Conspiracy Entertainment (CPYE) 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010.

OR

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION 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 Boulevard, Santa Monica, CA 90401

(Address of principal executive offices) (Zip Code)

Issuer's telephone number: (310) 260-6150

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company T

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

As of November 18, 2010, there were 30,288,019 outstanding shares of the Registrant's Common Stock, $0.001 par value.

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.

SEPTEMBER 30, 2010 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements	1
Item 2. Management’s Discussion and Analysis or Plan of Operation	10
Item 3. Quantitative and Qualitative Disclosure About Market Risk	15
Item 4T. Controls and Procedures	15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	16
Item 1A. Risk Factors	16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3. Defaults Upon Senior Securities	16
Item 4. Reserved	16
Item 5. Other Information	16
Item 6. Exhibits	17
SIGNATURES

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Conspiracy Entertainment Holdings, Inc.

Condensed Consolidated Financial Statements

September 30, 2010

1

CONTENTS

Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Operations	5
Consolidated Statements of Stockholders' Deficit	6
Condensed Consolidated Statements of Cash Flows	7
Notes to the Condensed Consolidated Financial Statements	8

2

CONSPIRACY ENTERTAINMENT HOLDINGS, INC
Consolidated Balance Sheets
ASSETS
	September 30,		December 31,
	2010		2009
	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	105,324	$	128,413
Accounts receivable, net		692,869		284,467
Total Current Assets		798,193		412,880
PROPERTY AND EQUIPMENT, NET		10,028		14,347
OTHER ASSETS
Capitalized development costs and licenses, net		4,441,334		3,699,735
Deposits		6,907		6,907
Other receivable		-		85,500
Total Other Assets		4,448,241		3,792,142
TOTAL ASSETS	$	5,256,462	$	4,219,369

3

CONSPIRACY ENTERTAINMENT HOLDINGS, INC
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' DEFICIT
	September 30,			December 31,
	2010			2009
	(Unaudited)
CURRENT LIABILITIES
Accounts payable	$	1,022,646		$	1,071,124
Accrued expenses		2,318,408			2,048,902
Payroll taxes payable		952,385			826,230
Deferred compensation		57,092			288,338
Related party loans		70,000			30,000
Deferred revenue		2,771,637			2,487,912
Current portion of convertible notes payable, net of discount		2,609,471			150,000
Total Current Liabilities		9,801,639			6,902,506
LONG-TERM LIABILITIES
Convertible notes payable, net of discount		415,213			2,484,302
Total Long-Term Liabilities		415,213			2,484,302
Total Liabilities		10,216,852			9,386,808
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value, 1,000,000,000 shares
authorized, 25,069,701 and 20,386,368 shares
issued and outstanding, respectively		25,069			20,386
Additional paid in capital		7,978,573			7,212,936
Accumulated deficit		(12,964,032	)		(12,400,761	)
Total Stockholders' Deficit		(4,960,390	)		(5,167,439	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	5,256,462		$	4,219,369

4

CONSPIRACY ENTERTAINMENT HOLDINGS, INC
Consolidated Statements of Operations
(Unaudited)
	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2010			2009			2010			2009
NET SALES	$	901,667		$	1,344,224		$	5,115,505		$	5,645,415
COST OF SALES		687,900			1,040,990			3,782,437			4,632,441
GROSS PROFIT		213,767			303,234			1,333,068			1,012,974
OPERATING EXPENSES
Professional fees		32,000			99,350			212,270			313,550
Salaries, wages and payroll taxes		146,896			164,816			447,533			475,563
Selling, general and administrative		183,003			172,631			576,350			554,318
Total Operating Expenses		361,899			436,797			1,236,153			1,343,431
NET INCOME (LOSS) FROM OPERATIONS		(148,132	)		(133,563	)		96,915			(330,457	)
OTHER INCOME (EXPENSE)
Interest expense		(100,039	)		(52,212	)		(269,804	)		(148,880	)
Net financing expense		(163,803	)		-			(390,382	)		(3,183	)
Loss on valuation of derivative liability		-			(5,150,340	)		-			(4,490,706	)
Total Other Income (Expense)		(263,842	)		(5,202,552	)		(660,186	)		(4,642,769	)
NET LOSS BEFORE INCOME TAXES		(411,974	)		(5,336,115	)		(563,271	)		(4,973,226	)
PROVISION FOR INCOME TAXES		-			-			-			-
NET LOSS	$	(411,974	)	$	(5,336,115	)	$	(563,271	)	$	(4,973,226	)
BASIC LOSS PER SHARE	$	(0.02	)	$	(0.31	)	$	(0.02	)	$	(0.29	)
DILUTED LOSS PER SHARE	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.03	)

5

CONSPIRACY ENTERTAINMENT HOLDINGS, INC
Consolidated Statements of Cash Flows
(Unaudited)
	For the Nine Months
	Ended September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(563,271	)	$	(4,973,226	)
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization		4,319			3,355
Amortization and impairment of capitalized
development costs and licenses		640,724			340,353
Amortization of discount on convertible notes payable		390,382			3,183
Common stock issued for services rendered		68,640			-
Net change in derivative liability		-			4,490,706
Change in operating assets and liabilities:
Accounts receivable and other receivable		(322,902	)		(67,187	)
Prepaid expenses		-			(257,071	)
Accounts payable and accrued expenses		427,183			460,166
Deferred compensation		(34,566	)		(55,291	)
Deferred revenue		283,725			827,957
Net Cash Provided by Operating Activities		894,234			772,945
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for development costs and licenses		(1,382,323	)		(1,098,599	)
Purchase of property and equipment		-			(5,371	)
Net Cash Used in Investing Activities		(1,382,323	)		(1,103,970	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on related party loans		-			(58,000	)
Proceeds from related party loans		40,000			8,000
Proceeds from convertible notes payable		425,000			-
Proceeds from notes payable		-			150,000
Net Cash Provided by Financing Activities		465,000			100,000
DECREASE IN CASH AND CASH EQUIVALENTS		(23,089	)		(231,025	)
CASH AND CASH EVUIVALENTS, BEGINNING OF PERIOD		128,413			424,529
CASH AND CASH EVUIVALENTS, END OF PERIOD	$	105,324		$	193,504
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	-		$	-
Cash paid for income taxes	$	-		$	-
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Beneficial conversion feature of convertible notes payable	$	425,000		$	-
Accounts payable converted to common stock	$	80,000		$	-
Deferred compensation converted to common stock	$	196,680		$	-
Common stock issued for services rendered	$	68,640		$	-

6

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations.  The information furnished in the interim condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements.  Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim consolidated financial statements be read in conjunction with the Company’s audited financial statements and notes thereto included in its December 31, 2009 Annual Report on Form 10-K which was filed on April 15, 2010.  Operating results for the nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010.

NOTE 2 - GOING CONCERN

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 September 30, 2010, the Company had an accumulated deficit of approximately $12,900,000 and 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 2011 and 2012 and to continue to generate cash flow from operations. The consolidated financial statements do not include any adjustments relating to t he 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.

7

NOTE 3 - MATERIAL TRANSACTIONS

Reverse Stock Split

Effective February 22, 2010, the Company’s Board of Directors (the “Board”) 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.

Common Stock Issuances

Effective February 5, 2010, the Board approved the issuance of 866,666 (post reverse split) shares of the Company’s common stock for various professional services rendered to the Company. These shares were issued at the market price on the date of authorization with a total value of $68,840.

Effective February 5, 2010, the Board approved the issuance of 1,333,333 (post reverse split) shares of the Company’s common stock for satisfaction of a portion of accounts payable due to the recipient of these shares. These shares were issued at an agreed upon conversion price of $0.06 (post reverse split value) per share or $80,000 which is consistent with the market value of the stock at the time of conversion.

Effective February 5, 2010, the Board approved the issuance of 2,333,333 (post reverse split) and 150,000 (post reverse split) shares of the Company’s common stock to its President and Chief Financial Officer, respectively, in satisfaction of a portion of deferred revenue due to these individuals. These shares were issued at the market price on the date of authorization with a total value of $196,680.

Convertible Debt

On June 30, 2010, the Company entered into two separate convertible loan agreements. Each loan was for $150,000 resulting in total new debt of $300,000. The convertible notes accrue interest at 15% per annum with principal and interest due at maturity of June 30, 2012. The note holder has the option to convert any unpaid balances to the Company’s common stock at a rate of the lower of (a) $0.02 per common share or (b) 70% of the average of the five lowest closing bid prices of the Company’s common stock for the ten trading days prior to the conversion date. The note holders also both received 7,500,000 common stock warrants with an exercise price of $0.02 per share for a period of five (5) years from the issue date.

The Company identified embedded derivatives related to the June 30, 2010 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 $300,000 to the embedded derivatives.

For the period ended September 30, 2010, the Company amortized the debt discount and charged to interest expense $37,500 related to the June 30, 2010 convertible debt.

8

NOTE 3 - MATERIAL TRANSACTIONS (Continued)

Convertible Debt (Continued)

On July 16, 2010, the Company entered into a convertible loan agreement. The loan was for $125,000. The convertible note accrues interest at 15% per annum with principal and interest due at maturity of July 16, 2012. The note holder has the option to convert any unpaid balances to the Company’s common stock at a rate of the lower of (a) $0.02 per common share or (b) 70% of the average of the five lowest closing bid prices of the Company’s common stock for the ten trading days prior to the conversion date. The note holder also received 3,125,000 common stock warrants with an exercise price of $0.02 per share for a period of five (5) years from issue date.

The Company identified embedded derivatives related to the July 16, 2010 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 $125,000 to the embedded derivatives.

For the period ended September 30, 2010, the Company amortized the debt discount and charged to interest expense $13,013 related to the July 16, 2010 convertible debt.

NOTE 4 - EARNINGS (LOSS) PER SHARE

The Company reports income (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 1:3 reverse stock split – see Note 3). 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 pot ential shares of common stock equivalents, as their impact would be anti-dilutive.

9

NOTE 4 - EARNINGS (LOSS) PER SHARE (Continued)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2010			2009			2010			2009
Earnings (loss) per share
Net income (loss) (numerator) - basic	$	(411,974	)	$	(5,336,115	)	$	(563,271	)	$	(4,973,226	)
Effect of dilutive securities, convertible
notes payable		163,803			5,150,340			390,382			4,493,889
Income (loss) (numerator) - diluted	$	(248,171	)	$	(185,775	)	$	(172,889	)	$	(479,337	)
Shares (denominator) - basic		25,069,701			17,063,022			24,452,119			17,063,022
Effect of dilutive securities, convertible
notes payable		-			-			-			-
Warrants		-			-			-			-
Shares (denominator) - diluted		25,069,701			17,063,022			24,452,119			17,063,022
Per share amount - basic	$	(0.02	)	$	(0.31	)	$	(0.02	)	$	(0.29	)
Per share amount - diluted	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.03	)

NOTE 5 - SUBSEQUENT EVENTS

Convertible Debt

On October 25, 2010, 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 14% per annum with principal and interest due at maturity of October 25, 2012. The note holder has the option to convert any unpaid balances to the Company’s common stock at a rate of the lower of (a) $0.02 per common share or (b) 70% of the average of the five lowest closing bid prices of the Company’s common stock for the thirty trading days prior to the conversion date. The note holders also both received 2,625,000 common stock warrants with an exercise price of $0.02 per share for a period of five (5) years from the issue date.

The Company has evaluated subsequent events for the period of September 30, 2010 through the date the financial statements were issued, and concluded there were no other events or transactions occurring during this period that required recognition or disclosure in its condensed financial statements.

Conversion of Debt to Common Stock

Subsequent to September 30, 2010, certain debt holders elected to convert a portion of its debt and interest into common shares of the Company. The Company converted $90,000 of debt principal and $1,051 of interest into 4,852,550 shares of the Company’s common stock. The debt and interest was all converted at $0.02 per share.

10

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The information in this 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 actua l results may differ significantly from management's expectations.

The following discussion and analysis should be read in conjunction with the financial statements and notes thereto included elsewhere in this report and with our annual report on Form 10-K for the fiscal year ended December 31, 2009. 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

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

Revenues for the three months ended September 30, 2010 were $901,667, compared to $1,334,224 for the three months ended September 30, 2009. This represents a decrease of $442,557 or 32.9% for the three months ended September 30, 2010. This decrease was primarily attributable to the release of Rock of the Dead (PS3, X360) being postponed until 4th Qtr 2010.

There was a 29.5% change in gross profit for the three months ended September 30, 2010, which was $213,768, compared to $303,324 for the three months ended September 30, 2009. This decrease in gross profit was primarily the result of lower sales, however the gross profit percentage was higher than that of the 4th Qtr 2009 due to new releases of Personal Fitness –Men (DS), Personal Fitness – Women (DS), and Witches and Vampires (DS) which generate a higher gross profit than reorders of previously released titles.

For the three months ended September 30, 2010, operating expenses totaled $361,900 as compared to $436,797 for the three months ended September 30, 2009. This was a decrease of $92,396 or 20.3%. The decrease in operating expenses resulted from lower a reduction in Salary and Wages of $17,920 or 10.9% from $164,816 for the three months ended September 30, 2009 to $146,896 for the three months ended September 30, 2010 relating to a reduction in salary taken by the CEO; a reduction of $67,350 or 67.8% in Professional Fees from $99,350 for the three months ended September 30, 2009 to $32,000 for the three months ended September 30, 2010 due to the termination of professional consultants; and a reduction in Travel Expenses of $20,299 or 100% from $20,299 for the three months ended September 30, 2009 to $0 for the three months ended Septembe r 30, 2010 which was the result of curtailing travel expenses for the quarter.

Interest expense was $100,039 and $52,212 for the three months ended September 30, 2010 and September 30, 2009, respectively. This was an increase of $47,827 or 91.6% was due to additional notes issued between the period ending September 30, 2009 and September 30, 2010.

Our gain on valuation of derivative liability was $0 for the three months ended September 30, 2010 compared to loss on valuation of derivative liability of $5,150,340 for the three months ended September 30, 2009. The difference of $5,150,340 or 100% was a result of the Company increasing its shares to 1,000,000,000, which would provide enough shares to convert in the event that all debt and warrants were called.

We had $163,803 in financing expense for the three months ended September 30, 2010 compared to $0 of financing expense for the three months ended September 30, 2009, which was due to the company closing several raises between the period of September 30, 2009 and September 30,2010.

Our net loss was $411,974 for the three months ended September30, 2010 compared to net loss of $5,336,115 for the three months ended September 30, 2009. The decrease in net income for the three months ended September 30, 2010 was due to incurring no loss on derivative liability and maintaining a higher gross profit percentage against smaller sales, and incurring fewer expenses.

Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

Revenues for the nine months ended September 30, 2010 were $5,115,506, compared to $5,645,415 for the nine months ended September 30, 2009. This represents a decrease of $529,910 or 9.4% for the nine months ended September 30, 2010. This decrease was primarily attributable to the release of Rock of the Dead (PS3, X360) being postponed until 4th Qtr 2010.

11

There was a 31.6% change in gross profit for the nine months ended September 30, 2010, which was $1,333,071, compared to $1,012,974 for the nine months ended September 30, 2009. This increase in gross profit was primarily the result of a gross profit percentage was higher than that of the 4th Qtr 2009 due to strong sales for new title releases which have a higher gross profit percentage.

For the nine months ended September 30, 2010, operating expenses totaled $1,236,153 as compared to $1,343,431 for the nine months ended September 30, 2009. This was a decrease of $105,577 or 7.9%. The decrease in operating expenses resulted from termination of a professional consultant which saved the Company $115,670 and decreases in Automobile Expense of $20,893, Entertainment of $31,232 and Travel of $17,015 against increases in Insurance of $14,923, Marketing of $38,456 due to the Company's participation at E3 and Comic Con in 2010, and Outside Service of $24,924 due to the necessity of hiring temporary labor to help with the release of several new titles in 2010.

Interest expense was $269,804 and $148,880 for the nine months ended September 30, 2010 and September 30, 2009, respectively. This was an increase of $120,924 or 81.2% due to additional notes issued between the period of September 30, 2009 and September 30, 2010.

Our gain on valuation of derivative liability was $0 for the nine months ended September 30, 2010 compared to loss on valuation of derivative liability of $4,490,706 for the nine months ended September 30, 2009. The difference of $4,490,706 or 100% was a result of the Company increasing its shares to 1,000,000,000, which would provide enough shares to convert in the event that all debt and warrants were called.

We had $390,382 in financing expense for the nine months ended September 30, 2010 compared to $3,183 of financing expense for the nine months ended September 30, 2009, which was due to the company closing several raises between the period of September 30, 2009 and September 30,2010.

Our net loss was $563,271 for the nine months ended September30, 2010 compared to net loss of $4,973,226 for the nine months ended September 30, 2009. The decrease in net income for the three months ended September 30, 2010 was due to incurring no loss on derivative liability and maintaining a higher gross profit, and incurring fewer expenses.

12

Liquidity and Capital Resources

As of September 30, 2010 our cash balance was $105,324 compared to $128,413 at December 31, 2009. Total current assets at September 30, 2010 were $798,193 compared to $412,880 at December 31, 2009. 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 2010 will be sufficient to cover our working capital requirements for fiscal 2010.  The Company reached this conclusion by identifying that a major portion of our debt is attributed to Deferred Revenue ($2,771,637), which will be re classified as revenue upon the completion of the projects in development. We had informally negotiated with the IRS to pay down our Payroll Tax liability in the amount of $10,000 per month and are in renegotiations to establish an official repayment schedule.  The Company is also 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 ($57,092).  In addition, based on our schedule of development for the remainder of the year, we anticipate profitability and cash receipts in 2010, which will allow the Company to continue to pay down our working capital requirements and help avoid additional working capital.

For the nine months ended September 30, 2010, net cash provided by operating activities was $894,234 as compared to $772,945 for the nine months ended September 30, 2009. The increase in cash used in operating activities can be attributed to the amortization of discount on convertible notes payable, common stock issued for services rendered, and the cash used to pay accounts payable and accrued expenses during the nine months ended September 30, 2010.

For the nine months ended September 30, 2010, net cash used by investing activities was $1,382,323, compared to net cash used by investing activities of $1,103,970 for the nine months ended September 30, 2009. The increase in cash used in investing activities of $278,353 for the nine months ended September 30, 2010 was due to more payments made for development costs and licenses.

For the nine months ended September 30, 2010, net cash used by financing activities was $465,000 compared to $100,000 for the nine months ended September 30, 2009.  This increase in cash used by financing activities resulted primarily from there being and increase in proceeds from convertible notes payable during the nine months ended September 30, 2010.

Our accounts receivable at September 30, 2010 was $692,869, compared to $248,467 at December 31, 2009. The very large increase in accounts receivable is primarily attributable to invoices issued at the end of the quarter that had not yet been collected.

As of September 30, 2010 we had a working capital deficiency of $9,020,446. A major portion of our debt is attributed to consulting fees, attorney fees, and payroll taxes payable. We plan 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 September 30, 2010 was $2,609,471.  We had no new additional long-term agreements for the nine months ended September 30, 2010.

At September 30, 2010, we owed payroll taxes to the IRS in the amount of $575,562 as compared to $449,407 as of December 31, 2009.  The increase in payroll taxes due as of June 30, 2010 is due to the increase in payroll and limited payments made to the IRS during the nine months ended September 30, 2010.  We are currently in discussion with the IRS to modify our payment schedule.

At September 30, 2010, 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 availab le, 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.

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We currently have outstanding 55,291,666 Class A Warrants with exercise prices as follows:  18,125,000 at .02, 3,333,334 at .03, 10,500,000 at .09, and 11,666,666 at .15; Class B Warrants, and 11,666,666 at .60. Exercise of all of these warrants would provide gross proceeds of $10,173,667. 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 op erating results will be materially adversely affected.

Contractual Obligations

The following table summarizes our contractual obligations as of September 30, 2010:

	Payments due by period
			Less than					More
Contractual Obligations	Total		One Year		Years 1-2			than 2 years
Notes Payable	$	3,024,683	$	2,609,471		$	415,212		0
Operating Lease Obligations	$	13,927	$	13,927		$	0		0
License Fee Obligations	$	60,000	$	60,000			0		0
Total	$	3,098,610	$	2,683,398		$	415,212		0

In July 2010, we entered into a notes payable agreements totaling $125,000 with an accredited investor.  The balance due as of September 30, 2010, net of discount, was $13,013.

In June 2010, we entered into two notes payable agreements totaling $300,000 with two accredited investors.  The balance due as of September 30, 2010, net of discount, was $37,500.

 In December 2009, we converted $731,146 of interest due on our convertible notes of which $282,449 net of discount was due as of September 30, 2010.

In December 2009, we entered into two notes payable agreements with accredited investors totaling $210,000.  As of September 30, 2010, net of discount, the balance due is $82,250.

In May 2009, we entered into two notes payable agreements totaling $150,000 with two accredited investors.  In December 2009, the conversion terms and maturity dates were modified.  Accordingly the balance due as of September 30, 2010 was $150,000.

In February 2008, we entered into two notes payable agreements with accredited investors totaling $227,778. In December 2009, the conversion terms and maturity dates were modified.  Accordingly the balance due as of September 30, 2010 was $227,778.

In July 2007, we entered into a convertible debenture in the amount of $200,000 with two accredited investors. In December 2009, the conversion terms and maturity dates were modified.  Accordingly the balance due as of September 30, 2010 was $200,000.

In March 2007, we entered into a convertible notes agreement totaling $80,000 with accredited investors. In December 2009, the conversion terms and maturity dates were modified.  Accordingly the balance due as of September 30, 2010 was $80,000.

In August 2006, we entered into a convertible notes agreement totaling $247,000. In December 2009, the conversion terms and maturity dates were modified.  Accordingly the balance due as of September 30, 2010 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. The notes bear no interest and are past due and have not been called.  In December 2009, the conversion terms and maturity dates were modified.  Accordingly the balance due as of September 30, 2010 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, the conversion terms and maturity dates were modified.  Accordingly the balance due as of September 30, 2010 was $1,510,600.

We currently lease office space at 612 Santa Monica Boulevard in Santa Monica, California. Through the remainder of the lease term, our minimum lease payments are as follows:

2010 $ 13,927

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Our license agreement with Discovery for "The Jeff Corwin Experience" requires payments of the remaining $80,000 to be paid in full during the year 2005. Although we have only made $20,000 in payments during 2006, we are looking into our options on how to best handle this matter and plan to pay the balance in full by the end of 2010.

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.

Summary of Significant Accounting Policies

Assignment of Accounts Receivable. We regularly assign our receivables to vendors with recourse. 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, we are 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.

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. 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.

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, we expense, as part of cost of sales, development costs when we believe such amounts are not recoverable. Amounts related to capitalized development costs that are not capitalized are charged immediately to cost of sales. We evaluate 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 pr oduct 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, we evaluate 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, we 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.

We evaluate 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, we expense, as part of cost of sales, licenses when we believe such amounts are not recoverable. Capitalized development cost 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.

Commencing upon the related products release, capitalized license costs are amortized to cost of sales - licenses based on the ratio of current revenues for the specific product to total projected revenues for all products in which the licensed trademark or copyright will be utilized. 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, we evaluate the future recoverability of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance.

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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 are satisfied.

Until all of the conditions of the sale have been met, amounts received on such distribution contracts are recorded as deferred income. Although we regularly enter into the assignment of accounts receivable to vendors, we do not record revenues net versus gross since we:

i. Act as the principal in the transaction.

ii. Take title to the products.

iii. Have risks and rewards of ownership, such as the risk of loss for collection, delivery, or returns.

iv. Do not act as an agent or broker.

At all times, we maintain control of the development process and are responsible for directing the vendor. Other than for payment, the customer does not communicate with the vendor.

We utilize 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. We complete the products in a short period of time since we obtain video games that are partially complete or obtain foreign language video games published by foreign manufacturers that are completed.

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 $4,441,334 at September 30, 2010. 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 inco me 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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

N/A.

ITEM 4T. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Pursuant to Rule 13a-15(b) under the Exchange Act the Company carried out an evaluation with the participation of the Company’s management, including Sirus Ahmadi, the Company’s Chief Executive Officer (“CEO”) and Keith Tanaka, the Company’s Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the period ended September 30, 2010.  Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures at the end of the period covered by this report were not effective due to material weaknesses in the design and effectiveness of the Company’s internal control over financial reporting as of September 30, 2010, as further described below, such that information required to be disclosed by the Company in the reports that the Company files or submits under the Securities Exchange Act of 1934, is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (ii) that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.  A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in internal controls

Our management, with the participation our Chief Executive Officer and Chief Financial Officer, performed an evaluation as to whether any change in our internal controls over financial reporting occurred during the Quarter ended September 30, 2010.  Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that no change occurred in the Company's internal controls over financial reporting during the Quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. 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.  

ITEM 1A. RISK FACTORS

There have been no material changes from the Risk Factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 - RESERVED

ITEM 5 - OTHER INFORMATION

None.

There were no material changes to the procedures by which security holders may recommend nominees to the registrant’s board of directors.

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Item 6. Exhibits

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATE: November 22, 2010

CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
By:	/s/ Sirus Ahmadi
	SIRUS AHMADI
	CHIEF EXECUTIVE OFFICER
	(PRINCIPAL EXECUTIVE OFFICER),
	SECRETARY AND DIRECTOR

DATE: November 22, 2010

By:	/s/ Keith Tanaka
	KEITH TANAKA
	CHIEF FINANCIAL OFFICER
	(PRINCIPAL FINANCIAL OFFICER),	��
	AND DIRECTOR

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