UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(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, 2009
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 000-32427
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
(Exact name of registrant as specified 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-known 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 Exchange Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not 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 check mark whether the issuer is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act
Large accelerated filer o Accelerated filer o
Non-accelerated filer o 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 June 30, 2009, was $730,058.
As of April 13, 2010, the issuer had 75,099,105 outstanding shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
TABLE OF CONTENTS
| | | | Page |
| PART I | | | |
| | | | |
| Item 1. | Business | | 1 |
| Item 1A. | Risk Factors | | 9 |
| Item 1B. | Unresolved Staff Comments | | ?? |
| Item 2. | Properties | | 11 |
| Item 3. | Legal Proceedings | | 11 |
| Item 4. | Reserved | | 11 |
| | | | |
| PART II | | | |
| | | | |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. | | 12 |
| Item 6. | Selected Financial Data | | 13 |
| Item 7. | Management's Discussion and Analysis Financial Condition and Results of Operations | | 13 |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | | 19 |
| Item 8. | Financial Statements and Supplementary Data | | 19 |
| Item 9. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure | | 20 |
| Item 9A(T). | Controls and Procedures | | 20 |
| Item 9B. | Other Information | | 21 |
| | | | |
| PART III | | | |
| | | | |
| Item 10. | Directors, Executive Officers and Corporate Governance | | 22 |
| Item 11. | Executive Compensation | | 24 |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | | 25 |
| Item 13. | Certain Relationship and Related Transactions | | 26 |
| Item 14. | Principal Accountant Fees and Services | | 26 |
| Item 15. | Exhibits | | 27 |
| | | | |
| SIGNATURES | | 30 |
PART I
ITEM 1. 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. 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.
In early 2004 we founded Conspiracy Entertainment Europe, Ltd., a United Kingdom corporation, and we owned a 51% of this entity. 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 in. However, this plan was never realized. In December 2005, we sold our 51% investment 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), PlayStation 3, 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.
On November 12, 2007, 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 PS3, 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 is either $3.50 or $4.50 plus 12.5% of the wholesale price depending on the size of the Blue Ray disc which can either be 25GB or 50GB.
In April 2008, we entered into a Publisher License Agreement with Microsoft to develop and/or publish one or more software products running on the Xbox 360 game system, which software products may also be made available to subscribers of Xbox Live and to license proprietary materials from Microsoft. We are required to pay Microsoft a royalty fee based on each of the licensed products manufactured. The royalty fee ranges from $3.50 to $8.00 based on the initial wholesale price of the product and whether the title is s standard software title, hits software title or expansion pack.
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, we cannot determine what percentage of our business entertainment licensing will represent. 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 December 31, 2008, all 10 titles have been approved for manufacturing and are currently being 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 is currently being sold through distribution.
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 are currently being sold through distribution.
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 is currently being sold through distribution.
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 released Crashtime in the second quarter 2008. All titles under this agreement are currently being sold through distribution.
In January 2008, we entered into an agreement with Blast Entertainment Ltd., to publish Garfield: The World Lasagna Tour on PS2. The title was approved for manufacturing and released during the 2nd Qtr 2008 and is currently being sold through distribution.
In January 2008, we entered into an agreement with Neko Entertainment S.R.L. and Elektrogames Limited to publish Safari Adventures (Wii and DS). Both titles were approved for manufacturing released in the 4th Qtr 2009 and are currently being sold through distribution.
In April 2008, we entered into an agreement with DTP Lizenz and Rechte GmbH and Co. KG to publish Summer Athletics on PS2, X360 and Wii. The products were approved for manufacturing and are currently being sold through distribution.
In May 2008, we entered into an agreement with RTL Games GmbH for the North American publishing rights for Winter Sports 2 on the Nintendo Wii and DS, Playstation 2 and Xbox 360, the agreement also included Ski and Shot on the Playstation 2 and Nintendo Wii platforms. All titles under this agreement were approved for manufacturing during the 4th quarter 2008 and are currently being sold through distribution.
In June 2008, we entered into an agreement with Lago S.R.L. to publish SBK: Superbike World Championship on the PS2, PS3, PSP, Wii, DS, and X360. The developer was unable to complete deliver as contracted by September 2008 but eventually the PS2, PSP, PS3 and X360 versions were approved for manufacturing and released during the 1st Qtr 2009. The Wii and DS versions were cancelled by Lago.
In August 2008, we entered into an agreement with Replay Games to publish Dr. Fizzwhizzles’s Animal Rescue (Wii). The title was approved for manufacturing during the 4th Qtr 2009 and is currently being sold through distribution.
In June 2009, we entered into an agreement with dtp Lizenz and Rechte GmbH to publish Think Logic Trainer (Wii, DS) and with dtp Young GmbH to publish Think Logic Trainer – Kids (DS). These titles were all approved for manufacturing during the 4th Qtr 2009 and are currently being sold through distribution.
In June 2009, we entered into an agreement with dtp Lizenz and Rechte GmbH to publish Music Party (Wii). The title is currently being developed and scheduled for a 2nd Qtr 2010 release.
In September 2009, we entered into an agreement with Game Campus Cologne GmbH to publish Personal Trainer Men (DS) and Personal Trainer Women (DS). These titles were approved for manufacturing during 4th Qtr 2009 and scheduled for a 2nd Qtr 2010 release.
In December 2010, we entered into an agreement with dtp Lizenz and Rechte GmbH to publish America’s Next Top Model (Wii and DS). These titles were approved for manufacturing during the 2nd Qtr 2010 and are scheduled for 2nd Qtr 2010 release.
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. In 2009 we released both Real Heroes: Firefighter (Wii) and Crazy Chicken Tales (Wii) both titles were developed for Conspiracy Entertaiment. We currently have a contract for the design and development of Rock of the Dead (Wii, PS3, and X360) with Epicenter. This title is scheduled for a 3rd or 4th Qtr 2010 release and will be sold 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 Fillpoint SVG, Tommo, Inc., and dreamGEAR LLC. In 2009, distribution by Fillpoint SVG represented approximately 88% of our revenues. It is not determinable who and what amount of these revenues that different retail outlets represent. 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. We have decided to seek 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 2010/2011. 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, some our products for 2010/2011 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., Namco Bandai America Games America, Inc., Capcom USA, Inc., Square Enix, Electronic Arts Inc., Konami Digital Entertainment, Inc., Sega of America, Inc., Take-Two Interactive Software, Inc., THQ, Inc., and Ubi Soft Entertainment,. 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 Fillpoint SVG 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, Fillpoint SVG, dream GEAR LLC, Tommo, Inc., 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). In 2009, Real Heroes: Firefighter (Wii) was nominated by IGN as one of the top 5 shooting games on the Nintendo Wii platform. 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 the date of this report, we have six full time employees and three 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-K 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, 2009, we incurred a net loss of $979,968 compared to a net income of $265,603 for the year-ended December 31, 2008. As of December 31, 2009, we had a working capital deficiency of $3,736,214 and an accumulated deficit of $12,400,762. 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 14, 2010, 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 13, 2010, we had 75,099,105 shares of common stock issued and outstanding. There are 354,061,728 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 2. PROPERTIES.
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 Monica Blvd., April 30, 2009. The new space is approximately 1,850 square feet of office space.
On February 9, 2009 we extended both leases through October 2010.
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, 2009 and 2008 the Company withheld $376,823 and $376,823, 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 arrangement in place for payment of these withholdings and we are complying with this agreement. The amount due at December 31, 2009 is included in accounts payable and accrued expenses in the balance sheet.
ITEM 4. RESERVED.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
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 Quarter | | Fiscal 2009 | | Fiscal 2008 | |
| | | High | | | Low | | | High | | | Low | |
| First Quarter ended March 31 | | $ | 0.03 | | | $ | 0.005 | | | $ | 0.83 | | | $ | 0.35 | |
| Second Quarter ended June 30 | | $ | 0.04 | | | $ | 0.008 | | | $ | 0.4997 | | | $ | 0.23 | |
| Third Quarter ended September 30 | | $ | 0.125 | | | $ | 0.012 | | | $ | 0.295 | | | $ | 0.1 | |
| Fourth Quarter ended December 31 | | $ | 0.03 | | | $ | 0.02 | | | $ | 0.25 | | | $ | 0.07 | |
| | | | | | | | | | | | | | | | | |
Holders
As of April 13, 2010, we had 75,099,105 shares of common stock outstanding and held by approximately 441 stockholders of record. The transfer agent of our common stock is Corporate Stock Transfer.
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.
Recent Sales of Unregistered Securities
On December 11, 2009, the Company entered into a subscription agreement (the “Subscription Agreement”), by and among the Company and the subscribers listed therein (the “Subscribers”). Pursuant to the Subscription Agreement, the Company issued and sold secured convertible notes in the aggregate principal amount of $210,000 (the “Notes”) to the Subscribers. The Notes mature two years from the date of issuance and accrue interest at a rate of 15% per annum. Upon the occurrence of an Event of Default (as such term is defined in the Notes), all principal and interest then remaining unpaid shall be immediately due and payable. Events of Default include but are not limited to (i) the Company’s failure to make payments when due, (ii) breaches by the Company of its representations, warranties and covenants, and (iii) delisting of the Company’s common stock from the OTC Bulletin Board.
Pursuant to the terms of the Notes, the Subscribers have the right, so long as the Notes are not fully repaid, to convert the Notes into shares of the Company’s common stock at a conversion price of $.01 per share, as may be adjusted. The Notes contain anti-dilution provisions, including but not limited to if the Company issues shares of its common stock at less than the then existing conversion price, the conversion price of the Notes will automatically be reduced to such lower price. The Notes contain limitations on conversion, including the limitation that the holder may not convert its Note to the extent that upon conversion the holder, together with its affiliates, would own in excess of 4.99% of the Company’s outstanding shares of common stock (subject to an increase upon at least 61-days’ notice by the Subscriber to the Company, of up to 9.99%).
The Notes are secured by a security interest in certain assets of the Company.
The Company claimed an exemption from the registration requirements of the Act for the private placement of these securities pursuant to Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated thereunder since, among other things, the transaction did not involve a public offering, the investor was an accredited investor and/or qualified institutional buyers, the investor had access to information about us and their investment, the investor took the securities for investment and not resale, and we took appropriate measures to restrict the transfer of the securities.
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, 2009 COMPARED TO YEAR ENDED DECEMBER 31, 2008
For the fiscal year ended December 31, 2009 we had total revenue of $9,600,592, compared to revenue of $10,905,490 for the fiscal year ended December 31, 2008. 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, 2009, we earned $0 in license revenue as compared to $90,000 in license revenue earned in 2008. Product sales for the period ended December 31, 2009 were $9,400,592 as compared to $10,615,490 for the period ended December 31, 2008. The decrease in product sales revenue of $1,414,898, or 13.1%, is the result of our releasing 3 fewer new titles as compared to the period ending December 31, 2008. We also generated $200,000 in flat fee revenue for the year ending December 31, 2009 as compared to $200,000 for the year ending December 31, 2008
The below table provides a comparison of the nature and source of our revenue for the periods indicated.
| | | Fiscal Year Ended | |
| | | December 31, 2009 | | | December 31, 2008 | |
| Number of New Titles Released | | | 15 | | | | 18 | |
| Number of Titles Reordered | | | 26 | | | | 8 | |
| Average Price Per Title | | | 8.06 | | | $ | 9.78 | |
| Revenue From Internally Developed Titles | | $ | 953,367 | | | $ | 0 | |
| Partially Complete Sales | | | 0 | | | | 0 | |
| Translated Sales | | $ | 8,447,225 | | | $ | 10,615,490 | |
| License Revenue | | $ | 0 | | | $ | 90,000 | |
| Other Revenue (packaging) | | $ | 200,000 | | | $ | 200,000 | |
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, 2009, we had license/development costs of $892,241 as compared to $2,841,260 for the period ending December 31, 2008. The decrease in license/development costs of $1,848,077or 67.4% was primarily the result of lower sales and the impairment of the MOB project which was cancelled in 2008 resulting in less amortization of prepaid.
Gross profit totaled $1,764,223 for the fiscal year ended December 31, 2009 as compared to gross profit of $1,986,165 for the fiscal year ended December 31, 2008, a decrease of $221,941 or 11.2%. Gross profit as a percentage of sales for the fiscal year ended December 31, 2009 was 18.4% as compared to 18.2% for the fiscal year ended December 31, 2008. The increase in our gross profit percentage is a result of the company not realizing any large impairments for the period ending December 31, 2009.
Total operating expenses in each of the fiscal years ended December 31, 2009 and December 31, 2008 were comprised of selling, general and administrative expenses. Operating expenses for the fiscal years ended December 31, 2009 and 2008 were $1,915,009 and $2,274,974 respectively, which constituted a decrease of $359,962 or 15.8%. The decrease in operating expenses is attributable to increases in marketing fees of $194,751 for the fiscal year ended December 31, 2009. Salary and wages decreased $62,757 or 9.5% due to the decrease in salary for the Company's Chief Executive Officer. Because we had no penalty in 2009, we incurred $98,972 less expense for the period ending December 31, 2009. 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, 2009, we incurred other expense of $829,180 compared to other income of $554,413 for the period ending December 31, 2008 a decrease of other income of $1,383,592. The decrease in other income is related to our financing agreements with our investors (interest expense and financing expense) and also consists of a significant loss on the extinguishment of debt for the period ending December 31, 2008 of $2,459,471 related to December 2009 conversion of interest and extension of warrants, which was almost offset by the $2,816,604 Gain on Valuation of Derivative Liability. We also incurred $829,734 or and increase of 68.1% in financing costs for the year ended December 31, 2009 as compared to $212,147 for the year ended December 31, 2008.
Our net loss was $ 979,968 in the fiscal year ended December 31, 2009 compared to a net income of $265,603 in the fiscal year ended December 31, 2008. Due to the fact that we incurred lower gross profit, less expenses but significantly higher other expense the change can be attributed to the substantial increase of $1,383,592 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, 2009 and 2008.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of December 31, 2009:
| | | Payments due by period | |
| | | | | Less than | | | | More | |
| Contractual Obligations | | Total | | One Year | | Years 1-2 | | than 2 years | |
| Notes Payable | | $ | 2,664,302 | | $ | 180,000 | | | | | | 2,484,302 | |
| Operating Lease Obligations | | $ | 79,577 | | $ | 79,577 | | $ | | | | | |
| License Fee Obligations | | $ | 60,000 | | $ | 60,000 | | | | | | | |
| Total | | $ | | | $ | | | $ | | | | | |
In December 2009, we converted $721,146 of interest due on our convertible notes of which $19,231 net of discount was due as of December 31, 2009.
In December 2009, we entered into two notes payable agreements with accredited investors totaling $204,400. As of December 31, 2009 net of discount, the balance due is $5,600.
In May 2009, we entered into two notes payable agreements with accredited investors totaling $150,000. In December 2009 these conversion terms and maturity dates were modified. Accordingly, the balance due as of December 31, 2009 was $150,000.
In February 2008, we entered into a two notes payable agreements with accredited investors totaling $224,595. In December 2009 these conversion terms and maturity dates were modified. Accordingly, the balance due as of December 31, 2009 was $227,778.
In March 2007, we issued a convertible debenture in the amount of $80,000 to an accredited investor. In December 2009 these conversion terms and maturity dates were modified. Accordingly, the balance due as of December 31, 2009 was $80,000.
In July 2007, we issued a convertible debenture in the amount of $200,000 to an accredited investor. In December 2009 these conversion terms and maturity dates were modified. Accordingly, the balance due as of December 31, 2009 was $200,000.
In August 2006, we entered into a convertible notes agreement totaling $247,000. In December 2009 these conversion terms and maturity dates were modified. Accordingly, the balance due as of December 31, 2009 was $247,000.
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. In December 2009 these conversion terms and maturity dates were modified. Accordingly, the balance due as of December 31, 2009 was $194,093.
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. In December 2009 these conversion terms and maturity dates were modified. Accordingly, the balance due as of December 31, 2009 was $1,510,600.
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. In February 2009 we extended both leases through October 2010. Through the remainder of the lease term, our minimum lease payments are as follows:
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 of $60,000 in full by the end of 2010.
The Company received two loans from officers of the Company totaling $80,000. One loan was for $50,000 and was repaid in 2009. Interest on both loans has been repaid as well. The balance as of December 31, 2009 for the remaining loan is $30,000.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2009, our cash balance was $128,413 as compared to $424,529 at December 31, 2008. Total current assets at December 31, 2009 were $412,880, as compared to $681,349 at December 31, 2008. 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 2009 will be sufficient to cover our working capital requirements for fiscal 2009. The Company reached this conclusion by assuming that because a major portion ($2,217,400) of our debt is attributed to convertible notes payable, this debt will be converted into shares (although there is no assurance that this debt will actually be converted into shares), and Deferred Revenue ($2,487,912) will be reclassified as revenue upon the completion of the current projects in development. We had informally negotiated with the IRS to pay down our Payroll Taxes liability in the amount of $10,000 per month and are in renegotiations to establish an official repayment schedule. 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 ($288,338). 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 2010 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, 2009, net cash provided by operating activities was $1,040,222, compared to net cash used in operating activities of $3,159,557 for the period ended December 31, 2008. The change in net cash provided by operating activities of $2,119,335 was primarily the result of our net income for the fiscal year ended December 31, 2008 of $265,603 which was considerably more than the net loss of $979,968 for 2009. In addition, we realized a significant net change in derivative liability of $2,050,707, while the net changes in the amortization and impairment of capitalized development costs and licenses and loss on extinguishment of debt cancel each other out.
For the year ended December 31, 2009 net cash used in investing activities totaled $1,647,710, compared to net cash used in investing activities of $3,520,018 for the year ended December 31, 2008. The decrease of $1,872,308 is due to decrease in cash paid for acquisition of products and licenses in the fiscal year ended December 31, 2009.
For the period ended December 31, 2009, we received $310,000 in proceeds from financing compared to net cash provided by financing activities of $245,000 for the period ended December 31, 2008. The increase of net cash provided by financing activities of $65,000 was primarily the result of the December 2009 financing of convertible notes payable transaction with accredited investors.
Our accounts receivable at December 31, 2009 was $369,968, as compared to $256,820 at December 31, 2008. We had no substantial orders being placed toward the end of the fiscal year, nor any significant late paying customers.
As of December 31, 2009 we had a working capital deficiency of $3,736,214. 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, 2009, 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, 2009 was $0 as compared to $0 at December 31 2008. We had no new additional long term agreements in 2008.
As of December 31, 2009, we owed payroll taxes to the IRS in the amount of $449,407 as compared to $335,762 as of December 31, 2008. The increase in payroll taxes due as of December 31, 2009 is due to the increase in payroll and limited payments made to the IRS during the year ended December 31, 2009. We are currently in discussion with the IRS to modify our payment schedule.
At December 31, 2009 and December 31, 2008 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.
We currently have outstanding 111,500,000 Class A Warrants and 111,500,000 Class B Warrants with exercise prices as follows: Class A Warrants, 35,000,000 at .20, 35,000,000 at .05, and 31,500,000,000 at .03; Class B Warrants, 35,000,000 at .20, 35,000,000 at .05, and 31,500,000 at .03. Exercise of all of these warrants would provide gross proceeds of $19,390,000. However, at recent market prices of our common stock, we do not expect the shareholders of such warrants to exercise. 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.
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 approximately $3,699,735 at December 31, 2009. 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 beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9A(T). CONTROLS AND PROCEDURES.
Our principal executive and principal financial officers have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this annual report. They have concluded that, based on such evaluation, our disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting as of December 31, 2009, as further described below.
Management’s Annual Report on Internal Control Over Financial Reporting
Internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management is responsible for establishing and maintaining adequate internal control over financial reporting for Conspiracy Entertainment.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Management has used the framework set forth in the report entitled “Internal Control -- Integrated Framework” published by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission to evaluate the effectiveness of Conspiracy Entertainment’s internal control over financial reporting. As a result of the material weaknesses described below, management has concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2009.
Management has determined that, as of the December 31, 2009 measurement date, there were material weaknesses in both the design and effectiveness of our internal control over financial reporting. Management has assessed these deficiencies and has determined that there were weaknesses in Conspiracy Entertainment’s internal control over financial reporting. As a result of our assessment that material weaknesses in our internal control over financial reporting existed as of December 31, 2009, management has concluded that our internal control over financial reporting was not effective as of December 31, 2009. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
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.
(b) Changes in Internal Control Over Financial Reporting
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.
ITEM 9B. OTHER INFORMATION.
On December 11, 2009, the Company entered into a subscription agreement (the “Subscription Agreement”), by and among the Company and the subscribers listed therein (the “Subscribers”). Pursuant to the Subscription Agreement, the Company issued and sold secured convertible notes in the aggregate principal amount of $210,000 (the “Notes”) to the Subscribers.
The Notes mature two years from the date of issuance and will accrue interest at the rate of 15%. Upon a default in the payment of any amounts due under the Notes, the interest rate will be increased to 18%. Upon the occurrence of an Event of Default (as such term is defined in the Notes), all principal and interest then remaining unpaid shall be immediately due and payable. Events of Default include but are not limited to (i) the Company’s failure to make payments when due, (ii) breaches by the Company of its representations, warranties and covenants, and (iii) delisting of the Company’s common stock from the OTC Bulletin Board.
Pursuant to the terms of the Notes, the Subscribers have the right, so long as the Notes are not fully repaid, to convert the Notes into shares of the Company’s common stock at a conversion price of $.01 per share, as may be adjusted. The Notes contain anti-dilution provisions, including but not limited to if the Company issues shares of its common stock at less than the then existing conversion price, the conversion price of the Notes will automatically be reduced to such lower price. The Notes contain limitations on conversion, including the limitation that the holder may not convert its Note to the extent that upon conversion the holder, together with its affiliates, would own in excess of 4.99% of the Company’s outstanding shares of common stock (subject to an increase upon at least 61-days’ notice by the Subscriber to the Company, of up to 9.99%).
The Notes are secured by a security interest in certain assets of the Company.
On December 16, 2009, the Company and certain holders (the “Holders”) of the Company’s notes (the “Notes” and warrants (the “Warrants”) entered into an amendment agreement (the “Amendment Agreement”), pursuant to which the Holders agreed to waive any and breaches that may have resulted by way of the Company’s failure to pay any and all amounts outstanding under the Notes by their stated maturity dates. In addition, the Company and the Holders agreed to extend the maturity dates of all Notes to June 30, 2011. In addition, pursuant to the Amendment Agreement, certain of the Notes, which when issued were non-convertible, were made convertible at a conversion price of $0.01 per share. Further, a cashless exercise feature was added to certain of the Warrants which previously did not contain such feature. Pursuant to the Amendment Agreement, the Company also agreed to issue to the Holders warrants to purchase an aggregate of 10,000,000 shares of the Company’s common stock with an exercise price equal to the lesser of (i) $0.01 or (ii) 70% of the average of the 5 lowest closing bid prices of the Company’s common stock for the 30 trading days prior to the exercise date.
The Company claimed an exemption from the registration requirements of the Act for the private placement of these securities pursuant to Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated thereunder since, among other things, the transaction did not involve a public offering, the investor was an accredited investor and/or qualified institutional buyers, the investor had access to information about us and their investment, the investor took the securities for investment and not resale, and we took appropriate measures to restrict the transfer of the securities.
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 | | 39 | | Chief Executive Officer and Director |
| Keith Tanaka | | 47 | | 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. In filling vacancies, the board considers, among other things, the diversity of potential board member’s backgrounds, including their professional experience, education, skills and other individual attributes in assessing their potential appointment to the board. 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 ten 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.
Board Leadership Structure and Role in Risk Oversight
Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in our best interests and our shareholders’ best interests to combine these roles. Sirus Ahmadi has served as our Chairman and Chief Executive Officer since 2003. Due to our small size, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions combined.
Our Board of Directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. Our Board of Directors focuses on the most significant risks facing our company and our company’s general risk management strategy, and also ensure that risks undertaken by us are consistent with the Board’s appetite for risk. While the Board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our Board leadership structure supports this approach.
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. 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, 2008, and Forms 5 and amendments thereto furnished to us with respect to the fiscal year ended December 31, 2008, we believe that during the fiscal year ended December 31, 2008, 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 Form 3 was filed, by Whalehaven Capital Fund on August 14, 2009 to report a an event requiring the filing of such report that occurred on July 29, 2009.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the aggregate cash compensation paid during the two years ended December 31, 2009 and 2008 to our Chief Executive Officer, and our Chief Financial Officer. No other officers or directors received annual compensation in excess of $100,000 during the last two fiscal years.
| SUMMARY COMPENSATION TABLE |
| Name and Principle Position | | Year | | Salary ($) | | Bonus ($) | | Stock Awards ($) | | Option Awards ($) | | Non-Equity Incentive Plan Compensation ($) | | Nonqualified Deferred Compensation Earnings ($) | | All Other Compensation ($) | | Total ($) | |
| Sirus Ahmadi - CEO | | | 2009 | | | 283,500 | | | | | | | | | | | | | | | | | | | | | 283,500 | |
| | | | 2008 | | | 324,000 | | | | | | | | | | | | | | | | | | | | | 324,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Keith Tanaka, Chief Financial Officer | | | 2009 | | | 134,400 | | | | | | | | | | | | | | | | | | | | | 134,400 | |
| | | | 2008 | | | 134,400 | | | | | | | | | | | | | | | | | | | | | 134,400 | |
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. Although the employment agreements 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 13, 2010. 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 | | Beneficially Owned (2) | | | Before Offering (3) | |
| Sirus Ahmadi(1) | | | 21,269,131 | | | | 28 | % |
| Keith Tanaka(1) | | | 2,495,190 | | | | 4.2 | % |
| Whalehaven Capital Fund Ltd. | | | 5,697,142 | (4) | | | 7.6 | % |
| All Directors and Executive Officers as a Group (2 persons) | | | 16,424,421 | | | | 32.1 | % |
(1) The address of the listed beneficial owners is c/o Conspiracy Entertainment Holdings, Inc., 612 Santa Monica Blvd., Santa Monica, California 90401
(2) The address of the listed beneficial owner Is 560 Sylvan Avenue, Englewood Cliffs, NJ 07632. Brian Mazzella has voting and dispositive control over such shares.
(3) Applicable percentage ownership is based on 75,099,105 shares of common stock outstanding as of April 13, 2010, together with securities exercisable or convertible into shares of common stock within 60 days of April 13, 2010 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 13, 2010 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.
(4) Of the 5,697,142 shares of the Company’s common stock beneficially owned by Whalehaven Capital Fund Ltd. 111,800 shares are issuable upon the conversion of a Zero Coupon Secured Note and 113,889 shares of our common stock are issuable upon conversion of a 10% Secured Note. The amount of shares of our common stock beneficially owned by Whalehaven does not include 12,000,000 shares of common stock issuable upon the exercise of warrants having an exercise price of $0.02 per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
We did not enter into any transactions with related persons, promoters or control persons in the fiscal year 2009 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. 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 by our principal accountant for the audit of our annual financial statements, review of financial statements included in the quarterly reports and other fees that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2009 and 2008 were $46,000 and $52,090, respectively.
Audit-Related Fees
The aggregate fees billed by our principal accountant for assurance and advisory services that were related to the performance of the audit or review of our financial statements for the fiscal years ended December 31, 2009 and 2008 were $0 and $0, respectively.
Tax Fees
The aggregate fees billed for professional services rendered by our principal accountant for tax compliance, tax advice and tax planning for the fiscal years ended December 31, 2009 and 2008 were $6,200 and $3,200, respectively. These fees related to the preparation of federal income and state franchise tax returns.
All Other Fees
The aggregate fees billed for products and services provided by our principal accountant for the fiscal years ended December 31, 2009 and 2008 were $0 and $0, respectively.
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) |
| | | |
| 4.25 | | Subscription Agreement, dated as of December 11, 2009 |
| | | |
| 4.26 | | Form of Secured Convertible Note dated December 11, 2009 |
| | | |
| 4.27 | | Form of Class B Common Stock Purchase Warrant dated December 11, 2009 |
| | | |
| 4.28 | | Amendment Agreement dated December 16, 2009 |
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| 4.32 | | Form of Subscription agreement dated May 21, 2009 (Incorporated by reference to Form 8-K, Filed with the Securities and Exchange Commission on May 22, 2009) |
| | | |
| 4.33 | | Form of Secured Convertible Note dated dated May 21, 2009 (Incorporated by reference to Form 8-K, Filed with the Securities and Exchange Commission on May 22, 2009) |
| | | |
| 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: April 15, 2010 | By: | /s/Sirus Ahmadi |
| | Sirus Ahmadi |
| | Chief Executive Officer |
| | | |
| | | |
| Dated: April 15, 2010 | 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 | | April 15, 2010 |
| Sirus Ahmadi | | | | |
| | | | | |
| /s/ Keith Tanaka | | | | |
Keith Tanaka | | Chief Financial Officer, Principal Accounting Officer, Secretary and Director | | April 15, 2010 |
Conspiracy Entertainment Holdings, Inc.
Consolidated Financial Statements
December 31, 2009 and 2008
CONTENTS
| Report of Independent Registered Public Accounting Firm | 3 |
| | |
| Consolidated Balance Sheets | 4 |
| | |
| Consolidated Statements of Operations | 6 |
| | |
| Consolidated Statements of Stockholders’ Deficit | 7 |
| | |
| Consolidated Statements of Cash Flows | 8 |
| | |
| Notes to the Consolidated Financial Statements | 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 consolidated balance sheets of Conspiracy Entertainment Holdings, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders' deficit and cash flows for the years ended December 31, 2009 and 2008. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatements. 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 consolidated financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall consolidated financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Conspiracy Entertainment Holdings, Inc. as of December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for the years ended December 31, 2009 and 2008 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has a working capital deficiency and continued losses from operations which raises substantial doubt about its ability to continue as a going concern. Management’s plans in those matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Chisholm, Bierwolf, Nilson & Morrill LLC
Bountiful, Utah
April 14, 2010
| CONSPIRACY ENTERTAINMENT HOLDINGS, INC. | |
| Consolidated Balance Sheets | |
| | | | | | | |
| | | | | | | |
| ASSETS | |
| | | | | | | |
| | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| CURRENT ASSETS | | | | | | |
| | | | | | | |
| Cash and cash equivalents | | $ | 128,413 | | | $ | 424,529 | |
| Accounts receivable, net | | | 284,467 | | | | 256,820 | |
| | | | | | | | | |
| Total Current Assets | | | 412,880 | | | | 681,349 | |
| | | | | | | | | |
| PROPERTY AND EQUIPMENT, NET | | | 14,347 | | | | 11,158 | |
| | | | | | | | | |
| OTHER ASSETS | | | | | | | | |
| | | | | | | | | |
| Capitalized development costs and licenses, net | | | 3,699,735 | | | | 2,543,710 | |
| Deposits | | | 6,906 | | | | 6,906 | |
| Other receivable | | | 85,500 | | | | 92,500 | |
| | | | | | | | | |
| Total Other Assets | | | 3,793,513 | | | | 2,643,116 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 4,219,368 | | | $ | 3,335,623 | |
| | | | | | | | | |
| CONSPIRACY ENTERTAINMENT HOLDINGS, INC. | |
| Consolidated Balance Sheets (Continued) | |
| | | | | | | |
| | | | | | | |
| LIABILITIES AND STOCKHOLDERS' DEFICIT | |
| | | | | | | |
| | | | | | | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| CURRENT LIABILITIES | | | | | | |
| | | | | | | |
| Accounts payable | | $ | 1,071,123 | | | $ | 712,175 | |
| Accrued expenses | | | 2,048,902 | | | | 2,440,193 | |
| Payroll taxes payable | | | 826,230 | | | | 712,585 | |
| Deferred compensation | | | 288,338 | | | | 371,555 | |
| Related party loans | | | 30,000 | | | | 80,000 | |
| Deferred revenue | | | 2,487,912 | | | | 2,145,632 | |
| Notes payable, net of discount | | | - | | | | 418,688 | |
| Derivative liability | | | - | | | | 2,816,604 | |
| Current portion of convertible notes payable, net of discount | | | 150,000 | | | | 2,217,400 | |
| | | | | | | | | |
| Total Current Liabilities | | | 6,902,505 | | | | 11,914,832 | |
| LONG-TERM LIABILITIES | | | | | | | | |
| Convertible notes payable, net of discount | | | 2,484,302 | | | | - | |
| Total Long-Term Liabilities | | | 2,484,302 | | | | - | |
| Total Liabilities | | | 9,386,807 | | | | 11,914,832 | |
| COMMITMENTS | | | | | | | | |
| STOCKHOLDERS' DEFICIT | | | | | | | | |
| Common stock, $0.001 par value; 1,000,000,000 shares | | | | | | | | |
| authorized, 20,386,368 and 17,063,022 shares | | | | | | | | |
| issued and outstanding, respectively | | | 20,386 | | | | 17,063 | |
| Additional paid in capital | | | 7,212,936 | | | | 2,824,521 | |
| Accumulated deficit | | | (12,400,761 | ) | | | (11,420,793 | ) |
| | | | | | | | | |
| Total Stockholders' Deficit | | | (5,167,439 | ) | | | (8,579,209 | ) |
| | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | | $ | 4,219,368 | | | $ | 3,335,623 | |
| | | | | | | | | |
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, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| NET SALES | | $ | 9,600,592 | | | $ | 10,905,490 | |
| | | | | | | | | |
| COST OF SALES | | | 7,836,371 | | | | 8,919,325 | |
| | | | | | | | | |
| GROSS PROFIT | | | 1,764,221 | | | | 1,986,165 | |
| | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | |
| | | | | | | | | |
| Professional fees | | | 491,530 | | | | 507,165 | |
| Salaries, wages and payroll taxes | | | 595,186 | | | | 658,950 | |
| Selling, general and administrative | | | 828,293 | | | | 1,108,863 | |
| | | | | | | | | |
| Total Operating Expenses | | | 1,915,009 | | | | 2,274,978 | |
| | | | | | | | | |
| NET INCOME (LOSS) FROM OPERATIONS | | | (150,788 | ) | | | (288,813 | ) |
| | | | | | | | | |
| OTHER INCOME (EXPENSE) | | | | | | | | |
| | | | | | | | | |
| Interest expense | | | (356,579 | ) | | | (212,146 | ) |
| Net financing expense | | | (829,734 | ) | | | (109,463 | ) |
| Loss on extinguishment of debt | | | (2,459,471 | ) | | | - | |
| Gain on valuation of derivative liability | | | 2,816,604 | | | | 765,897 | |
| Gain on debt forgiveness | | | - | | | | 110,128 | |
| | | | | | | | | |
| Total Other Income (Expense) | | | (829,180 | ) | | | 554,416 | |
| | | | | | | | | |
| NET INCOME (LOSS) BEFORE INCOME TAXES | | | (979,968 | ) | | | 265,603 | |
| | | | | | | | | |
| PROVISION FOR INCOME TAXES | | | - | | | | - | |
| | | | | | | | | |
| NET INCOME (LOSS) | | $ | (979,968 | ) | | $ | 265,603 | |
| | | | | | | | | |
| BASIC INCOME (LOSS) PER SHARE (Note 2) | | $ | (0.05 | ) | | $ | 0.02 | |
| DILUTED INCOME (LOSS) PER SHARE (Note 2) | | $ | (0.03 | ) | | $ | (0.02 | ) |
| | | | | | | | | |
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, 2009 and 2008 | |
| | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | Additional | | | | | |
| | | Common Stock | | | Paid-In | | | Retained | |
| | | Shares | | | Amount | | | Capital | | | Deficit | |
| | | | | | | | | | | | | | | |
| Balance, December 31, 2007 | | | 17,063,022 | | | $ | 17,063 | | | $ | 2,824,521 | | | $ | (11,686,396 | ) |
| | | | | | | | | | | | | | | | | |
| Net income for the year ended | | | | | | | | | | | | | | | | |
| December 31, 2008 | | | - | | | | - | | | | - | | | | 265,603 | |
| | | | | | | | | | | | | | | | | |
| Balance, December 31, 2008 | | | 17,063,022 | | | | 17,063 | | | | 2,824,521 | | | | (11,420,793 | ) |
| | | | | | | | | | | | | | | | | |
| Common stock issued for debt | | | | | | | | | | | | | | | | |
| and accrued interest | | | 3,323,347 | | | | 3,323 | | | | 196,078 | | | | - | |
| | | | | | | | | | | | | | | | | |
| Beneficial conversion features | | | | | | | | | | | | | | | | |
| on new debt | | | - | | | | - | | | | 931,146 | | | | - | |
| | | | | | | | | | | | | | | | | |
| Loss on extinguishment of debt | | | | | | | | | | | | | | | | |
| related to modifying the | | | | | | | | | | | | | | | | |
| conversion terms or adding | | | | | | | | | | | | | | | | |
| terms to existing debt | | | - | | | | - | | | | 2,459,471 | | | | - | |
| | | | | | | | | | | | | | | | | |
| Value of warrants issued | | | | | | | | | | | | | | | | |
| during the year | | | - | | | | - | | | | 801,720 | | | | - | |
| | | | | | | | | | | | | | | | | |
| Net loss for the year ended | | | | | | | | | | | | | | | | |
| December 31, 2009 | | | - | | | | - | | | | - | | | | (979,968 | ) |
| | | | | | | | | | | | | | | | | |
| Balance, December 31, 2009 | | | 20,386,369 | | | $ | 20,386 | | | $ | 7,212,936 | | | $ | (12,400,761 | ) |
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, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net income | | $ | (979,968 | ) | | $ | 265,603 | |
| Adjustments to reconcile net income to net cash | | | | | | | | |
| provided by operating activities: | | | | | | | | |
| Depreciation and amortization | | | 2,528 | | | | 2,528 | |
| Amortization of discount on convertible notes payable | | | 24,830 | | | | 109,463 | |
| Amortization and impairment of capitalized | | | | | | | | |
| development costs and licenses | | | 484,596 | | | | 2,589,001 | |
| Amortization of discount on notes payable | | | 3,183 | | | | 19,595 | |
| Loss on extinguishment of debt | | | 2,459,471 | | | | - | |
| Value of warrants issued | | | 801,720 | | | | - | |
| Gain on debt forgiveness | | | - | | | | (110,128 | ) |
| Net change in derivative liability | | | (2,816,604 | ) | | | (765,897 | ) |
| Change in operating assets and liabilities: | | | | | | | | |
| Accounts receivable and other receivable | | | (20,647 | ) | | | (106,625 | ) |
| Prepaid expenses | | | - | | | | 277,200 | |
| Accounts payable and accrued expenses | | | 822,050 | | | | 221,293 | |
| Deferred compensation | | | (83,217 | ) | | | (161,455 | ) |
| Deferred revenue | | | 342,280 | | | | 818,979 | |
| | | | | | | | | |
| Net Cash Provided by Operating Activities | | | 1,040,222 | | | | 3,159,557 | |
| | | | | | | | | |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Payments for development costs and licenses | | | (1,641,993 | ) | | | (3,510,781 | ) |
| Purchase of property and equipment | | | (5,717 | ) | | | (9,237 | ) |
| | | | | | | | | |
| Net Cash Used in Investing Activities | | | (1,647,710 | ) | | | (3,520,018 | ) |
| | | | | | | | | |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Proceeds from (payments on) related party loans | | | (50,000 | ) | | | 80,000 | |
| Proceeds from convertible notes payable | | | 360,000 | | | | - | |
| Proceeds from notes payable | | | - | | | | 205,000 | |
| Payments on notes payable | | | - | | | | (40,000 | ) |
| | | | | | | | | |
| Net Cash Provided by Financing Activities | | $ | 310,000 | | | $ | 245,000 | |
| | | | | | | | | |
| | | | | | | | | |
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, | |
| | | | 2009 | | | | 2008 | |
| | | | | | | | | |
| | | | | | | | | |
| DECREASE IN CASH AND CASH EQUIVALENTS | | $ | (296,116 | ) | | $ | (115,461 | ) |
| | | | | | | | | |
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | | | 424,529 | | | | 539,990 | |
| | | | | | | | | |
| CASH AND CASH EQUIVALENTS, END OF YEAR | | $ | 128,413 | | | $ | 424,529 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| SUPPLEMENTAL DISCLOSURES: | | | | | | | | |
| Cash paid for interest | | $ | 5,000 | | | $ | 5,000 | |
| Cash paid for income taxes | | $ | - | | | $ | - | |
| | | | | | | | | |
| | | | | | | | | |
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | |
| Beneficial conversion feature of convertible notes payable | | $ | 931,146 | | | $ | - | |
| Accrued interest converted to convertible debt | | $ | 721,147 | | | $ | - | |
| Notes payable converted to convertible debt | | $ | 421,871 | | | $ | - | |
| Convertible notes payable and interest converted to stock | | $ | 199,401 | | | $ | - | |
| | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 1 - | NATURE OF ORGANIZATION |
The consolidated 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 7,184,300 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) 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 were consolidated with the Company through the date of sale.
| 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, 2009 and 2008
| 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, 2009 and 2008, the allowance for doubtful accounts was $-0- and $62,500, respectively.
e. Assignment of Accounts Receivable
Regularly, the Company assigns its receivables to vendors with recourse and accounts for such assignments in accordance with FASB ASC 860 (Prior authoritative literature: 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 FASB ASC 985 (Prior authoritative literature: 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, 2009 and 2008
| 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, 2009 and 2008
| 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, 2009 and 2008, $484,596 and $2,589,001, respectively, of amortization and impairment expense has been included in cost of sales for the years on the titles that have been released or have been discontinued during the year.
h. Property and Equipment
Property and equipment as of December 31, 2009 and 2008 consists of the following and are recorded at cost:
| | | | December 31, | |
| | Life | | 2009 | | | 2008 | |
| | | | | | | | |
| | | | | | | | |
| Furniture and equipment | 4-5 years | | $ | 58,707 | | | $ | 58,707 | |
| Development tools | 3 years | | | 41,606 | | | | 41,606 | |
| Computer equipment | 3 years | | | 54,199 | | | | 46,285 | |
| Automobile | 4 years | | | 51,549 | | | | 51,549 | |
| Leasehold improvements | 5 years | | | 24,457 | | | | 24,457 | |
| Total property and equipment | | | | 230,518 | | | | 222,604 | |
| Less: accumulated depreciation | | | | (216,171 | ) | | | (211,446 | ) |
| Property and equipment, net | | | $ | 14,347 | | | $ | 11,158 | |
| | | | | | | | | | |
Provision for depreciation of property and equipment is computed using 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 $4,724 and $2,528 for the years ended December 31, 2009 and 2008, respectively.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 2 - | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
h. Property and Equipment (continued)
In accordance with FASB ASC 360 (Prior authoritative literature: SFAS 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, 2009 and 2008, 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 FASB ASC 605 (Prior authoritative literature: 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 agreements to assign accounts receivable to vendors, the Company presents revenues on gross basis per FASB ASC 605-45-45 (Prior authoritative literature: 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, 2009 and 2008
| 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 June 2006, FASB issued FASB ASC 740-10 (Prior authoritative literature: FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB No. 109, “Accounting for Income Taxes”. FASB ASC 740-10 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. FASB ASC 740-10 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FASB ASC 740-10 is effective for fiscal years beginning after December 15, 2006.
The Company adopted the provisions of FASB ASC 740-10 on January 1, 2007. The adoption of FASB ASC 740-10 had no effect on the Company’s reported deficit, its net income (loss) or on its reported deferred net tax assets from net operating loss carryforwards or the related valuation allowance (Note 12).
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| 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, 2009, 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, 2009 and 2008 was $346,062 and $540,813, respectively.
l. Earnings (Loss) Per Share of Common Stock
The Company reports loss per share in accordance with FASB ASC 260 (Prior authoritative literature: 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 (as adjusted for subsequent 1:3 reverse stock split – see Note 14). 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, | |
| | | 2009 | | | 2008 | |
| Earnings (loss) per share: | | | | | | |
| Net income (numerator) - basic | | $ | (979,968 | ) | | $ | 265,603 | |
| Effect of dilutive securities, convertible | | | | | | | | |
| notes payable | | | 472,601 | | | | (656,434 | ) |
| | | | | | | | | |
| Income (loss) (numerator) - diluted | | $ | (507,367 | ) | | $ | (390,831 | ) |
| | | | | | | | | |
| | | | | | | | | |
| Shares (denominator) - basic | | | 17,825,783 | | | | 17,063,022 | |
| Effect of dilutive securities, convertible | | | | | | | | |
| notes payable | | | - | | | | - | |
| Warrants | | | - | | | | - | |
| | | | | | | | | |
| Shares (denominator) - diluted | | | 17,825,783 | | | | 17,063,022 | |
| | | | | | | | | |
| Per share amount - basic | | $ | (0.05 | ) | | $ | 0.02 | |
| | | | | | | | | |
| Per share amount - diluted | | $ | (0.03 | ) | | $ | (0.02 | ) |
For the year ended December 31, 2009, the Company had warrants to purchase 37,166,666 common shares at a weighted average price of $0.264 and notes payable convertible into 118,020,576 common shares that were not included in the computation of diluted earnings per share as their effect was anti-dilutive - (all amounts are adjusted for subsequent 1:3 reverse stock split – see Note 14).
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 2 - | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
l. Earnings (Loss) Per Share of Common Stock (Continued)
For the year ended December 31, 2008, the Company had warrants to purchase 23,333,333 common shares at a weighted average price of $0.375 and notes payable convertible into 51,890,756 common shares that were not included in the computation of diluted earnings per share as their effect was anti-dilutive - (all amounts are adjusted for subsequent 1:3 reverse stock split – see Note 14).
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 FASB ASC 815-40 (Prior authoritative literature: 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 are valued using the Black Scholes Option Pricing Model.
n. Registration Rights
In raising capital through the issuance of Convertible Notes, the Company has issued convertible debentures and warrants 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 FASB ASC 815-40 (Prior authoritative literature: EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock"), the net value 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, 2009 and 2008.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
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, as of December 31, 2009, the Company had an accumulated deficit of approximately $12,400,000 and has significant 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 2010 and to continue to generate cash flow from operations. The consolidated financial statements do not 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 |
On December 11, 2009, the Company entered into two separate convertible loan agreements. Each loan was for $105,000 resulting in total new debt of $210,000. The convertible notes accrue interest at 15% per annum with principal and interest due at maturity of December 31, 2011. The note holder has the option to convert any unpaid balances to the Company’s common stock at a rate of $0.03 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) per common share. The note holders also both received 5,250,000 common stock warrants with an exercise price of $0.09 per share for a period of five (5) years (as adjusted for subsequent 1:3 reverse stock split – see Note 14).
The Company identified embedded derivatives related to the December 11, 2009 convertible debt. 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 up to the proceeds amount. At inception of the new debt, the Company allocated $210,000 to the embedded derivatives.
For the years ended December 31, 2009 and 2008, the Company amortized the debt discount and charged to interest expense $5,600 and $-0-, respectively.
On December 11, 2009, the Company also converted $376,418 of accrued interest due on another convertible loan to a new convertible loan agreement. The convertible note accrues interest at 15% per annum with principal and interest due at maturity of December 31, 2011. The note holder has the option to convert any unpaid balances to the Company’s common stock at a rate of $0.03 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) per common share.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 4 - | CONVERTIBLE NOTES PAYABLE (Continued) |
The Company identified embedded derivatives related to the December 11, 2009 convertible debt. 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 up to the proceeds amount. At inception of the new debt, the Company allocated $376,418 to the embedded derivatives.
For the years ended December 31, 2009 and 2008, the Company amortized the debt discount and charged to interest expense $10,038 and $-0-, respectively.
On December 11, 2009, the Company also converted $344,728 of accrued interest due on another convertible loan to a new convertible loan agreement. The convertible note accrues interest at 15% per annum with principal and interest due at maturity of December 31, 2011. The note holder has the option to convert any unpaid balances to the Company’s common stock at a rate of $0.03 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) per common share.
The Company identified embedded derivatives related to the December 11, 2009 convertible debt. 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 up to the proceeds amount. At inception of the new debt, the Company allocated $344,728 to the embedded derivatives.
For the years ended December 31, 2009 and 2008, the Company amortized the debt discount and charged to interest expense $9,193 and $-0-, respectively.
On May 21, 2009, the Company entered into two separate convertible loan agreements. Each loan was for $75,000 resulting in total new debt of $150,000. Both loans bear interest at 15%, mature May 21, 2010, require a payment of $37,500 on December 31, 2009 with the balance (including interest) due at maturity, and are convertible into shares of the Company’s common stock at $0.03 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) per share (at the note holder’s option at any time the debt is outstanding).
The debt was accounted for under U.S. generally accepted accounting principles which resulted in no beneficial conversion feature as the conversion rate was equal to the trading price on the date of the transaction (the conversion features were not “in-the-money”).
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 had the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of a) $0.06 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) 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 matured on August 1, 2008.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 4 - | CONVERTIBLE NOTES PAYABLE (Continued) |
However, in December 2009 the note holder agreed to modify the conversion terms and maturity date to the following: (a) maturity of June 30, 2011 with interest and principal due at maturity, and (b) convertible at the Holders' option into shares of the Company's common stock at the lesser of $0.03 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) or 70% of the average of the five (5) lowest closing bid prices of the Company's common stock for the thirty (30) trading days prior to the conversion date. The substantial modification of the terms of the convertible debt resulted in a loss on modification and extinguishment of debt in the amount of $200,000 in accordance with the provisions of Accounting Standards Codification (ASC) 470-50 (Modifications and Extinguishments of Debt).
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 years ended December 31, 2009 and 2008, the Company amortized the debt discount and charged to interest expense $-0- and $109,463, respectively.
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 had the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of a) $0.06 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) 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 matured on August 1, 2007.
However, in December 2009 the note holder agreed to modify the conversion terms and maturity date to the following: (a) maturity of June 30, 2011 with interest and principal due at maturity, and (b) convertible at the Holders' option into shares of the Company's common stock at the lesser of $0.03 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) or 70% of the average of the five (5) lowest closing bid prices of the Company's common stock for the thirty (30) trading days prior to the conversion date. The substantial modification of the terms of the convertible debt resulted in a loss on modification and extinguishment of debt in the amount of $80,000 in accordance with the provisions of Accounting Standards Codification (ASC) 470-50 (Modifications and Extinguishments of Debt).
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.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 4 - | CONVERTIBLE NOTES PAYABLE (Continued) |
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 had the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of a) $0.06 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) 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 matured on August 1, 2007.
However, in December 2009 the note holder agreed to modify the conversion terms and maturity date to the following: (a) maturity of June 30, 2011 with interest and principal due at maturity, and (b) convertible at the Holders' option into shares of the Company's common stock at the lesser of $0.03 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) or 70% of the average of the five (5) lowest closing bid prices of the Company's common stock for the thirty (30) trading days prior to the conversion date. The substantial modification of the terms of the convertible debt resulted in a loss on modification and extinguishment of debt in the amount of $247,000 in accordance with the provisions of Accounting Standards Codification (ASC) 470-50 (Modifications and Extinguishments of Debt).
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.
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 4,333,333 shares of the Company’s common stock at $0.15 per share and warrants to purchase 4,333,333 shares of the Company’s common stock at $0.60 per share - (each as adjusted for subsequent 1:3 reverse stock split – see Note 14). The Convertible Note accrues interest at 5% per annum. The note holder had the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of a) $0.06 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) 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 matured on February 9, 2007.
However, in December 2009 the note holder agreed to modify the conversion terms and maturity date to the following: (a) maturity of June 30, 2011 with interest and principal due at maturity, and (b) convertible at the Holders' option into shares of the Company's common stock at the lesser of $0.03 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) or 70% of the average of the five (5) lowest closing bid prices of the Company's common stock for the thirty (30) trading days prior to the conversion date. The substantial modification of the terms of the convertible debt resulted in a loss on modification and extinguishment of debt in the amount of $650,000 in accordance with the provisions of Accounting Standards Codification (ASC) 470-50 (Modifications and Extinguishments of Debt).
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 4 - | CONVERTIBLE NOTES PAYABLE (Continued) |
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 7,000,000 shares of the Company’s common stock at $0.15 per share and warrants to purchase 7,000,000 shares of the Company’s common stock at $0.60 per share - (each as adjusted for subsequent 1:3 reverse stock split – see Note 14). The Convertible Note accrues interest at 5% per annum. The note holder had the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of a) $0.06 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) 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 matured on August 30, 2006.
However, in December 2009 the note holder agreed to modify the conversion terms and maturity date to the following: (a) maturity of June 30, 2011 with interest and principal due at maturity, and (b) convertible at the Holders' option into shares of the Company's common stock at the lesser of $0.03 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) or 70% of the average of the five (5) lowest closing bid prices of the Company's common stock for the thirty (30) trading days prior to the conversion date. The substantial modification of the terms of the convertible debt resulted in a loss on modification and extinguishment of debt in the amount of $810,600 in accordance with the provisions of Accounting Standards Codification (ASC) 470-50 (Modifications and Extinguishments of Debt).
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.
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 333,333 shares of the Company’s common stock at $0.15 per share and warrants to purchase 333,333 shares of the Company’s common stock at $0.60 per share - (each as adjusted for subsequent 1:3 reverse stock split – see Note 14). The Convertible Note accrues interest at 5% per annum. The note holder had the option to convert any unpaid note principal to the Company’s common stock at a rate of the lower of a) $0.06 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) 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).
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 4 - | CONVERTIBLE NOTES PAYABLE (Continued) |
However, in December 2009 the note holder agreed to modify the conversion terms and maturity date to the following: (a) maturity of June 30, 2011 with interest and principal due at maturity, and (b) convertible at the Holders' option into shares of the Company's common stock at the lesser of $0.03 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) or 70% of the average of the five (5) lowest closing bid prices of the Company's common stock for the thirty (30) trading days prior to the conversion date. The substantial modification of the terms of the convertible debt resulted in a loss on modification and extinguishment of debt in the amount of $50,000 in accordance with the provisions of Accounting Standards Codification (ASC) 470-50 (Modifications and Extinguishments of Debt).
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.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 4 - | CONVERTIBLE NOTES PAYABLE (Continued) |
Convertible notes payable are detailed as follows:
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Convertible debentures to partnerships and funds; 5% interest per annum; secured by the Company’s assets, matured August 2006. In December 2009, the note holders agreed to modify the conversion terms and maturity date to the following: (a) maturity of June 30, 2011 with interest and principal due at maturity, and (b) convertible at the Holders' option into shares of the Company's common stock at the lesser of $0.03 (as restated for the reverse stock split - see Note 14) or 70% of the average of the five (5) lowest closing bid prices of the Company's common stock for the thirty (30) trading days prior to the conversion date. | | $ | 1,510,600 | | | $ | 1,690,400 | |
| | | | | | | | | |
| Convertible debentures to partnerships and funds; 15% interest per annum; secured by the Company’s assets, matured February 2007. In December 2009, the note holders agreed to modify the conversion terms and maturity date to the following: (a) maturity of June 30, 2011 with interest and principal due at maturity, and (b) convertible at the Holders' option into shares of the Company's common stock at the lesser of $0.03 (as restated for the reverse stock split - see Note 14) or 70% of the average of the five (5) lowest closing bid prices of the Company's common stock for the thirty (30) trading days prior to the conversion date. | | | 247,000 | | | | 247,000 | |
| | | | | | | | | |
| Convertible debentures to partnerships and funds; 15% interest per annum; secured by the Company’s assets, matured August 1, 2007. In December 2009, the note holders agreed to modify the conversion terms and maturity date to the following: (a) maturity of June 30, 2011 with interest and principal due at maturity, and (b) convertible at the Holders' option into shares of the Company's common stock at the lesser of $0.03 (as restated for the reverse stock split - see Note 14) or 70% of the average of the five (5) lowest closing bid prices of the Company's common stock for the thirty (30) trading days prior to the conversion date. | | | 80,000 | | | | 80,000 | |
| | | | | | | | | |
| Convertible debentures to an entity; 15% interest per annum; secured by the Company’s assets, matures May 21, 2010, convertible anytime at the Holder’s option at the conversion rate of $0.03 (as restated for the reverse stock split - see Note 14) per common share. Principal due in equal installments on December 31, 2009 and at maturity. Interest due at maturity. | | | 75,000 | | | | - | |
| | | | | | | | | |
| Subtotal | | $ | 1,912,600 | | | $ | 2,017,400 | |
| | | | | | | | | |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 4 - | CONVERTIBLE NOTES PAYABLE (Continued) |
| | | December 31, | |
| | | | 2009 | | | | 2008 | |
| | | | | | | | | |
| Balance forward | | $ | 1,912,600 | | | $ | 2,017,400 | |
| | | | | | | | | |
| Convertible debentures to an entity; 15% interest per annum; secured by the Company’s assets, matures May 21, 2010, convertible anytime at the Holder’s option at the conversion rate of $0.03 (as restated for the reverse stock split - see Note 14) per common share. Principal due in equal installments on December 31, 2009 and at maturity. Interest due at maturity. | | | 75,000 | | | | - | |
| | | | | | | | | |
| Convertible debentures to an entity; 15% interest per annum; secured by Company assets, principal and interest matures December 31, 2011, convertible anytime at the Holder’s option at a rate of $0.03 (as restated for the reverse stock split - see Note 14) per common share; net of discount of $102,200 and $-0- at December 31, 2009 and 2008, respectively. | | | 2,800 | | | | - | |
| | | | | | | | | |
| Convertible debentures to an entity; 15% interest per annum; secured by Company assets, principal and interest matures December 31, 2011, convertible anytime at the Holder’s option at a rate of $0.03 (as restated for the reverse stock split - see Note 14) per common share; net of discount of $102,200 and $-0- at December 31, 2009 and 2008, respectively. | | | 2,800 | | | | - | |
| | | | | | | | | |
| Convertible debentures to an entity as a result of converting $376,418 of interest due on a different convertible note; 15% interest per annum; secured by Company assets, principal and interest matures December 31, 2011, convertible anytime at the Holder’s option at a rate of $0.03 (as restated for the reverse stock split - see Note 14) per common share; net of discount of $366,380 and $-0- at December 31, 2009 and 2008, respectively. | | | 10,038 | | | | - | |
| | | | | | | | | |
| Convertible debentures to an entity as a result of converting $344,728 of interest due on a different convertible note; 15% interest per annum; secured by Company assets, principal and interest matures December 31, 2011, convertible anytime at the Holder’s option at a rate of $0.03 (as restated for the reverse stock split - see Note 14) per common share; net of discount of $335,535 and $-0- at December 31, 2009 and 2008, respectively. | | | 9,193 | | | | - | |
| | | | | | | | | |
| Subtotal | | $ | 2,012,431 | | | $ | 2,017,400 | |
| | | | | | | | | |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 4 - | CONVERTIBLE NOTES PAYABLE (Continued) |
| | | December 31, | |
| | | | 2009 | | | | 2008 | |
| | | | | | | | | |
| Balance forward | | $ | 2,012,431 | | | $ | 2,017,400 | |
| | | | | | | | | |
| 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. In December 2009, the note holder agreed to extend the maturity date and add conversion terms to the debt as follows: (a) maturity of June 30, 2011 with interest and principal due at maturity, and (b) convertible at the Holder's option into shares of the Company's common stock at the lesser of $0.03 (as restated for the reverse stock split - see Note 14) or 70% of the average of the five (5) lowest closing bid prices of the Company's common stock for the thirty (30) trading days prior to the conversion date. Balance was included as part of notes payable at December 31, 2008 since there were no conversion terms until December 2009. | | | 194,093 | | | | - | |
| | | | | | | | | |
| Note payable to an entity; interest at 10% per annum, original maturity on February 20, 2009. The note was issued at a 10% discount with the Company receiving $102,500 for a $113,889 face value note. The discount was amortized over the life of the note (1 year) and recorded as interest expense, secured by a security interest. In December 2009, the note holder agreed to extend the maturity date and add conversion terms to the debt as follows: (a) maturity of June 30, 2011 with interest and principal due at maturity, and (b) convertible at the Holder's option into shares of the Company's common stock at the lesser of $0.03 (as restated for the reverse stock split - see Note 14) or 70% of the average of the five (5) lowest closing bid prices of the Company's common stock for the thirty (30) trading days prior to the conversion date. Balance was included as part of notes payable at December 31, 2008 since there were no conversion terms until December 2009. | | | 113,889 | | | | - | |
| | | | | | | | | |
| Note payable to an entity; interest at 10% per annum, original maturity on February 20, 2009. The note was issued at a 10% discount with the Company receiving $102,500 for a $113,889 face value note. The discount was amortized over the life of the note (1 year) and recorded as interest expense, secured by a security interest. In December 2009, the note holder agreed to extend the maturity date and add conversion terms to the debt as follows: (a) maturity of June 30, 2011 with interest and principal due at maturity, and (b) convertible at the Holder's option into shares of the Company's common stock at the lesser of $0.03 (as restated for the reverse stock split - see Note 14) or 70% of the average of the five (5) lowest closing bid prices of the Company's common stock for the thirty (30) trading days prior to the conversion date. Balance was included as part of notes payable at December 31, 2008 since there were no conversion terms until December 2009. | | | 113,889 | | | | - | |
| | | | | | | | | |
| Subtotal | | $ | 2,434,302 | | | $ | 2,017,400 | |
| | | | | | | | | |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 4 - | CONVERTIBLE NOTES PAYABLE (Continued) |
| | | December 31, | |
| | | | 2009 | | | | 2008 | |
| | | | | | | | | |
| Balance forward | | $ | 2,434,302 | | | $ | 2,017,400 | |
| | | | | | | | | |
| Convertible debentures to an entity; 15% interest per annum; secured by Company assets, matured August 1, 2008. In December 2009, the note holder agreed to modify the conversion terms and maturity date to the following: (a) maturity of June 30, 2011 with interest and principal due at maturity, and (b) convertible at the Holders' option into shares of the Company's common stock at the lesser of $0.03 (as restated for the reverse stock split - see Note 14) or 70% of the average of the five (5) lowest closing bid prices of the Company's common stock for the thirty (30) trading days prior to the conversion date. | | | 100,000 | | | | 100,000 | |
| | | | | | | | | |
| Convertible debentures to an entity; 15% interest per annum; secured by Company assets, matured August 1, 2008. In December 2009, the note holder agreed to modify the conversion terms and maturity date to the following: (a) maturity of June 30, 2011 with interest and principal due at maturity, and (b) convertible at the Holders' option into shares of the Company's common stock at the lesser of $0.03 (as restated for the reverse stock split - see Note 14) or 70% of the average of the five (5) lowest closing bid prices of the Company's common stock for the thirty (30) trading days prior to the conversion date. | | | 100,000 | | | | 100,000 | |
| | | | | | | | | |
| Total convertible notes payable, net of discount of $906,315 and $-0- at December 31, 2009 and 2008, respectively. | | | 2,634,302 | | | | 2,217,400 | |
| | | | | | | | | |
| Less: current portion | | | (150,000 | ) | | | (2,217,400 | ) |
| | | | | | | | | |
| Long-term convertible notes payable | | $ | 2,484,302 | | | $ | - | |
| | | | | | | | | |
Future minimum principal payments on the convertible notes payable are as follows:
| | |
| | | | |
| For the Years Ending December 31, | | | |
| | | | |
| 2010 | | $ | 150,000 | |
| 2011 | | | 2,484,302 | |
| Thereafter | | | - | |
| | | | | |
| Total | | $ | 2,634,302 | |
| | | | | |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Notes payable are detailed as follows:
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| 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. In December 2009, the note holder agreed to extend the maturity date and add conversion terms to the debt as follows: (a) maturity of June 30, 2011 with interest and principal due at maturity, and (b) convertible at the Holder's option into shares of the Company's common stock at the lesser of $0.01 or 70% of the average of the five (5) lowest closing bid prices of the Company's common stock for the thirty (30) trading days prior to the conversion date. Balance was included as part of notes payable at December 31, 2008 since there were no conversion terms until December 2009 and reclassified to convertible notes payable at December 31, 2009. | | $ | - | | | $ | 194,093 | |
| | | | | | | | | |
| Note payable to an entity; interest at 10% per annum, original maturity on February 20, 2009. The note was issued at a 10% discount with the Company receiving $102,500 for a $113,889 face value note. The discount was amortized over the life of the note (1 year) and recorded as interest expense, secured by a security interest. In December 2009, the note holder agreed to extend the maturity date and add conversion terms to the debt as follows: (a) maturity of June 30, 2011 with interest and principal due at maturity, and (b) convertible at the Holder's option into shares of the Company's common stock at the lesser of $0.01 or 70% of the average of the five (5) lowest closing bid prices of the Company's common stock for the thirty (30) trading days prior to the conversion date. Balance was included as part of notes payable at December 31, 2008 since there were no conversion terms until December 2009 and reclassified to convertible notes payable at December 31, 2009. | | | - | | | | 112,298 | |
| | | | | | | | | |
| Note payable to an entity; interest at 10% per annum, original maturity on February 20, 2009. The note was issued at a 10% discount with the Company receiving $102,500 for a $113,889 face value note. The discount was amortized over the life of the note (1 year) and recorded as interest expense, secured by a security interest. In December 2009, the note holder agreed to extend the maturity date and add conversion terms to the debt as follows: (a) maturity of June 30, 2011 with interest and principal due at maturity, and (b) convertible at the Holder's option into shares of the Company's common stock at the lesser of $0.01 or 70% of the average of the five (5) lowest closing bid prices of the Company's common stock for the thirty (30) trading days prior to the conversion date. Balance was included as part of notes payable at December 31, 2008 since there were no conversion terms until December 2009 and reclassified to convertible notes payable at December 31, 2009. | | | - | | | | 112,297 | |
| | | | | | | | | |
| Total notes payable, net of discount $-0- and $3,183, respectively | | | - | | | | 418,688 | |
| | | | | | | | | |
| Less: current portion | | | - | | | | (418,688 | ) |
| | | | | | | | | |
| Long-term notes payable | | $ | - | | | $ | - | |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 6 - | LEASE COMMITMENTS |
On February 11, 2009, the Company signed an addendum to its office lease for an additional term of eighteen (18) months commencing May 1, 2009 through October 31, 2010 requiring base monthly rental payments of $7,958.
Future minimum lease payments under non-cancelable operating leases at December 31, 2009 were as follows:
| For the Years Ending December 31, | | | |
| | | | |
| 2010 | | $ | 79,577 | |
| Thereafter | | | - | |
| | | | | |
| Total | | $ | 79,577 | |
| | | | | |
Rent expense was $106,102 and $94,976 for the years ended December 31, 2009 and 2008, respectively.
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 718,430 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) 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, 2009 and 2008, total deferred compensation related to these employment agreements was $288,338 and $371,555, respectively.
License Fee Agreement
The Company is obligated under a license agreement with Discovery of which $60,000 remained unpaid as of December 31, 2009 and 2008. 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.
Vacation Accrual
During the years ended December 31, 2009 and 2008, the Company did not accrue liabilities for vacation payable to employees. The Company’s management believes vacation earned during and prior to 2009 was utilized by the employees of the Company as of December 31, 2009, and accordingly, has not recorded an accrued liability.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| 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 both December 31, 2009 and 2008 the Company had withholding tax payable of $376,823. As of December 31, 2009, the Company had not remitted any of the 2001-2006 withholdings to the IRS for which it is most likely subject to penalties and interest which have been estimated and accrued. As of December 31, 2009, the Company had not been audited or invoiced by the IRS. The amounts due at December 31, 2009 and 2008 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet.
| 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
As of December 31, 2008, the Company had authorized for issuance 100,000,000 shares of common stock at $0.001 par value. At December 31, 2008 the Company had 51,189,065 (pre-stock split) common shares issued and outstanding. In addition to the issued shares, the Company has 70,000,000 (pre-stock split) warrants outstanding and notes payable convertible into 155,672,269 (pre-stock split) shares as of December 31, 2008. If each of the equity instruments were exercised for conversion to common stock at December 31, 2008, the Company did 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.
In November 2009, the Company increased its authorized shares to 1,000,000,000 to cover the potential shortfall as noted above. As of December 31, 2009, no derivative liability is recorded as the Company has sufficient shares to cover all of its potential obligations related to conversion of debt or equity instruments into shares of common stock.
Major Customers
For the year ended December 31, 2009, two customers generated sales in excess of 10% of the Company’s total sales. Sales to these customers totaled $8,469,380 and $996,168 or 88.4% and 10.4% of total revenues during 2009, respectively. At December 31, 2009, the receivable balance from these customers was $168,336 (59% of net accounts receivable) and $-0-, respectively.
For the year ended December 31, 2008, one customer generated sales in excess of 10% of the Company’s total sales. Sales to this customer totaled $10,578,263 or 97.0% of total revenues during 2008. At December 31, 2008, the receivable balance from this customer was $256,820 (100% of net accounts receivable).
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 9 - | CAPITALIZED DEVELOPMENT COSTS AND LICENSES |
Capitalized development costs and licenses at December 31, 2009 consisted of the following (only including non-fully amortized costs):
| | | Development | | | License | | | Combined | |
| | | Costs | | | Costs | | | Totals | |
| | | | | | | | | | |
| Capitalized development costs and licenses | | $ | 2,750,606 | | | $ | 4,479,528 | | | $ | 7,230,134 | |
| Less: impairment | | | (872,635 | ) | | | (191,500 | ) | | | (1,064,135 | ) |
| Less: accumulated amortization | | | (186,080 | ) | | | (2,278,812 | ) | | | (2,464,892 | ) |
| | | | | | | | | | | | | |
| Net balance | | $ | 1,691,891 | | | $ | 2,009,216 | | | $ | 3,701,107 | |
| | | | | | | | | | | | | |
Amortization expense was $484,596 and $1,811,296 for the years ended December 31, 2009 and 2008, respectively.
The Company’s total impairment losses of $-0- and $777,705 for the years ended December 31, 2009 and 2008, respectively, 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, | | | |
| | | | |
| 2010 | | $ | 2,530,599 | |
| 2011 | | | 1,013,495 | |
| 2012 | | | 157,014 | |
| Thereafter | | | - | |
| | | | | |
| Total | | $ | 3,701,107 | |
| | | | | |
| NOTE 10 - | NEW TECHNICAL PRONOUNCEMENTS |
In December, 2007, the FASB issued FASB ASC 805 (Prior authoritative literature: SFAS No. 141(R), “Business Combinations”), which established the principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. FASB ASC 805 also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. FASB ASC 805 is effective the first annual reporting period beginning on or after December 15, 2008 and is not expected to have any impact on the Company’s financial statements.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 10 - | NEW TECHNICAL PRONOUNCEMENTS (Continued) |
In December, 2007, the FASB issued FASB ASC 810-10-65 (Prior authoritative literature: SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, an amendment of ARB No. 51). FASB ASC 810-10-65 will change the accounting and reporting for minority interests which will be characterized as noncontrolling interests and classified as a component of equity. This new consolidation method will significantly change the accounting for transactions with minority interest shareholders. This standard is effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008.and is not expected to have an impact on the Company’s financial statements.
In March 2008, the FASB issued FASB ASC 815-10 (Prior authoritative literature: SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”), which is effective January 1, 2009. FASB ASC 815-10 requires enhanced disclosures about derivative instruments and hedging activities to allow for a better understanding of their effects on an entity’s financial position, financial performance, and cash flows. Among other things, this standard requires disclosures of the fair values of derivative instruments and associated gains and losses in a tabular formant. This standard is not currently applicable to the Company since we do not have derivative instruments or engage in hedging activity.
In May 2008, the FASB issued FASB ASC 944 (Prior authoritative literature: SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60"). FASB ASC 944 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended March 31, 2009. The Company does not believe this standard will have any impact on the financial statements.
In April, 2009, the FASB issued FASB ASC 810-10-65 (Prior authoritative literature: SFAS No. 164, “Not-for-Profit Entities: Mergers and Acquisitions”) which governs the information that a not-for-profit entity should provide in its financial reports about a combination with one or more other not-for-profit entities, businesses or nonprofit activities and sets out the principles and requirements for how a not-for-profit entity should determine whether a combination is in fact a merger or an acquisition. This standard is effective for mergers occurring on or after Dec. 15, 2009 and for acquisitions where the acquisition date is on or after the beginning of the first annual reporting period, beginning on or after Dec. 15, 2009. This standard does not apply to the Company since the Company is considered a for-profit entity
In May 2009, FASB issued FASB ASC 855-10 (Prior authoritative literature: SFAS No. 165, "Subsequent Events"). FASB ASC 855-10 establishes principles and requirements for the reporting of events or transactions that occur after the balance sheet date, but before financial statements are issued or are available to be issued. FASB ASC 855-10 is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009. As such, the Company adopted these provisions at the beginning of the interim period ended June 30, 2009. Adoption of FASB ASC 855-10 did not have a material effect on our financial statements.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 10 - | NEW TECHNICAL PRONOUNCEMENTS (Continued) |
In June 2009, the FASB ASC 860-10 (Prior authoritative literature: issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140”), which eliminates the concept of a qualifying special-purpose entity (“QSPE”), clarifies and amends the de-recognition criteria for a transfer to be accounted for as a sale, amends and clarifies the unit of account eligible for sale accounting and requires that a transferor initially measure at fair value and recognize all assets obtained and liabilities incurred as a result of a transfer of an entire financial asset or group of financial assets accounted for as a sale. This standard is effective for fiscal years beginning after November 15, 2009. The Company is currently evaluating the potential impact of this standard on its financial statements, but does not expect it to have a material effect.
In June 2009, the FASB issued FASB ASC 810-10-65 (Prior authoritative literature: SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”) which amends the consolidation guidance applicable to a variable interest entity (“VIE”). This standard also amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is therefore required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. Previously, the standard required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. This standard is effective for fiscal years beginning after November 15, 2009, and for interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the potential impact of the adoption of this standard on its financial statements, but does not expect it to have a material effect.
In June 2009, FASB issued ASC 105-10 (Prior authoritative literature: SFAS No. 168, "The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162").FASB ASC 105-10 establishes the FASB Accounting Standards Codification TM (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. FASB ASC 105-10 is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ending September 30, 2009. Adoption of FASB ASC 105-10 did not have a material effect on the Company’s financial statements.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 11 - | SHAREHOLDERS EQUITY |
Warrants
Warrants - The Company has issued warrants to non-employees under various agreements expiring through various dates. A summary of the status of warrants at December 31, 2009 and 2008 (as adjusted for subsequent 1:3 reverse stock split – see Note 14), and changes during the years then ended is as follows:
| | | For the Year Ended | | | For the Year Ended | |
| | | December 31, 2009 | | | December 31, 2008 | |
| | | Shares | | | Weighted Average Exercise Price | | | Shares | | | Weighted Average Exercise Price | |
| | | | | | | | | | | | | |
| Outstanding at beginning of year | | | 23,333,333 | | | $ | 0.375 | | | | 23,333,333 | | | $ | 0.375 | |
| Granted | | | 13,833,333 | | | | 0.076 | | | | - | | | | - | |
| Exercised | | | - | | | | - | | | | - | | | | - | |
| Forfeited | | | - | | | | - | | | | - | | | | - | |
| Expired | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| Outstanding at end of year | | | 37,166,666 | | | $ | 0.264 | | | | 23,333,333 | | | $ | 0.375 | |
| | | | | | | | | | | | | | | | | |
| Exercisable at end of year | | | 37,166,666 | | | $ | 0.264 | | | | 23,333,333 | | | $ | 0.375 | |
| | | | | | | | | | | | | | | | | |
A summary of the status of warrants outstanding at December 31, 2009 (as adjusted for subsequent 1:3 reverse stock split – see Note 14) 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 | |
| | | | | | | | | | | | | | | |
| $ | 0.03 | | | | 3,333,334 | | 5.0 years | | $ | 0.030 | | | | 3,333,334 | | | $ | 0.030 | |
| $ | 0.09 | | | | 10,500,000 | | 4.9 years | | | 0.090 | | | | 10,500,000 | | | | 0.090 | |
| $ | 0.15 | | | | 11,666,666 | | 1.9 years | | | 0.150 | | | | 11,666,666 | | | | 0.150 | |
| $ | 0.60 | | | | 11,666,666 | | 2.2 years | | | 0.600 | | | | 11,666,666 | | | | 0.600 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | 37,166,666 | | | | $ | 0.264 | | | | 37,166,666 | | | $ | 0.264 | |
| | | | | | | | | | | | | | | | | | | | |
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 11 - | SHAREHOLDERS EQUITY (Continued) |
Warrants (Continued)
All terms, conversion rates and amounts of warrants as shown adjusted for subsequent 1:3 reverse stock split – see Note 14.
During 2009, the Company issued a total of 13,833,333 common stock warrants as follows: (a) 1,666,667 to a note holder as additional compensation for re-negotiating its debt terms, the warrants are convertible at the lesser of $0.03 or 70% of the average of the five (5) lowest closing bid prices for the Company’s common stock for the thirty (30) trading days prior to the conversion date, and mature on December 16, 2014, (b) 1,666,667 to a note holder as additional compensation for re-negotiating its debt terms, the warrants are convertible at the lesser of $0.03 or 70% of the average of the five (5) lowest closing bid prices for the Company’s common stock for the thirty (30) trading days prior to the conversion date, and mature on December 16, 2014, (c) 5,250,000 attached to convertible debt (see Note 4), convertible at $0.09 per share, and mature on December 11, 2014, and (d) 5,250,000 attached to convertible debt (see Note 4), convertible at $0.09 per share, and mature on December 11, 2014. The issuance of these warrants resulting in an expense of $366,967 based on the fair value of the warrants issued which has been recorded during the year ended December 31, 2009.
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 7,000,000 shares of the Company’s common stock at $0.60 per share expiring originally on August 31, 2009 (note: during 2009 the maturity date was extended to February 28, 2012 resulting in a value of $260,852 which was expensed during 2009), and Class B Common Stock Purchase Warrants to purchase 7,000,000 shares of the Company’s common stock at $0.15 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.
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 333,333 shares of the Company’s common stock at $0.60 per share expiring originally on October 31, 2009 (note: during 2009 the maturity date was extended to February 28, 2012 resulting in a value of $12,421 which was expensed during 2009), and Class B Common Stock Purchase Warrants to purchase 333,333 shares of the Company’s common stock at $0.15 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 4,333,333 shares of the Company’s common stock at $0.60 per share expiring originally on February 28, 2010 (note: during 2009 the maturity date was extended to February 28, 2012 resulting in a value of $161,480 which was expensed during 2009), and Class B Common Stock Purchase Warrants to purchase 4,333,333 shares of the Company’s common stock at $0.15 per share expiring two and a half years 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.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
| NOTE 11 - | SHAREHOLDERS EQUITY (Continued) |
Warrants (Continued)
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: 5 years | Contract terms; B warrants expire 18 to 30 months after effective registration. The Company has estimated 24 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 |
Common Stock
In October 2009, the Company converted a portion of its convertible debt and interest into the Company’s common stock. In total, 3,323,347 shares were issued at a conversion rate of $0.06 per share (as adjusted for subsequent 1:3 reverse stock split – see Note 14) to convert $179,800 of principal and $19,600 of accrued interest.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2009 and 2008
Income taxes from continuing operations for 2009 and 2008 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, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Income tax benefit (expense) at statutory rates | | $ | 382,188 | | | $ | (103,585 | ) |
| Items not recorded for tax purposes: | | | | | | | | |
| Bad debts | | | - | | | | - | |
| Amortization of discount on convertible notes | | | (10,925 | ) | | | (42,691 | ) |
| Value of warrants expense | | | (312,671 | ) | | | - | |
| Loss on extinguishment of debt | | | (959,194 | ) | | | - | |
| Gain on valuation of derivative liabilities | | | 1,098,476 | | | | 298,700 | |
| | | | | | | | | |
| | | | 197,874 | | | | 152,424 | |
| | | | | | | | | |
| Change in valuation allowance | | | (197,874 | ) | | | (152,424 | ) |
| | | | | | | | | |
| Income tax expense | | $ | - | | | $ | - | |
The Company’s net deferred tax assets consisted of the following at December 31, 2009:
| Operating loss carryforwards | | $ | 2,182,727 | |
| Less: valuation allowance | | | (2,182,727 | ) |
| | | | | |
| Net deferred tax assets | | $ | - | |
| | | | | |
The Company has federal net operating loss carryforwards in the amount of approximately $5,600,000 at December 31, 2009, 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 FASB ASC 740-10 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, 2009 and 2008
| NOTE 12 - | 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 carryforwards may be limited in future periods. Further, a portion of the carryforwards 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, 2009 and 2008, 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 2005 through 2009 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 2005.
| NOTE 13 - | RELATED PARTY LOANS |
The Company received two loans during the year ended December 31, 2008 from officers of the Company. One loan is for $50,000 and the other is for $30,000. Each loan is payable on demand and requires repayment of $5,000 interest for each loan in addition to the principal balance. The $50,000 loan was repaid during 2009 and the interest has been paid on both loans. The balances due on these related party loans at December 31, 2009 and 2008 was $30,000 and $80,000, respectively.
| NOTE 14 - | SUBSEQUENT EVENTS |
Effective February 22, 2010, the Company’s Board of Directors approved a one-for-three (1:3) reverse split of the Company’s issued and outstanding shares of common stock. All references to common shares, convertible notes payable, warrants and any other potential common stock equivalent instruments have been retroactively restated to reflect this change.
