and 15 dated January 14, 2009
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Balance Sheets
ASSETS
| | | December 31, | |
| | | 2007 | | | 2006 | |
| | | (as restated) | | | (as restated) | |
| CURRENT ASSETS | | | | | | |
| | | | | | | |
| Cash and cash equivalents | | $ | 539,990 | | | $ | 24,976 | |
| Accounts receivable, net of allowance for doubtful accounts of $62,500 and $-0- in 2007 and 2006, respectively | | | 110,195 | | | | 305,002 | |
| Prepaid manufacturing | | | 277,200 | | | | - | |
| Other prepaid expenses | | | - | | | | 4,412 | |
| | | | | | | | | |
| Total Current Assets | | | 927,385 | | | | 334,390 | |
| | | | | | | | | |
| PROPERTY AND EQUIPMENT, NET | | | 4,449 | | | | 6,090 | |
| | | | | | | | | |
| OTHER ASSETS | | | | | | | | |
| | | | | | | | | |
| Capitalized development costs and licenses, net | | | 1,621,930 | | | | 563,304 | |
| Deposits | | | 6,906 | | | | 6,906 | |
| Other receivable | | | 132,500 | | | | 179,500 | |
| | | | | | | | | |
| Total Other Assets | | | 1,761,336 | | | | 749,710 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 2,693,170 | | | $ | 1,090,190 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' DEFICIT
| | | December 31, | |
| | | 2007 | | | 2006 | |
| | | (as restated) | | | (as restated) | |
| CURRENT LIABILITIES | | | | | | |
| | | | | | | |
| Accounts payable | | $ | 707,437 | | | $ | 653,627 | |
| Accrued expenses | | | 2,153,669 | | | | 2,014,060 | |
| Payroll taxes payable | | | 782,554 | | | | 524,215 | |
| Deferred compensation | | | 533,010 | | | | 638,043 | |
| Advance from customer | | | - | | | | 201,327 | |
| Deferred revenue | | | 1,326,653 | | | | 17,474 | |
| Notes payable, current portion | | | 344,221 | | | | 366,721 | |
| Derivative liability | | | 3,582,501 | | | | 6,701,018 | |
| Convertible notes payable, net of discount of $109,463 and $45,425 in 2007 and 2006, respectively | | | 2,107,937 | | | | 1,891,975 | |
| | | | | | | | | |
| Total Current Liabilities | | | 11,537,982 | | | | 13,008,460 | |
| | | | | | | | | |
| Total Liabilities | | | 11,537,982 | | | | 13,008,460 | |
| | | | | | | | | |
| COMMITMENTS | | | | | | | | |
| | | | | | | | | |
| STOCKHOLDERS' DEFICIT | | | | | | | | |
| | | | | | | | | |
| Common stock, $0.001 par value; 100,000,000 shares authorized, 51,189,065 shares issued and outstanding | | | 51,190 | | | | 51,190 | |
| Additional paid in capital | | | 2,790,394 | | | | 2,790,394 | |
| Accumulated deficit | | | (11,686,396 | ) | | | (14,759,854 | ) |
| | | | | | | | | |
| Total Stockholders' Deficit | | | (8,844,812 | ) | | | (11,918,270 | ) |
| | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | | $ | 2,693,170 | | | $ | 1,090,190 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Statements of Operations
| | | For the Years Ended | |
| | | December 31, | |
| | | 2007 | | | 2006 | |
| | | (as restated) | | | (as restated) | |
| NET SALES | | $ | 8,791,131 | | | $ | 803,493 | |
| | | | | | | | | |
| COST OF SALES | | | 6,648,149 | | | | 704,454 | |
| | | | | | | | | |
| GROSS PROFIT | | | 2,142,982 | | | | 99,039 | |
| | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | |
| | | | | | | | | |
| Professional fees | | | 667,549 | | | | 92,921 | |
| Wages and salaries | | | 464,427 | | | | 479,436 | |
| Selling, general and administrative | | | 882,800 | | | | 563,310 | |
| | | | | | | | | |
| Total Operating Expenses | | | 2,014,776 | | | | 1,135,667 | |
| | | | | | | | | |
| NET INCOME (LOSS) FROM OPERATIONS | | | 128,206 | | | | (1,036,628 | ) |
| | | | | | | | | |
| OTHER INCOME (EXPENSE) | | | | | | | | |
| | | | | | | | | |
| Interest expense | | | (237,303 | ) | | | (266,236 | ) |
| Net financing income (expense) | | | (215,962 | ) | | | (4,718 | ) |
| Gain (loss) on valuation of derivative liability | | | 3,398,517 | | | | (5,350,680 | ) |
| Other income (expense) | | | - | | | | 12,362 | |
| | | | | | | | | |
| Total Other Income (Expense) | | | 2,945,252 | | | | (5,609,272 | ) |
| | | | | | | | | |
| NET INCOME (LOSS) BEFORE INCOME TAXES | | | 3,073,458 | | | | (6,645,900 | ) |
| | | | | | | | | |
| PROVISION FOR INCOME TAXES | | | - | | | | - | |
| | | | | | | | | |
| NET INCOME (LOSS) | | $ | 3,073,458 | | | $ | (6,645,900 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Statements of Operations (Continued)
| | | For the Years Ended | |
| | | December 31, | |
| | | 2007 | | | 2006 | |
| | | (as restated) | | | (as restated) | |
| | | | | | | | | |
| BASIC INCOME (LOSS) PER SHARE (Note 2) | | $ | 0.06 | | | $ | (0.17 | ) |
| | | | | | | | | |
| DILUTED INCOME (LOSS) PER SHARE (Note 2) | | $ | (0.02 | ) | | $ | (0.17 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Statements of Stockholders' Deficit
For the Years Ended December 31, 2007 and 2006
(Restated)
| | | | | | | | | Additional | | | | |
| | | Common Stock | | | Paid-In | | | Retained | |
| | | Shares | | | Amount | | | Capital | | | Deficit | |
| | | | | | | | | | | | | |
| Balance, December 31, 2005 | | | 37,785,509 | | | | 37,786 | | | | 2,732,545 | | | | (8,113,954 | ) |
| | | | | | | | | | | | | | | | | |
| Shares issued for services at $0.015 | | | 500,000 | | | | 500 | | | | 7,000 | | | | - | |
| | | | | | | | | | | | | | | | | |
| Conversion of notes payable and related accrued interest | | | 12,903,556 | | | | 12,904 | | | | 50,849 | | | | - | |
| | | | | | | | | | | | | | | | | |
| Net loss for the year ended December 31, 2006 (as restated) | | | - | | | | - | | | | - | | | | (6,645,900 | ) |
| | | | | | | | | | | | | | | | | |
| Balance, December 31, 2006 | | | 51,189,065 | | | | 51,190 | | | | 2,790,394 | | | | (14,759,854 | ) |
| | | | | | | | | | | | | | | | | |
| Net income for the year ended December 31, 2007 | | | - | | | | - | | | | - | | | | 3,073,458 | |
| | | | | | | | | | | | | | | | | |
| Balance, December 31, 2007 | | | 51,189,065 | | | $ | 51,190 | | | $ | 2,790,394 | | | $ | (11,686,396 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Statements of Cash Flows
| | | For the Years Ended | |
| | | December 31, | |
| | | 2007 | | | 2006 | |
| | | (as restated) | | | (as restated) | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| | | | | | | |
| Net income (loss) | | $ | 3,073,458 | | | $ | (6,645,900 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | |
| Depreciation and amortization | | | 5,869 | | | | 9,147 | |
| Amortization of discount on convertible notes payable | | | 215,962 | | | | 725,496 | |
| Amortization and impairment of capitalized development costs and licenses | | | 455,430 | | | | 431,287 | |
| Gain on sale of subsidiary | | | - | | | | (11,600 | ) |
| Financing fees and services paid with common stock | | | - | | | | 7,500 | |
| Net change in derivative liability | | | (3,398,517 | ) | | | 4,885,680 | |
| Change in operating assets and liabilities: | | | | | | | | |
| Accounts receivable and other receivable | | | 241,807 | | | | (294,726 | ) |
| Prepaid expenses | | | (272,788 | ) | | | (4,412 | ) |
| Accounts payable and accrued expenses | | | 451,758 | | | | 557,641 | |
| Deferred compensation | | | (105,033 | ) | | | 174,200 | |
| Deferred revenue | | | 1,309,179 | | | | 17,474 | |
| Advance from customers | | | (201,327 | ) | | | - | |
| | | | | | | | | |
| Net Cash Provided by (Used in) Operating Activities | | | 1,775,798 | | | | (148,213 | ) |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| | | | | | | | | |
| Payments for development costs and licenses | | | (1,514,056 | ) | | | (183,127 | ) |
| Purchase of property and equipment | | | (4,228 | ) | | | - | |
| Proceeds from sale of subsidiary | | | - | | | | 41,000 | |
| | | | | | | | | |
| Net Cash Used in Investing Activities | | | (1,518,284 | ) | | | (142,127 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| | | | | | | | | |
| Cash held in escrow | | | - | | | | 4,489 | |
| Proceeds from advances | | | - | | | | 76,327 | |
| Proceeds from convertible notes payable | | | 280,000 | | | | 247,000 | |
| Proceeds from notes payable | | | - | | | | 150,000 | |
| Payments on notes payable | | | (22,500 | ) | | | (162,500 | ) |
| | | | | | | | | |
| Net Cash Provided by Financing Activities | | $ | 257,500 | | | $ | 315,316 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Statements of Cash Flows (Continued)
| | | For the Years Ended | |
| | | December 31, | |
| | | 2007 | | | 2006 | |
| | | (as restated) | | | (as restated) | |
| | | | | | | |
| INCREASE IN CASH AND CASH EQUIVALENTS | | $ | 515,014 | | | $ | 24,976 | |
| | | | | | | | | |
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | | | 24,976 | | | | - | |
| | | | | | | | | |
| CASH AND CASH EQUIVALENTS, END OF YEAR | | $ | 539,990 | | | $ | 24,976 | |
| | | | | | | | | |
| SUPPLEMENTAL DISCLOSURES: | | | | | | | | |
| | | | | | | | | |
| Cash paid for interest | | $ | - | | | $ | - | |
| Cash paid for income taxes | | $ | - | | | $ | - | |
| | | | | | | | | |
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | |
| | | | | | | | | |
| Common stock issued for services | | $ | - | | | $ | 7,500 | |
| Notes payable converted to common stock | | $ | - | | | $ | 59,600 | |
| Beneficial conversion feature of convertible notes payable | | $ | 280,000 | | | $ | 105,857 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 1 - | NATURE OF ORGANIZATION |
The financial statements presented are those of Conspiracy Entertainment Holdings, Inc., (formerly Lance Systems, Inc.) (the Company). The Company was incorporated under the laws of the state of Utah on July 29, 1982 as Strategic Recovery Corporation. On February 16, 1987, the Company merged with Lance, Inc., (a Utah Corporation), and changed its name to Lance Systems, Inc. The Company was organized for the purpose of acquiring investments. However, subsequent to the merge, the Company changed its purpose from acquiring investments to creating, developing and selling micro computer software.
On October 7, 2003, the Company effected a reorganization and acquisition agreement with Conspiracy Entertainment Corporation (CEC), organized in November 1997. The reorganization agreement provided for the issuance of 21,552,900 shares of common stock to the shareholder of CEC, for all outstanding shares of CEC. Pursuant to the acquisition, CEC became a wholly-owned subsidiary of the Company, and the name of the Company was changed to Conspiracy Entertainment Holdings, Inc. The reorganization was recorded as a reverse acquisition using the purchase method of business combination. In a reverse acquisition all accounting history becomes that of the accounting acquirer, therefore all historical information prior to the acquisition is that of CEC. The shares issued to the shareholders of CEC have been stated retroactively, as though a 1,026 for 1 stock split occurred on January 1, 2003. The reverse merger adjustment is therefore all the shares held by the Lance shareholders prior to the acquisition.
In early 2004, the Company acquired a 51% interest in Conspiracy Entertainment Europe, LTD (CEE), a United Kingdom Corporation, to develop and distribute certain game titles in Europe. During 2004, the Company advanced $60,000 to this majority owned subsidiary to cover operating expenses. During 2006, the Company sold it’s 51% interest in CEE for $41,000. The financial statements of CEE are consolidated with the Company through the date of sale, with a minority interest adjustment.
| NOTE 2 - | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
a. Accounting Method
The Company recognizes income and expense on the accrual basis of accounting. The Company has elected a December 31 year end.
b. Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 2 - | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
c. Fair Value of Financial Instruments
The fair value of the Company's cash and cash equivalents, receivables, accounts payable, accrued liabilities and notes payable approximate carrying value based on their effective interest rates compared to current market prices.
d. Receivables
The Company sells its products throughout the United States. The Company evaluates its accounts receivable on a regular basis for collectibility and provides for an allowance for potential credit losses as deemed necessary. As of December 31, 2007 and 2006, the allowance for doubtful accounts was $62,500 and $-0-, respectively.
e. Assignment of Accounts Receivable
Regularly, the Company assigns its receivables to vendors with recourse and accounts for such assignments in accordance with Statement of Financial Accounting Standards ("SFAS") No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Assigned accounts receivable are shown on the accounts receivable section of the balance sheet until collected by the beneficiary. Should the accounts receivable become uncollectible, the Company is ultimately responsible for paying the vendor and recording an allowance for potential credit losses as deemed necessary. The assigned accounts receivable are generally collected within 90 days; therefore, the balance shown approximates its fair value.
f. Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
g. Capitalized Development Costs and Licenses
Capitalized development costs include payments made to independent software developers under development agreements, as well as direct costs incurred for internally developed products.
The Company accounts for software development costs in accordance with SFAS No. 86 “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Software development costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a product encompasses both technical design documentation and game design documentation.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 2 - | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
g. Capitalized Development Costs and Licenses (Continued)
Capitalized Development Costs
For products where proven technology exits, this may occur early in the development cycle. Technological feasibility is evaluated on a product-by-product basis. Prior to a product's release, the Company expenses, as part of cost of sales, when the Company believes such amounts are not recoverable. Amounts related to capitalized development costs that are not capitalized are charged immediately to cost of sales. The Company evaluated the future recoverability of capitalized amounts on a quarterly basis. The recoverability of capitalized development costs is evaluated based on the expected performance of the specific products for which the costs relate. The following criteria are used to evaluate expected product performance: historical performance of comparable products using comparable technology and orders of the product prior to its release.
Commencing upon product release, capitalized development costs are amortized to cost of sales - software royalties and amortization is based on the ratio of current revenues to total projected revenues, generally resulting in an amortization period of one year or less. For products that have been released in prior periods, the Company evaluates the future recoverability of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance.
Capitalized Licenses
Capitalized license costs represent license fees paid to intellectual property rights holders for use of their trademarks or copyrights in the development of the products. Depending on the agreement with the rights holder, the Company may obtain the rights to use acquired intellectual property in multiple products over multiple years, or alternatively, for a single product over a shorter period of time. Most license agreements include a "per unit" royalty obligation; however, royalties are offset against the prepaid license amount first and then accrued as sales continue.
The Company evaluates the future recoverability of capitalized licenses on a quarterly basis. The recoverability of capitalized license costs is evaluated based on the expected performance of the specific products in which the licensed trademark or copyright is to be used. Prior to the related product’s release, the Company expenses, as part of cost of sales, licenses when the Company believes such amounts are not recoverable. Capitalized development costs for those products that are cancelled or abandoned are charged to cost of sales. The following criteria are used to evaluate expected product performance: historical performance of comparable products using comparable technology and orders for the product prior to its release.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 2 - | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
g. Capitalized Development Costs and Licenses (Continued)
Commencing upon the related products release, capitalized license costs are amortized to cost of sales - licenses based on the number of units sold, multiplied by the "per unit" royalty amount. As license contracts may extend for multiple years, the amortization of capitalized intellectual property license costs relating to such contracts may extend beyond one year. For intellectual property included in products that have been released, the Company evaluates the future recoverability of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance. License agreements vary in length between two and five years. Royalty unit rates vary from $1.50 per unit to $5.00 per unit.
At December 31, 2007, $1,979,394 of amortization expense has been included in cost of sales for the year on the titles that have been released during the year.
h. Property and Equipment
Property and equipment as of December 31, 2007 and 2006 consists of the following and are recorded at cost:
| | | | December 31, | |
| | Life | | 2007 | | | 2006 | |
| | | | | | | | |
| Furniture and equipment | 4-5 years | | | 52,687 | | | | 48,460 | |
| Development tools | 3 years | | | 41,606 | | | | 41,606 | |
| Computer equipment | 3 years | | | 43,068 | | | | 43,068 | |
| Automobile | 4 years | | | 51,549 | | | | 51,549 | |
| Leasehold improvements | 5 years | | | 24,457 | | | | 24,457 | |
| Total property and equipment | | | | 213,367 | | | | 209,140 | |
| Less: accumulated depreciation | | | | (208,918 | ) | | | (203,050 | ) |
| Property and equipment, net | | | | 4,449 | | | | 6,090 | |
Provision for depreciation of property and equipment is computed on the straight-line method for financial reporting purposes. Maintenance, repairs and renewals which neither materially add to the value of the equipment nor appreciably prolong its life are charged to expense as incurred.
Depreciation charged to operations was $5,869 and $9,147 for the years ended December 31, 2007 and 2006, respectively.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 2 - | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
h. Property and Equipment (continued)
In accordance with Financial Accounting Standards Board Statement No. 144, the Company records impairment of long-lived assets to be held and used or to be disposed of when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount. At December 31, 2007 and 2006, no impairments were recognized.
i. Revenue Recognition
Revenue from video game distribution contracts, which provide for the receipt of non-refundable guaranteed advances, is recognized when the games are delivered to the distributor by the manufacturer under the completed contract method, provided the other conditions of sale as established by the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101 (revised SAB No. 104), "Revenue Recognition," are satisfied:
| | i. | Persuasive evidence of an arrangement exists. |
| | ii. | Delivery has occurred or services have been rendered. |
| | iii. | The seller's price to the buyer is fixed or determinable. |
| | iv. | Collectibility is reasonably assured |
Until all of the conditions of the sale have been met, amounts received on such distribution contracts are recorded as deferred income. Although the Company regularly enters into the assignment of accounts receivable to vendors, the Company presents revenues on gross basis per Emerging Issues Task Force ("EITF") No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," since the Company:
| | i. | Acts as the principal in the transaction. |
| | ii. | Takes title to the products. |
| | iii. | Has risks and rewards of ownership, such as the risk of loss for collection, delivery, or returns. |
| | iv. | Does not act as an agent or broker. |
At all times, the Company maintains control of the development process and is responsible for directing the vendor. Other than for payment, the customer does not communicate with the vendor. There is no right of return, price protection or requirement for upgrade on the video game sales and distribution.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 2 - | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
i. Revenue Recognition (Continued)
The Company utilizes the completed contract method of revenue recognition as opposed to the percentage-of-completion method of revenue recognition for substantially all of its products since the majority of its products are completed within six to eight months. The Company completes the products in a short period of time since the Company obtains video games that are partially complete or obtains foreign language video games published by foreign manufacturers that are completed.
License revenue is generated when the Company sells the acquired license to another publisher to develop and sell. Revenues are recorded when the royalty payments are received from that publisher upon sale of the product.
j. Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
In July 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 was effective for fiscal years beginning after December 15, 2006.
The Company adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN 48 had no effect on the Company’s reported deficit as of December 31, 2006, its net loss or net loss per share for 2007 or on its reported deferred net tax assets from net operating loss carryforwards or the related valuation allowance (Note 13).
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 2 - | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
j. Income Taxes (Continued)
The Company will recognize interest and penalties related to unrecognized tax benefits within the income tax expense (benefit) line in its consolidated statement of operations. As of December 31, 2007, the Company had not recognized liabilities for penalty and interest as the Company does not have liability for unrecognized tax benefits.
k. Advertising and Marketing Expense
The Company expenses advertising and marketing costs as incurred. Advertising and marketing expense for the years ended December 31, 2007 and 2006 was $380,343 and $74,377, respectively.
l. Earnings (Loss) Per Share of Common Stock
The Company reports loss per share in accordance with SFAS No. 128 "Earnings per Share." Basic net loss per common share is computed by dividing net loss available to common stockholder by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares and dilutive potential common share equivalents then outstanding. Potential common shares consist of shares issuable upon the exercise of stock options and warrants. The calculation of the net income (loss) per share available to common stockholders for the periods presented with net losses does not include potential shares of common stock equivalents, as their impact would be anti-dilutive.
| | | For the Years Ended | |
| | | December 31, | |
| | | 2007 | | | 2006 | |
| Earnings (loss) per share: | | | | | | |
| Income (loss) (numerator) - basic | | $ | 3,073,458 | | | $ | (6,645,900 | ) |
| Effect of dilutive securities, convertible notes payable | | | (3,182,555 | ) | | | - | |
| Income (loss) (numerator) - diluted | | $ | (109,097 | ) | | $ | (6,645,900 | ) |
| | | | | | | | | |
| Shares (denominator) - basic | | | 51,189,065 | | | | 39,454,597 | |
| Effect of dilutive securities, convertible notes payable | | | - | | | | - | |
| Warrants | | | - | | | | - | |
| Shares (denominator) - diluted | | | 51,189,065 | | | | 39,454,597 | |
| Per share amount - basic | | $ | 0.06 | | | $ | (0.17 | ) |
| Per share amount - diluted | | $ | (0.02 | ) | | $ | (0.17 | ) |
For the year ended December 31, 2007, the Company had warrants to purchase 70,000,000 common shares at a weighted average price of $0.125 and notes payable convertible into 110,870,000 common shares that were not included in the computation of diluted earnings per share as their effect was anti-dilutive.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 2 - | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
m. Derivative Financial Instruments
The Company's derivative financial instruments consist of embedded derivatives related to the Secured Convertible Debentures (see Note 4). These embedded derivatives include certain conversion features, variable interest features, call options and default provisions. The accounting treatment of derivative financial instruments requires that the Company record the derivatives and related warrants at their fair values as of the inception date of the Note Agreement and at fair value as of each subsequent balance sheet date. In addition, under the provisions of EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," as a result of entering into the Notes, the Company is required to classify all other non-employee stock options and warrants as derivative liabilities and mark them to market at each reporting date. Any change in fair value inclusive of modifications of terms will be recorded as non-operating, non-cash income or expense at each reporting date. If the fair value of the derivatives is higher at the subsequent balance sheet date, the Company will record a non-operating, non-cash charge. If the fair value of the derivatives is lower at the subsequent balance sheet date, the Company will record non-operating, non-cash income. Conversion-related derivatives and the warrants using the Black Scholes Option Pricing Model with the following assumptions: dividend yield of 0%; annual volatility of 133.88%; and risk free interest rate from 2.76% to 3.34%. The derivatives are classified as long-term liabilities.
n. Registration Rights
In with raising capital through the issuance of Convertible Notes, the Company has issued convertible debentures and warrants in that have registration rights with liquidated damages for the underlying shares. As the contract must be settled by the delivery of registered shares and the delivery of the registered shares is not controlled by the Company, pursuant to EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the net value of the of the underlying embedded derivative and warrants at the date of issuance was recorded as liabilities on the balance sheet. Liquidated damages are estimated and accrued as a liability at each reporting date. The Company has accrued an estimated 1,821,620 in liquidation damages and is included in accrued expenses on the balance sheet at December 31, 2007 and 2006.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, during the year ended December 31, 2007, the Company had an accumulated deficit of approximately $11,300,000 and negative working capital. These factors raise substantial doubt about the Company's ability to continue as a going concern.
Recovery of the Company's assets is dependent upon future events, the outcome of which is indeterminable. Successful completion of the Company's development program and its transition to the attainment of profitable operations is dependent upon the company achieving a level of sales adequate to support the Company’s cost structure. In addition, realization of a major portion of the assets in the accompanying balance sheet is dependent upon the Company's ability to meet its financing requirements and the success of its plans to develop and sell its products. Management plans to issue additional debt and equity to fund the release of new products in 2008. The consolidated financial statements do no include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
| NOTE 4 - | CONVERTIBLE NOTES PAYABLE |
The Company entered into a Securities Purchase Agreement on July 7, 2007 for the issuance of $200,000 of convertible notes (“Convertible Notes”) The Convertible Note accrues interest at 15% per annum. The note holder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of a) $0.02 or b) 70% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 30 trading days before, but not including, conversion date. The notes are due on August 1, 2008.
As of December 31 2007, the Company issued to investors of the Convertible Notes a total amount of $200,000 in exchange for total proceeds of $200,000.
The Company's identified embedded derivatives related to the Securities Purchase Agreement entered into on July 7, 2007. These embedded derivatives included certain conversion features, variable interest features, call options and default provisions. The accounting treatment of derivative financial instruments requires that the Company allocate the relative fair values of the derivatives as of the inception date of the Securities Purchase Agreement up to the proceeds amount and to fair value as of each subsequent balance sheet date. At the inception of the Securities Purchase Agreement, the Company allocated $200,000 to the embedded derivatives.
For the year ended December 31, 2007, the Company amortized the debt discount and charged to interest expense $90,537.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 4 - | CONVERTIBLE NOTES PAYABLE (Continued) |
The Company entered into a Securities Purchase Agreement on March 30, 2007 for the issuance of $80,000 of convertible note (“Convertible Note”) The Convertible Note accrues interest at 15% per annum.. The note holder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of a) $0.02 or b) 70% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 30 trading days before, but not including, conversion date. The note was due on August 1, 2007 and currently in default.
As of December 31 2007, the Company issued to investors of the Convertible Note a total amount of $80,000 in exchange for total proceeds of $80,000.
The Company's identified embedded derivatives related to the Securities Purchase Agreement entered into on March 30, 2007. These embedded derivatives included certain conversion features, variable interest features, call options and default provisions. The accounting treatment of derivative financial instruments requires that the Company allocate the relative fair values of the derivatives as of the inception date of the Securities Purchase Agreement up to the proceeds amount and to fair value as of each subsequent balance sheet date. At the inception of the Securities Purchase Agreement, the Company allocated $80,000 to the embedded derivatives.
For the year ended December 31, 2007, the Company amortized the debt discount and charged to interest expense $80,000.
The Company entered into a Securities Purchase Agreement on August 11, 2006 for the issuance of $247,000 of convertible note (“Convertible Note”) The Convertible Note accrues interest at 15% per annum.. The note holder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of a) $0.02 or b) 70% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 30 trading days before, but not including, conversion date. The note was due on August 1, 2007 and currently in default.
During the year ended December 31 2006, the Company issued to investors of the Convertible Note a total amount of $247,000 in exchange for total proceeds of $247,000.
The Company's identified embedded derivatives related to the Securities Purchase Agreement entered into on August 11, 2006. These embedded derivatives included certain conversion features, variable interest features, call options and default provisions. The accounting treatment of derivative financial instruments requires that the Company allocate the relative fair values of the derivatives as of the inception date of the Securities Purchase Agreement up to the proceeds amount and to fair value as of each subsequent balance sheet date. At the inception of the Securities Purchase Agreement, the Company allocated $247,000 to the embedded derivatives.
For the year ended December 31, 2007 and 2006, the Company amortized the debt discount and charged to interest expense $45,425 and $201,575, respectively.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 4 - | CONVERTIBLE NOTES PAYABLE (Continued) |
The Company entered into a Securities Purchase Agreement with investors on February 9, 2005 for the issuance of $650,000 of convertible notes (“Convertible Notes”) and attached to the Convertible Notes was warrants to purchase 13,000,000 shares of the Company’s common stock at $0.05 per share and warrants to purchase 13,000,000 shares of the Company’s common stock at $0.20 per share. The Convertible Note accrues interest at 5% per annum. The note holder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of a) $0.02 or b) 70% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before, but not including, conversion date. (as amended). The note was due on February 9, 2007 and currently in default.
As of December 31, 2007, the Company issued to investors of the Convertible Notes a total amount of $650,000 in exchange for total proceeds of $650,000.
The Company's identified embedded derivatives related to the Securities Purchase Agreement entered into on February 9, 2005. These embedded derivatives included certain conversion features, variable interest features, call options and default provisions. The accounting treatment of derivative financial instruments requires that the Company allocate the relative fair values of the derivatives and related warrants as of the inception date of the Securities Purchase Agreement up to the proceeds amount and to fair value as of each subsequent balance sheet date.
The Company entered into a Securities Purchase Agreement with investors on August 31, 2004 for the issuance of $1,050,000 of convertible notes (“Convertible Notes”) and attached to the Convertible Notes was warrants to purchase 21,000,000 shares of the Company’s common stock at $0.05 per share and warrants to purchase 21,000,000 shares of the Company’s common stock at $0.20 per share. The Convertible Note accrues interest at 5% per annum. The note holder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of a) $0.02 or b) 70% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before, but not including, conversion date. (as amended). The note was due on August 30, 2006 and is currently in default.
As of December 31, 2007, the Company issued to investors of the Convertible Notes a total amount of $1,050,000 in exchange for total proceeds of $1,050,000.
The Company's identified embedded derivatives related to the Securities Purchase Agreement entered into on August 31, 2004. These embedded derivatives included certain conversion features, variable interest features, call options and default provisions. The accounting treatment of derivative financial instruments requires that the Company allocate the relative fair values of the derivatives and related warrants as of the inception date of the Securities Purchase Agreement up to the proceeds amount and to fair value as of each subsequent balance sheet date.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 4 - | CONVERTIBLE NOTES PAYABLE (Continued) |
The Company entered into a Securities Purchase Agreement with investors on September 28, 2004 for the issuance of $50,000 of convertible notes (“Convertible Notes”) and attached to the Convertible Notes was warrants to purchase 1,000,000 shares of the Company’s common stock at $0.05 per share and warrants to purchase 1,000,000 shares of the Company’s common stock at $0.20 per share. The Convertible Note accrues interest at 5% per annum. The note holder has the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of a) $0.02 or b) 70% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before, but not including, conversion date. (as amended). The note currently is in default.
As of December 31, 2007, the Company issued to investors of the Convertible Notes a total amount of $50,000 in exchange for total proceeds of $50,000.
The Company's identified embedded derivatives related to the Securities Purchase Agreement entered into on September 28, 2004. These embedded derivatives included certain conversion features, variable interest features, call options and default provisions. The accounting treatment of derivative financial instruments requires that the Company allocate the relative fair values of the derivatives and related warrants as of the inception date of the Securities Purchase Agreement up to the proceeds amount and to fair value as of each subsequent balance sheet date.
For the year ended December 31, 2007 and 2006, the Company amortized the debt discounts associated with the 2004 and 2005 debentures and charged to interest expense $-0- and $27,083, respectively.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 4 - | CONVERTIBLE NOTES PAYABLE (Continued) |
Convertible notes payable are detailed as follows:
| | December 31, | |
| | | 2007 | | | 2006 | |
| | | | | | | |
| Convertible debentures to partnerships and funds; 5% interest payable annually; secured by the Company’s assets, matured August 2006, convertible anytime at a rate of the lesser of $0.05 per common share or 70% of the 5 lowest closing bid prices for the last 30 days trading prior to the conversion. | | $ | 1,690,400 | | | $ | 1,690,400 | |
| | | | | | | | | |
| Convertible debentures to partnerships and funds; 15% interest payable annually; secured by the Company’s assets, matured February 2007, convertible anytime at the Holder’s option at a rate of the lesser of $0.02 per common share or 70% of the average of the 5 lowest closing bid prices for the last 30 days trading prior to the conversion date; net of discount of $-0- and $45,425 at December 31, 2007 and 2006, respectively. | | | 247,000 | | | | 201,575 | |
| | | | | | | | | |
| Convertible debentures to partnerships and funds; 15% interest payable annually; secured by the Company’s assets, matured August 1, 2007, convertible anytime at the Holder’s option at a rate of the lesser of $0.02 per common share or 70% of the average of the 5 lowest closing bid prices for the last 30 days trading prior to the conversion date; net of discount of $-0- at December 31, 2007. | | | 80,000 | | | | - | |
| | | | | | | | | |
| Convertible debentures to an entity; 15% interest payable annually; secured by the Company’s assets, matures August 1, 2008, convertible anytime at the Holder’s option at a rate of the lesser of $0.02 per common share or 70% of the average of the 3 lowest closing bid prices for the last 30 days trading prior to the conversion date; net of discount of $54,731 at December 31, 2007. | | | 45,269 | | | | - | |
| | | | | | | | | |
| Convertible debentures to an entity; 15% interest payable annually; secured by the Company’s assets, matures August 1, 2008, convertible anytime at the Holder’s option at a rate of the lesser of $0.02 per common share or 70% of the average of the 3 lowest closing bid prices for the last 30 days trading prior to the conversion date; net of discount of $54,732 at December 31, 2007. | | | 45,268 | | | | - | |
| | | | | | | | | |
| Total convertible notes payable, net of discount of $109,463 and $45,425 at December 31, 2007 and 2006, respectively. | | | 2,107,937 | | | | 1,891,975 | |
| | | | | | | | | |
| Less: current portion | | | (2,107,937 | ) | | | (1,891,975 | ) |
| | | | | | | | | |
| Long-term convertible notes payable | | $ | - | | | $ | - | |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 4 - | CONVERTIBLE NOTES PAYABLE (Continued) |
Future minimum principal payments on the convertible notes payable are as follows:
| For the Years Ending December 31, | | | |
| | | | |
| 2008 | | $ | 2,107,937 | |
| Thereafter | | | - | |
| | | | | |
| Total | | $ | 2,107,937 | |
On August 8, 2005 the Company entered into notes payable agreements with two capital funds for a total of $223,600 in proceeds. Under the terms of the loans, the Company also agreed to share 50% of the profit earned by the Company on a new product that is scheduled to release in late 2005 for a maximum of $300,000. They matured on February 1, 2006 and bear no interest (other than the profit sharing arrangement). The Company has agreed to pay a consultant $5,000 and 200,000 restricted shares of its common stock in exchange for services provided relating to the notes payable agreement.
Notes payable are detailed as follows:
| | December 31, | |
| | | 2007 | | | 2006 | |
| | | | | | | |
| Note payable to institutional investors; no interest; profit sharing of 50% for the game "Ultimate Block Party" up to a maximum of $300,000; secured by the Company's assets; matured in February 2006. | | $ | 194,093 | | | $ | 194,093 | |
| | | | | | | | | |
| Note payable to an individual; total interest of $88,000 (50,000 pounds) due; principal and interet due upon receipt of first $355,000 of product sales from British publisher, unsecured. | | | 150,128 | | | | 172,628 | |
| | | | | | | | | |
| Total notes payable | | | 344,221 | | | | 366,721 | |
| | | | | | | | | |
| Less: current portion | | | (344,221 | ) | | | (366,721 | ) |
| | | | | | | | | |
| Long-term notes payable | | $ | - | | | $ | - | |
Future minimum principal payments on the convertible notes payable are as follows:
| For the Years Ending December 31, | | | |
| | | | |
| 2008 | | $ | 344,221 | |
| Thereafter | | | - | |
| | | | | |
| Total | | $ | 344,221 | |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 6 - | LEASE COMMITMENTS |
On January 22, 2008, the Company signed an addendum to its current lease for a term of thirteen months commencing March 2008 through April 2009 for its office space.
Future minimum lease payments under non-cancelable operating leases at December 31, 2007 were as follows:
| For the Years Ending December 31, | | | |
| | | | |
| 2008 | | $ | 116,611 | |
| 2009 | | | 31,234 | |
| Thereafter | | | - | |
| | | | | |
| Total | | $ | 147,845 | |
Rent expense was $63,378 and $65,193 for the years ended December 31, 2007 and 2006, respectively.
Settlement Agreements
During July 2005, the Company entered into a Settlement Agreement and Mutual Release with a merchandising service company related to a dispute. Pursuant to the agreement, the Company received an advance of $125,000 and may receive three additional advances of $125,000 from the company for Conspiracy to develop a cellular fan club for certain artists of the merchandising service company.
Employment Agreements
On January 1, 2002, the Company entered into three-year employment agreements with its President and its Chief Financial Officer (CFO), providing for annual salaries of $324,000, plus benefits, and $134,400, plus benefits, respectively. In addition, per the agreement, each employee is entitled to a corporate vehicle monthly allowance of $800 and $500, respectively. The CFO also received 2,155,290 shares of the Company’s common stock (10% of the Company’s total issued and outstanding common shares as of the date of the agreement) as part of his employment agreement. No additional shares are owed to the CFO. The employment agreements expired January 2005 and were not renewed; however, compensation for the President and Chief Operating Officer did not change. At December, 2007 and 2006, total deferred compensation related to these employment agreements was $533,010 and $638,043, respectively.
License Fee Agreement
The Company is obligated under a license agreement with Discovery of which $60,000 remained unpaid as of December 31, 2007 and 2006. The amount is included in accounts payable. The Company is currently attempting to negotiate either an amendment to the agreement to maintain the rights to the property or to have Discovery waive the remaining balances.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 7 - | AGREEMENTS (Continued) |
Withholding Tax Payable
The Company withholds 10% of all foreign sales intended to be remitted to the Internal Revenue Service (“IRS”). As of December 31, 2007 and 2006 the Company had withholding tax payable of $376,823 and $279,128, respectively. As of December 31, 2007, the Company had not remitted any of the 2001-2006 withholdings to the IRS for which is most likely subject to penalties and interest which have been estimated and accrued. As of December 31, 2007, the Company had not been audited or invoiced by the IRS. The amounts due at December 31, 2007 and 2006 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet.
Vacation Accrual
During the years ended December 31, 2007 and 2006, the Company did not accrue liabilities for vacation payable to employees. The Company’s management believes vacation earned during and prior to 2007 was utilized by the employees of the Company as of December 31, 2007, and accordingly, has not recorded an accrued liability.
| NOTE 8 - | CONTINGENCIES, CONCENTRATIONS AND UNCERTAINTIES |
The Company operates in the computer software industry, which is highly competitive and changes rapidly. The Company’s operating results could be significantly affected by its ability to develop new products and find new distribution channels for new and existing products.
Authorized Shares of Common Stock
The Company has authorized for issuance 100,000,000 shares of common stock at $0.001 par value. At December 31, 2007 the Company had 51,189,065 common shares issued and outstanding. In addition to the issued shares, the Company has 70,000,000 warrants outstanding and notes payable convertible into 110,870,000 shares as of December 31, 2007 (see Note 2 – earnings (loss) per common share). If each of the equity instruments were exercised for conversion to common stock, the Company does not have enough authorized shares to satisfy each of the equity conversions. As a result, the Company has recorded a derivative liability to account for the shortfall and potential liability if amounts were demanded for conversion. The Company is currently in the process of increasing its authorized shares to compensate for the difference.
Major Customers
For the year ended December 31, 2007, one customer generated sales in excess of 10% of the Company’s total sales. Sales to this customer totaled $8,228,131 or 93.6% of total revenues during 2007. At December 31, 2007, the receivable balance from this customer was $110,195 (100% of net accounts receivable).
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 9 - | CAPITALIZED DEVELOPMENT COSTS AND LICENSES |
Capitalized development costs and licenses at December 31, 2007 consisted of the following (only including non-fully amortized costs):
| | | Development | | | License | | | Combined | |
| | | Costs | | | Costs | | | Totals | |
| | | | | | | | | | |
| Capitalized development costs and licenses | | $ | 832,635 | | | $ | 1,244,725 | | | $ | 2,077,360 | |
| Less: impairment | | | (129,930 | ) | | | (156,500 | ) | | | (286,430 | ) |
| Less: accumulated amortization | | | - | | | | (169,000 | ) | | | (169,000 | ) |
| | | | | | | | | | | | | |
| Net balance | | $ | 702,705 | | | $ | 919,225 | | | $ | 1,621,930 | |
Amortization expense was $1,979,394 and $431,287 for the years ended December 31, 2007 and 2006, respectively.
The Company’s total impairment losses of $286,430 on the capitalized costs were determined as a result of the projects either being cancelled or terminated.
The estimated amortization of capitalized development costs and licenses are as follows for the next five years:
| For the Years Ending December 31, | | | |
| | | | |
| 2008 | | $ | 609,625 | |
| 2009 | | | 590,253 | |
| 2010 | | | 422,052 | |
| 2011 | | | - | |
| Thereafter | | | - | |
| | | | | |
| Total | | $ | 1,621,930 | |
| NOTE 10 - | NEW TECHNICAL PRONOUNCEMENTS |
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which establishes a framework for reporting fair value and expands disclosures about fair value measurements. SFAS 157 will have not have a material impact on the Company’s financial statements.
In June 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company has adopted the requirements of FIN 48 beginning in fiscal year 2007 (see disclosures in Notes 2 and 13).
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 10 - | NEW TECHNICAL PRONOUNCEMENTS (Continued) |
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS No. 158 requires employers that sponsor defined benefit pension and postretirement benefit plans to recognize previously unrecognized actuarial losses and prior service costs in the statement of financial position and to recognize future changes in these amounts in the year in which changes occur through comprehensive income. As a result, the statement of financial position will reflect the funded status of those plans as an asset or liability. Additionally, employers are required to measure the funded status of a plan as of the date of its year-end statement of financial position. SFAS No. 158 will have no impact on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115”. This statements objective is to improve financial reporting by providing the Company with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objective for accounting for financial instruments. The adoption of SFAS 159 did not have an impact on the Company’s financial statements. The Company presently comments on significant accounting policies (including fair value of financial instruments) in Note 2 to the consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, “Non-controlling interests in Consolidated Financial Statements – an Amendment of ARB No. 51”. This statements objective is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require ownership interests in the subsidiaries held by parties other than the parent be clearly identified. The adoption of SFAS 160 did not have an impact on the Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised), “Business Combinations”. This revision statements objective is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its effects on recognizing identifiable assets and measuring goodwill. The adoption of SFAS 141 (revised) did not have an impact on the Company’s consolidated financial statements.
| NOTE 11 - | SHAREHOLDERS EQUITY |
Common Stock
During August 2006, the Company issued 500,000 shares of common stock for consulting services valued at $7,500.
During September and December 2006, the Company issued 4,095,890 and 8,807,666 shares of common stock upon conversion of $23,800 and $35,800 of notes payable and related accrued interest of $1,662 and $2,492 respectively.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 11 - | SHAREHOLDERS EQUITY (Continued) |
Warrants
Warrants - The Company has issued warrants to non-employees under various agreements expiring through February 2009. A summary of the status of warrants granted at December 31, 2007 and 2006, and changes during the years then ended is as follows:
| | | For the Year Ended | | | For the Year Ended | |
| | | December 31, 2007 | | | December 31, 2006 | |
| | | Shares | | | Weighted
Average
Exercise Price | | | Shares | | | Weighted
Average Exercise Price | |
| | | | | | | | | | | | | |
| Outstanding at beginning of year | | | 70,000,000 | | | $ | 0.125 | | | | 71,500,000 | | | $ | 0.143 | |
| Granted | | | - | | | | - | | | | - | | | | - | |
| Exercised | | | - | | | | - | | | | - | | | | - | |
| Forfeited | | | - | | | | - | | | | - | | | | - | |
| Expired | | | - | | | | - | | | | (1,500,000 | ) | | | (1.00 | ) |
| | | | | | | | | | | | | | | | | |
| Outstanding at end of year | | | 70,000,000 | | | $ | 0.125 | | | | 70,000,000 | | | $ | 0.125 | |
| | | | | | | | | | | | | | | | | |
| Exercisable at end of year | | | 70,000,000 | | | $ | 0.125 | | | | 70,000,000 | | | $ | 0.125 | |
A summary of the status of warrants outstanding at December 31, 2007 is presented below:
| | | Warrants Outstanding | | | Warrants Exercisable | |
Range of
Exercise
Prices | | Number
Outstanding | | Weighted
Average
Remaining
Contractual
Life | | Weighted
Average
Exercise Price | | | Number
Exercisable | | | Weighted
Average
Exercise Price | |
| | | | | | | | | | | | | | |
| $ | 0.05 | | | 35,000,000 | | 1.9 years | | $ | 0.050 | | | | 35,000,000 | | | $ | 0.050 | |
| $ | 0.20 | | | 35,000,000 | | 1.9 years | | | 0.200 | | | | 35,000,000 | | | | 0.200 | |
| | | | | | | | | | | | | | | | | | |
| | | | 70,000,000 | | | | $ | 0.125 | | | | 70,000,000 | | | $ | 0.125 | |
On August 31, 2004, the Company sold an aggregate of $1,050,000 principal amount of 5% Secured Convertible Debentures, Class A Common Stock Purchase Warrants to purchase 21,000,000 shares of the Company’s common stock at $0.20 per share expiring a year and half after the registration of the underlying shares goes effective, and Class B Common Stock Purchase Warrants to purchase 21,000,000 shares of the Company’s common stock at $0.05 per share expiring a year and half after the registration of the underlying shares goes effective, to four institutional investors. The Company received gross proceeds totaling $1,050,000 from the sale of the Debentures and the Warrants.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 11 - | SHAREHOLDERS EQUITY (Continued) |
Warrants (Continued)
On September 28, 2004, the Company sold an aggregate of $50,000 principal amount of 5% Secured Convertible Debentures, Class A Common Stock Purchase Warrants to purchase 1,000,000 shares of the Company’s common stock at $0.20 per share expiring a year and half after the registration of the underlying shares goes effective, and Class B Common Stock Purchase Warrants to purchase 1,000,000 shares of the Company’s common stock at $0.05 per share expiring a year and half after the registration of the underlying shares goes effective, to four institutional investors. The Company received gross proceeds totaling $50,000 from the sale of the Debentures and the Warrants.
On February 9, 2005, the Company sold an aggregate of $650,000 principal amount of 5% Secured Convertible Debentures, Class A Common Stock Purchase Warrants to purchase 13,000,000 shares of the Company’s common stock at $0.20 per share expiring a year and half after the registration of the underlying shares goes effective, and Class B Common Stock Purchase Warrants to purchase 13,000,000 shares of the Company’s common stock at $0.05 per share expiring a year and half after the registration of the underlying shares goes effective, to four institutional investors. The Company received gross proceeds totaling $650,000 from the sale of the Debentures and the Warrants.
All warrants are convertible at the option of the warrant holder and are exercisable in cash where the holder receives shares in exchange for cash payment and there are no additional special redemption features. The Company estimates the fair value of each warrant at the grant date by using the Black-Scholes option pricing model. The Company determines the following significant assumptions at the time of grant in order to calculate the value of the warrant based on the Black-Scholes option pricing model: dividend yield, expected volatility, risk-free interest rate, and expected lives of the warrant. Management believes the best input assumptions available were used to value the warrants and that the resulting warrant values are reasonable. The Company’s assumptions used are as follows:
| | | A Warrants | | B Warrants |
| | | | | |
| Term | | Contract term | | Contract terms; B warrants expire 9 to 18 months after effective registration. The Company has estimated 10 months from filing to effectiveness in determining the estimated warrant life |
| | | | | |
| Volatility | | Estimated future volatility determined using prior stock history of the Company over the same period as the expected term | | Estimated future volatility determined using prior stock history of the Company over the same period as the expected term |
| | | | | |
| Annual rate of quarterly dividends | | $-0- | | $-0- |
| | | | | |
| Discount (risk free rate) | | US Treasury rate at fair value determination date | | US Treasury rate at fair value determination date |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 12 - | PREPAID MANUFACTURING |
Prepaid manufacturing costs consist of fees paid in advance to the manufacturer for the production and packaging of the video games. These prepaid costs are generally short-term in nature and the Company expects to receive and ship the related finished products during the following quarter. The balance of prepaid manufacturing at December 31, 2007 and 2006 was $277,200 and $-0-, respectively.
Income taxes from continuing operations for 2007 and 2006 differ from “expected” income taxes for those years computed by applying the U.S. federal statutory rate of 34% and State estimated rate of 5% to loss before taxes for those years as follows:
| | | December 31, | |
| | | 2007 | | | 2006 | |
| | | | | | | |
| Income tax (expense) benefit at statutory rates | | $ | (1,198,649 | ) | | $ | 2,591,901 | |
| | | | | | | | | |
| Items not recorded for tax purposes: | | | | | | | | |
| Bad debts | | | (24,375 | ) | | | - | |
| Deferred compensation | | | - | | | | (67,938 | ) |
| Amortization of discount on convertible notes | | | (84,225 | ) | | | (143,074 | ) |
| Gain (loss) on valuation of derivative liabilities | | | 1,325,422 | | | | (2,086,765 | ) |
| | | | | | | | | |
| | | | 18,173 | | | | 294,124 | |
| | | | | | | | | |
| Change in valuation allowance | | | (18,173 | ) | | | (294,124 | ) |
| | | | | | | | | |
| | | $ | - | | | $ | - | |
The Company’s net deferred tax assets consisted of the following at December 31, 2007:
| Operating loss carryforwards | | $ | 1,832,429 | |
| Less: valuation allowance | | | (1,832,429 | ) |
| | | | | |
| Net deferred tax assets | | $ | - | |
The Company has federal net operating loss carryforwards in the amount of approximately $4,700,000 at December 31, 2007, substantially all of which are also available for state income tax purposes, which are expected to begin expiring in 2022.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the amount and timing of scheduled reversals of deferred tax liabilities and projected future taxable income over the periods for which the deferred tax assets are deductible. Although the management believes the Company will be profitable in the foreseeable future, based upon the Company’s history of continuing operating losses, realization of its deferred tax assets does not meet the more likely than not criteria under SFAS No. 109 and, accordingly, a valuation allowance for the entire deferred tax asset amount has been recorded.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 13 - | INCOME TAXES (Continued) |
Due to the change of ownership provisions of the Tax Reform Act of 1986, utilization of a portion of our net operating loss and tax credit carryfowards may be limited in future periods. Further, a portion of the carryfowards may expire before being applied to reduce future income tax liabilities.
The Company expects resolution of unrecognized tax benefits, if created, would occur while the full valuation allowance of deferred tax assets is maintained; therefore, the Company does not expect to have any unrecognized tax benefits that, if recognized, that would affect the effective tax rate.
The Company will recognize interest and penalty related to unrecognized tax benefits and penalties as income tax expense. As of December 31, 2007, the Company has not recognized liabilities for penalty and interest as the Company does not have liability for unrecognized tax benefits.
The Company is subject to taxation in the U.S. and California. The Company’s tax years for 2004, 2005 and 2006 are subject to examination by the taxing authorities. With few exceptions, the Company is no longer subject to U.S., state, or local examinations by taxing authorities for years before 2004.
| NOTE 14 - | SUBSEQUENT EVENTS |
On February 21, 2008, the Company entered into two separate loan payable arrangements. Both notes are for the principal amount of $113,889, accrue interest at 8.0% per annum, with principal and interest due at maturity of February 20, 2009. The loans are both secured by certain assets of the Company.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 15 - | RESTATEMENT OF FINANCIAL STATEMENTS |
The accompanying consolidated financial statements as of December 31, 2007 and 2006 and the for the years ended December 31, 2007 and 2006 have been restated to correct the following errors in its previously issued financial statements:
· The Company had issued convertible debt with embedded derivatives including certain conversion features, variable interest rate features, call and default provisions. The accounting treatment of these derivative financial instruments requires that the Company record the derivatives and related warrants at their fair values as of inception date of the Note and at fair value as of each subsequent balance sheet date. In addition, under the provisions of EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," as a result of entering into the Notes, the Company are required to classify all other non-employee stock options and warrants as derivative liabilities and mark them to market at each reporting date. In our initial financial statements we erred in following the guidance of SFAS 133.
· In conjunction with raising capital through the issuance of Convertible Notes, the Company has issued registration rights for the underlying shares under certain debentures and related warrants. This agreement includes a liquidated damages provision that if the Company did not met the “Required Filing Date” or the “Initial Required Effectiveness Date” as defined therein. The Company has not met the “Required Filing Date” nor is the “Initial Required Effectiveness Date” as of December 31, 2007 and as such, under the guidance of FSB ETIF 00-19-2, “Accounting for Registration Payment Agreements”, required to accrue an estimate of liquidated damages.
· The Company had previously recorded monies received from a joint venture as minority interest. Upon re-review of the agreement, it was noted that the amounts received as part of the joint venture were to reimburse the Company for costs incurred on developing the related video games. As such, the Company is restating the amounts received as a reduction of the capitalized costs related to the joint venture and not as minority interest (reclassification). This has no effect to the statement of operations in either December 31, 2007 and 2006.
The impact on these restatement adjustments is to increase reported net income by $3,972,462 from a net loss of $899,004 to net income of $3,073,458 for the year ended December 31, 2007 and increase reported net loss by $2,359,616 from a net loss of $4,286,284 to a net loss of $6,645,900 for the year ended December 31, 2006. There was no effect on the total cash flows.
The following are reconciliations of the Company’s Consolidated Balance Sheets as of December 31, 2007 and 2006 and Consolidated Statements of Operations and Consolidated Statement of Cash Flows for the years ended December 31, 2007 and 2006:
1. Estimated accrual for liquidated damages under a registration rights agreement issued in connection with Convertible debt
2. Correction in the recording of the fair value of embedded derivatives and warrant liability as of December 31, 2007
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 15 - | RESTATEMENT OF FINANCIAL STATEMENTS (Continued) |
3. Correction to the carrying value of the convertible debt created by errors in the amortization of the debt discount.
4. The Company initially recorded the debt discount of the convertible debt at the date of issuance with an offset to equity (additional paid in capital) as a beneficial conversion feature and warrants as an equity instrument. Under SFAS 133, the appropriate offset should have been to derivative and warrant liability accounts. This entry re-classes previous year’s errors and charges to Accumulated Deficit.
5. Correction in recording the fair value of embedded derivatives and warrant liability as of December 31, 2006.
6. Income statement. Corrects the amortization of the debt discounts associated with the convertible debt
7. Income statement. Corrects the mark to market change in the fair value of the embedded derivatives and warrant liability.
8. Reclassification. Correction in recording proceeds from a joint venture agreement as a reimbursement for capitalized development costs (reduction of costs) rather than as originally recorded as minority interest.
The comparisons between the initial and restated financial statements are as follows:
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 15 - | RESTATEMENT OF FINANCIAL STATEMENTS (Continued) |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Balance Sheet
As of December 31, 2007
| | | As Reported | | | Ref | | | Adjustments | | | As Restated | |
| | | | | | | | | | | | | |
| CURRENT ASSETS | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 539,990 | | | | | | $ | - | | | $ | 539,990 | |
| Accounts receivable, net | | | 110,195 | | | | | | | - | | | | 110,195 | |
| Prepaid manufacturing | | | 277,200 | | | | | | | - | | | | 277,200 | |
| Other prepaid expenses | | | - | | | | | | | - | | | | - | |
| Total Current Assets | | | 927,385 | | | | | | | - | | | | 927,385 | |
| | | | | | | | | | | | | | | | |
| PROPERTY AND EQUIPMENT, NET | | | 4,449 | | | | | | | - | | | | 4,449 | |
| | | | | | | | | | | | | | | | |
| OTHER ASSETS | | | | | | | | | | | | | | | |
| Capitalized development costs and licenses, net | | | 1,901,330 | | | | 8 | | | | (279,400 | ) | | | 1,621,930 | |
| Deposits | | | 6,906 | | | | | | | | - | | | | 6,906 | |
| Other receivable | | | 132,500 | | | | | | | | - | | | | 132,500 | |
| Total Other Assets | | | 2,040,736 | | | | | | | | (279,400 | ) | | | 1,761,336 | |
| | | | | | | | | | | | | | | | | |
| TOTAL ASSETS | | | 2,972,570 | | | | | | | | (279,400 | ) | | | 2,693,170 | |
| | | | | | | | | | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | | | | | | | | | |
| Accounts payable | | | 707,437 | | | | | | | | - | | | | 707,437 | |
| Accrued expenses | | | 332,049 | | | | 1 | | | | 1,821,620 | | | | 2,153,669 | |
| Payroll taxes payable | | | 782,554 | | | | | | | | - | | | | 782,554 | |
| Deferred compensation | | | 533,010 | | | | | | | | - | | | | 533,010 | |
| Advance from customer | | | - | | | | | | | | - | | | | - | |
| Deferred revenue | | | 1,326,653 | | | | | | | | - | | | | 1,326,653 | |
| Notes payable, current portion | | | 344,221 | | | | | | | | - | | | | 344,221 | |
| Derivative liability | | | 3,397,012 | | | | 2 | | | | 185,489 | | | | 3,582,501 | |
| Convertible notes payable, net of discounts | | | 2,143,077 | | | | 3 | | | | (35,140 | ) | | | 2,107,937 | |
| Total Current Liabilities | | | 9,566,013 | | | | | | | | 1,971,969 | | | | 11,537,982 | |
| | | | | | | | | | | | | | | | | |
| Total Liabilities | | | 9,566,013 | | | | | | | | 1,971,969 | | | | 11,537,982 | |
| | | | | | | | | | | | | | | | | |
| MINORITY INTEREST | | | 279,400 | | | | 8 | | | | (279,400 | ) | | | - | |
| STOCKHOLDERS' DEFICIT | | | | | | | | | | | | | | | | |
| Common stock | | | 51,190 | | | | | | | | - | | | | 51,190 | |
| Additional paid in capital | | | 4,973,450 | | | | 4 | | | | (2,183,056 | ) | | | 2,790,394 | |
| Accumulated deficit | | | (11,897,483 | ) | | | | | | | 211,087 | | | | (11,686,396 | ) |
| Total Stockholders' Deficit | | | (6,872,843 | ) | | | | | | | (1,971,969 | ) | | | (8,844,812 | ) |
| | | | | | | | | | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | | $ | 2,972,570 | | | | | | | $ | (279,400 | ) | | $ | 2,693,170 | |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 15 - | RESTATEMENT OF FINANCIAL STATEMENTS (Continued) |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Balance Sheet
As of December 31, 2006
| | | As Reported | | | Ref | | | Adjustments | | | As Restated | |
| | | | | | | | | | | | | |
| CURRENT ASSETS | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 24,976 | | | | | | $ | - | | | $ | 24,976 | |
| Accounts receivable, net | | | 305,002 | | | | | | | - | | | | 305,002 | |
| Prepaid manufacturing | | | - | | | | | | | - | | | | - | |
| Other prepaid expenses | | | 4,412 | | | | | | | - | | | | 4,412 | |
| Total Current Assets | | | 334,390 | | | | | | | - | | | | 334,390 | |
| | | | | | | | | | | | | | | | |
| PROPERTY AND EQUIPMENT, NET | | | 6,090 | | | | | | | - | | | | 6,090 | |
| | | | | | | | | | | | | | | | |
| OTHER ASSETS | | | | | | | | | | | | | | | |
| Capitalized development costs and licenses, net | | | 750,804 | | | | 8 | | | | (187,500 | ) | | | 563,304 | |
| Deposits | | | 6,906 | | | | | | | | - | | | | 6,906 | |
| Other receivable | | | 179,500 | | | | | | | | - | | | | 179,500 | |
| Total Other Assets | | | 937,210 | | | | | | | | (187,500 | ) | | | 749,710 | |
| | | | | | | | | | | | | | | | | |
| TOTAL ASSETS | | | 1,277,690 | | | | | | | | (187,500 | ) | | | 1,090,190 | |
| | | | | | | | | | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | | | | | | | | | |
| Accounts payable | | | 653,627 | | | | | | | | - | | | | 653,627 | |
| Accrued expenses | | | 192,440 | | | | 1 | | | | 1,821,620 | | | | 2,014,060 | |
| Payroll taxes payable | | | 524,215 | | | | | | | | - | | | | 524,215 | |
| Deferred compensation | | | 638,043 | | | | | | | | - | | | | 638,043 | |
| Advance from customer | | | 201,327 | | | | | | | | - | | | | 201,327 | |
| Deferred revenue | | | 17,474 | | | | | | | | - | | | | 17,474 | |
| Notes payable, current portion | | | 366,721 | | | | | | | | - | | | | 366,721 | |
| Derivative liability | | | 2,819,060 | | | | 5 | | | | 3,881,958 | | | | 6,701,018 | |
| Convertible notes payable, net of discounts | | | 1,869,150 | | | | 3 | | | | 22,825 | | | | 1,891,975 | |
| Total Current Liabilities | | | 7,282,057 | | | | | | | | 5,726,403 | | | | 13,008,460 | |
| | | | | | | | | | | | | | | | | |
| Total Liabilities | | | 7,282,057 | | | | | | | | 5,726,403 | | | | 13,008,460 | |
| | | | | | | | | | | | | | | | | |
| MINORITY INTEREST | | | 187,500 | | | | 8 | | | | (187,500 | ) | | | - | |
| STOCKHOLDERS' DEFICIT | | | | | | | | | | | | | | | | |
| Common stock | | | 51,190 | | | | | | | | - | | | | 51,190 | |
| Additional paid in capital | | | 4,755,422 | | | | 4 | | | | (1,965,028 | ) | | | 2,790,394 | |
| Accumulated deficit | | | (10,998,479 | ) | | | | | | | (3,761,375 | ) | | | (14,759,854 | ) |
| Total Stockholders' Deficit | | | (6,191,867 | ) | | | | | | | (5,726,403 | ) | | | (11,918,270 | ) |
| | | | | | | | | | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | | $ | 1,277,690 | | | | | | | $ | (187,500 | ) | | $ | 1,090,190 | |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 15 - | RESTATEMENT OF FINANCIAL STATEMENTS (Continued) |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Statement of Operations
For the Year Ended December 31, 2007
| | | As Reported | | | Ref | | | Adjustments | | | As Restated | |
| | | | | | | | | | | | | |
| NET SALES | | $ | 8,791,131 | | | | | | $ | - | | | $ | 8,791,131 | |
| | | | | | | | | | | | | | | | |
| COST OF SALES | | | 6,648,149 | | | | | | | - | | | | 6,648,149 | |
| | | | | | | | | | | | | | | | |
| GROSS PROFIT | | | 2,142,982 | | | | | | | - | | | | 2,142,982 | |
| | | | | | | | | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | | | | | | | | |
| Professional fees | | | 667,549 | | | | | | | - | | | | 667,549 | |
| Wages and salaries | | | 464,427 | | | | | | | - | | | | 464,427 | |
| Selling, general and administrative | | | 882,800 | | | | | | | - | | | | 882,800 | |
| Total Operating Expenses | | | 2,014,776 | | | | | | | - | | | | 2,014,776 | |
| | | | | | | | | | | | | | | | |
| NET INCOME (LOSS) FROM OPERATIONS | | | 128,206 | | | | | | | - | | | | 128,206 | |
| | | | | | | | | | | | | | | | |
| OTHER INCOME (EXPENSE) | | | | | | | | | | | | | | | |
| Interest expense | | | (237,303 | ) | | | | | | - | | | | (237,303 | ) |
| Net financing income (expense) | | | (211,955 | ) | | | 6 | | | | (4,007 | ) | | | (215,962 | ) |
| Gain (loss) on valuation of derivative liability | | | (577,952 | ) | | | 7 | | | | 3,976,469 | | | | 3,398,517 | |
| Other income (expense) | | | - | | | | | | | | - | | | | - | |
| Total Other Income (Expense) | | | (1,027,210 | ) | | | | | | | 3,972,462 | | | | 2,945,252 | |
| | | | | | | | | | | | | | | | | |
| NET INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST | | | (899,004 | ) | | | | | | | 3,972,462 | | | | 3,073,458 | |
| | | | | | | | | | | | | | | | | |
| PROVISION FOR INCOME TAXES | | | - | | | | | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| NET INCOME (LOSS) BEFORE MINORITY INTEREST | | | (899,004 | ) | | | | | | | 3,972,462 | | | | 3,073,458 | |
| | | | | | | | | | | | | | | | | |
| MINORITY INTEREST | | | - | | | | | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| NET INCOME (LOSS) | | $ | (899,004 | ) | | | | | | $ | 3,972,462 | | | $ | 3,073,458 | |
| | | | | | | | | | | | | | | | | |
| BASIC INCOME (LOSS) PER SHARE | | $ | (0.02 | ) | | | | | | $ | 0.08 | | | $ | 0.06 | |
| DILUTED INCOME (LOSS) PER SHARE | | $ | (0.02 | ) | | | | | | $ | 0.01 | | | $ | (0.01 | ) |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 15 - | RESTATEMENT OF FINANCIAL STATEMENTS (Continued) |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Statement of Operations
For the Year Ended December 31, 2006
| | | As Reported | | | Ref | | | Adjustments | | | As Restated | |
| | | | | | | | | | | | | |
| NET SALES | | $ | 803,493 | | | | | | $ | - | | | $ | 803,493 | |
| | | | | | | | | | | | | | | | |
| COST OF SALES | | | 704,454 | | | | | | | - | | | | 704,454 | |
| | | | | | | | | | | | | | | | |
| GROSS PROFIT | | | 99,039 | | | | | | | - | | | | 99,039 | |
| | | | | | | | | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | | | | | | | | |
| Professional fees | | | 92,921 | | | | | | | - | | | | 92,921 | |
| Wages and salaries | | | 479,436 | | | | | | | - | | | | 479,436 | |
| Selling, general and administrative | | | 563,310 | | | | | | | - | | | | 563,310 | |
| Total Operating Expenses | | | 1,135,667 | | | | | | | - | | | | 1,135,667 | |
| | | | | | | | | | | | | | | | |
| NET INCOME (LOSS) FROM OPERATIONS | | | (1,036,628 | ) | | | | | | - | | | | (1,036,628 | ) |
| | | | | | | | | | | | | | | | |
| OTHER INCOME (EXPENSE) | | | | | | | | | | | | | | | |
| Interest expense | | | (266,236 | ) | | | | | | - | | | | (266,236 | ) |
| Net financing income (expense) | | | (176,722 | ) | | | 6 | | | | 172,004 | | | | (4,718 | ) |
| Loss on valuation of derivative liability | | | (2,819,060 | ) | | | 7 | | | | (2,531,620 | ) | | | (5,350,680 | ) |
| Other income (expense) | | | 12,362 | | | | | | | | - | | | | 12,362 | |
| Total Other Income (Expense) | | | (3,249,656 | ) | | | | | | | (2,359,616 | ) | | | (5,609,272 | ) |
| | | | | | | | | | | | | | | | | |
| NET INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST | | | (4,286,284 | ) | | | | | | | (2,359,616 | ) | | | (6,645,900 | ) |
| | | | | | | | | | | | | | | | | |
| PROVISION FOR INCOME TAXES | | | - | | | | | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| NET INCOME (LOSS) BEFORE MINORITY INTEREST | | | (4,286,284 | ) | | | | | | | (2,359,616 | ) | | | (6,645,900 | ) |
| | | | | | | | | | | | | | | | | |
| MINORITY INTEREST | | | - | | | | | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| NET INCOME (LOSS) | | $ | (4,286,284 | ) | | | | | | $ | (2,359,616 | ) | | $ | (6,645,900 | ) |
| | | | | | | | | | | | | | | | | |
| BASIC INCOME (LOSS) PER SHARE | | $ | (0.11 | ) | | | | | | $ | (0.06 | ) | | $ | (0.17 | ) |
| DILUTED INCOME (LOSS) PER SHARE | | $ | (0.11 | ) | | | | | | $ | (0.06 | ) | | $ | (0.17 | ) |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 15 - | RESTATEMENT OF FINANCIAL STATEMENTS (Continued) |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Statement of Cash Flows
For the Year Ended December 31, 2007
| | | As Reported | | | Ref | | | Adjustments | | | As Restated | |
| | | | | | | | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | |
| Net income (loss) | | $ | (899,004 | ) | | | | | $ | 3,972,462 | | | $ | 3,073,458 | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | 5,869 | | | | | | | - | | | | 5,869 | |
| Amortization of discount on convertible notes | | | 211,955 | | | | 6 | | | | 4,007 | | | | 215,962 | |
| Amortization and impariment of capitalized development costs and licenses | | | 455,430 | | | | | | | | - | | | | 455,430 | |
| Gain on sale of subsidiary | | | - | | | | | | | | - | | | | - | |
| Financing fees and services paid with stock | | | - | | | | | | | | - | | | | - | |
| Net change in derivative liability | | | 577,952 | | | | 7 | | | | (3,976,469 | ) | | | (3,398,517 | ) |
| Change in operating assets and liabilities: | | | | | | | | | | | | | | | - | |
| Accounts receivable and other receivable | | | 241,807 | | | | | | | | - | | | | 241,807 | |
| Prepaid expenses | | | (272,788 | ) | | | | | | | - | | | | (272,788 | ) |
| Accounts payable and accrued expenses | | | 451,758 | | | | | | | | - | | | | 451,758 | |
| Deferred compensation | | | (105,033 | ) | | | | | | | - | | | | (105,033 | ) |
| Deferred revenue | | | 1,309,179 | | | | | | | | - | | | | 1,309,179 | |
| Advance from customers | | | (201,327 | ) | | | | | | | - | | | | (201,327 | ) |
| Net Cash Provided by (Used in) Operating Activities | | | 1,775,798 | | | | | | | | - | | | | 1,775,798 | |
| | | | | | | | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | | | | | | | |
| Payments for development costs and licenses | | | (1,605,956 | ) | | | 8 | | | | 91,900 | | | | (1,514,056 | ) |
| Purchase of property and equipment | | | (4,228 | ) | | | | | | | - | | | | (4,228 | ) |
| Proceeds from sale of subsidiary | | | - | | | | | | | | - | | | | - | |
| Net Cash Used in Investing Activities | | | (1,610,184 | ) | | | | | | | 91,900 | | | | (1,518,284 | ) |
| | | | | | | | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | | | | | |
| Proceeds from convertible notes payable | | | 280,000 | | | | | | | | - | | | | 280,000 | |
| Proceeds received on joint venture | | | 91,900 | | | | 8 | | | | (91,900 | ) | | | - | |
| Payments on notes payable | | | (22,500 | ) | | | | | | | - | | | | (22,500 | ) |
| Net Cash Provided by Financing Activities | | | 349,400 | | | | | | | | (91,900 | ) | | | 257,500 | |
| | | | | | | | | | | | | | | | | |
| INCREASE IN CASH | | | 515,014 | | | | | | | | - | | | | 515,014 | |
| | | | | | | | | | | | | | | | | |
| CASH, BEGINNING OF YEAR | | | 24,976 | | | | | | | | - | | | | 24,976 | |
| | | | | | | | | | | | | | | | | |
| CASH, END OF YEAR | | $ | 539,990 | | | | | | | $ | - | | | $ | 539,990 | |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2007 and 2006
| NOTE 15 - | RESTATEMENT OF FINANCIAL STATEMENTS (Continued) |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Consolidated Statement of Cash Flows
For the Year Ended December 31, 2006
| | | As Reported | | | Ref | | | Adjustments | | | As Restated | |
| | | | | | | | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | |
| Net income (loss) | | $ | (4,286,284 | ) | | | | | $ | (2,359,616 | ) | | $ | (6,645,900 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | 9,147 | | | | | | | - | | | | 9,147 | |
| Amortization of discount on convertible notes | | | 897,500 | | | | 6 | | | | (172,004 | ) | | | 725,496 | |
| Amortization and impariment of capitalized development costs and licenses | | | 431,287 | | | | | | | | - | | | | 431,287 | |
| Gain on sale of subsidiary | | | (11,600 | ) | | | | | | | - | | | | (11,600 | ) |
| Financing fees and services paid with stock | | | 7,500 | | | | | | | | - | | | | 7,500 | |
| Net change in derivative liability | | | 2,354,060 | | | | 7 | | | | 2,531,620 | | | | 4,885,680 | |
| Change in operating assets and liabilities: | | | | | | | | | | | | | | | - | |
| Accounts receivable and other receivable | | | (294,726 | ) | | | | | | | - | | | | (294,726 | ) |
| Prepaid expenses | | | (4,412 | ) | | | | | | | - | | | | (4,412 | ) |
| Accounts payable and accrued expenses | | | 557,641 | | | | | | | | - | | | | 557,641 | |
| Deferred compensation | | | 174,200 | | | | | | | | - | | | | 174,200 | |
| Deferred revenue | | | 17,474 | | | | | | | | - | | | | 17,474 | |
| Advance from customers | | | - | | | | | | | | - | | | | - | |
| Net Cash Provided by (Used in) Operating Activities | | | (148,213 | ) | | | | | | | - | | | | (148,213 | ) |
| | | | | | | | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | | | | | | | |
| Payments for development costs and licenses | | | (370,627 | ) | | | 8 | | | | 187,500 | | | | (183,127 | ) |
| Purchase of property and equipment | | | - | | | | | | | | - | | | | - | |
| Proceeds from sale of subsidiary | | | 41,000 | | | | | | | | - | | | | 41,000 | |
| Net Cash Used in Investing Activities | | | (329,627 | ) | | | | | | | 187,500 | | | | (142,127 | ) |
| | | | | | | | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | | | | | |
| Cash held in escrow | | | 4,489 | | | | | | | | - | | | | 4,489 | |
| Proceeds from advances | | | 76,327 | | | | | | | | - | | | | 76,327 | |
| Proceeds from convertible notes payable | | | 247,000 | | | | | | | | - | | | | 247,000 | |
| Proceeds from notes payable | | | 150,000 | | | | | | | | - | | | | 150,000 | |
| Proceeds received on joint venture | | | 187,500 | | | | 8 | | | | (187,500 | ) | | | - | |
| Payments on notes payable | | | (162,500 | ) | | | | | | | - | | | | (162,500 | ) |
| Net Cash Provided by Financing Activities | | | 502,816 | | | | | | | | (187,500 | ) | | | 315,316 | |
| | | | | | | | | | | | | | | | | |
| INCREASE IN CASH | | | 24,976 | | | | | | | | - | | | | 24,976 | |
| | | | | | | | | | | | | | | | | |
| CASH, BEGINNING OF YEAR | | | - | | | | | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| CASH, END OF YEAR | | $ | 24,976 | | | | | | | $ | - | | | $ | 24,976 | |
