As filed with the Securities and Exchange Commission on September 14, 2005.
An Exhibit List can be found on page II-4.
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Conspiracy Entertainment Holdings, Inc
(Exact Name of Registrant as Specified in its Charter)
UTAH 9995 87-0386790
------ ---- ----------
(State of Incorporation) (Primary Standard (IRS Employer
Industrial Code No.) Identification No.)
612 Santa Monica Blvd.
Santa Monica, California 90401
(310) 260-6150
(Address and telephone number of principal executive offices)
Sirus Ahmadi, CEO
Conspiracy Entertainment Holdings, Inc.
612 Santa Monica Blvd.
Santa Monica, California 90401
(310) 260-6150
(Name, address and telephone number of agent for service)
Copies to:
Marc Ross, Esq.
David Schubauer, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Floor.
New York, New York 10018
(212) 930-9700
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
(COVER CONTINUES ON FOLLOWING PAGE)
CALCULATION OF REGISTRATION FEE
======================================================= ================= ==================== ===================== ==============
Proposed Maximum Proposed Maximum Amount of
Title of each class of securities Amount to be Offering Price Per Aggregate Offering Registration
to be registered Registered (1) Security (2) Price Fee
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Common Stock, $.001 par value (3) 30,000,000 $0.0345 $1,035,000.00 $121.82
Common Stock, $.001 par value (4) 30,000,000 $0.0345 $1,035,000.00 $121.82
Common Stock, $.001 par value (5) 1,250,000 $0.0345 $43,125.00 $5.08
Common Stock, $.001 par value (6) 600,000 $0.0345 $20,700.00 $2.44
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Total 61,850,000 $0.0345 $2,133,825.00 $251.15 (7)
======================================================= ================= ==================== ===================== ==============
(1) Pursuant to Rule 416 promulgated under the Securities Act of 1933, as
amended, there are also registered hereunder such indeterminate number of
additional shares as may be issued to the selling stockholders to prevent
dilution resulting from stock splits, stock dividends or similar
transactions.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) promulgated under the
Securities Act of 1933, as amended, using the average of the bid and ask
prices as reported on the Over-The-Counter Bulletin Board on September 13,
2005, which was $0.0345 per share.
(3) Represents: (a) up to 22,000,000 shares issuable upon conversion of
$1,100,000 in aggregate principal amount of the registrant's 5%
convertible debentures at a per share conversion price equal to the lesser
of $0.05 or 70% of the average of the five lowest closing bid prices for
our common stock for the 30 trading days prior to a conversion date; (b)
up to 2,200,000 shares issuable upon conversion of the convertible
debentures with respect to interest accrued thereon through the maturity
date thereof on the second anniversary of their issuance; and (c) up to
5,800,000 shares representing our current good faith estimate of
additional shares issuable to the holders of the convertible debentures as
liquidated damages through the projected effective date of this
registration statement or as a result of adjustments, as contemplated by
certain provisions of the Securities Purchase Agreement or the related
Registration Rights Agreement.
(4) Represents up to 30,000,000 shares issuable upon exercise of Class A and
Class B warrants issued in connection with the registrant's 5% convertible
debentures.
(5) Represents shares issuable upon exercise of outstanding common stock
purchase warrants issued to a consultant.
(6) Represents shares of common stock issued pursuant to consulting
agreements.
(7) Previously paid.
The registrant amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED SEPTEMBER 14, 2005
Conspiracy Entertainment Holdings, Inc.
Up to 61,850,000 Shares of
Common Stock
This prospectus relates to the resale by the selling stockholders of up
to 61,850,000 shares of our common stock. 22,000,000 of such shares are issuable
upon conversion of outstanding secured convertible debentures, 2,200,000 of such
shares are issuable upon conversion of such convertible debentures with respect
to interest through the maturity date of the convertible debentures, 5,800,000
of such shares represents our current good faith estimate of additional shares
issuable to the holders of the convertible debentures as liquidated damages,
31,250,000 of such shares are issuable upon exercise of outstanding common stock
purchase warrants and 600,000 of such shares were issued pursuant to consulting
agreements. The selling stockholders may sell common stock from time to time in
the principal market on which the stock is traded at the prevailing market price
or in negotiated transactions.
We are not selling any shares of common stock in this offering and
therefore will not receive any proceeds from this offering. We will, however,
receive proceeds from the exercise of warrants, if exercised. The proceeds from
the exercise of warrants, if any, will be used for working capital. All costs
associated with this registration will be borne by us.
Our common stock is currently quoted on the Over-The-Counter Bulletin
Board under the symbol CPYE. The last reported sales price for our common stock
on September 13, 2005, was $0.035 per share.
Investing in our common stock involves substantial risks.
See "Risk Factors," beginning on page 2.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The information in this Prospectus is not complete and may be changed.
This Prospectus is included in the Registration Statement that was filed by
Conspiracy Entertainment Holdings, Inc. with the Securities and Exchange
Commission. The selling stockholders may not sell these securities until the
registration statement becomes effective. This Prospectus is not an offer to
sell these securities and is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
TABLE OF CONTENTS
Page
----
Prospectus Summary 1
Risk Factors 2
Forward Looking Statements 5
Use of Proceeds 6
Selling Stockholders 6
Plan of Distribution 8
Market for Common Equity and Related Stockholder Matters 9
Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Description of Business 19
Description of Property 24
Legal Proceedings 25
Management 25
Executive Compensation 26
Certain Relationships and Related Transactions 27
Security Ownership of Certain Beneficial Owners and Management 27
Description of Securities 28
Indemnification for Securities Act Liabilities 31
Changes and Disagreements With Accountants on Accounting and Financial Disclosure 31
Legal Matters 32
Experts 32
Additional Information 32
Index to Financial Statements F-1
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "RISK
FACTORS" section, the financial statements and the debentures to the financial
statements. As used throughout this prospectus, the terms "Conspiracy
Entertainment," "we," "us," and "our" refer to Conspiracy Entertainment
Holdings, Inc.
Conspiracy Entertainment Holdings, Inc.
On May 29, 2003, we acquired 100% of the issued and outstanding capital
stock of Conspiracy Entertainment Corporation, a California corporation, and
began to carry on the business of developing, publishing and marketing
interactive entertainment software. Conspiracy Entertainment Corporation was
formed in November 1997. The business originally operated as a licensing agent
specializing in purchasing and selling entertainment licenses suitable for video
game publishers. In 2001 the company became an approved publisher with Nintendo,
and Sony Computer Entertainment. In 2002, the company became an approved
Microsoft publisher. Through Conspiracy Entertainment Corporation, 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, Nintendo GameCube and Microsoft's Xbox, and also for the PC.
For the years ended December 31, 2004 and December 31, 2003, we
incurred net losses of $2,539,477 and $2,252,444, respectively. For the six
months ended June 30, 2005 we incurred a net loss of $1,061,309. For the six
months ended June 30, 2004 we had net income of $1,956,099 principally related
to forgiveness of debt from SWING! Entertainment Media AG as part of its
bankruptcy proceedings in Germany. As of June 30, 2005, we had a working capital
deficiency of $1,675,520 (current assets less current liabilities) and an
accumulated deficit of $8,719,043.
Our principal executive offices are located at 612 Santa Monica Blvd.,
Santa Monica, California 90401. Our telephone number is (310) 260-6150. We are a
Utah corporation.
The Offering
Common Stock outstanding before the offering.............. 37,785,509 shares.
Common stock offered by selling stockholders.............. Up to 61,850,000 shares. *
Common stock to be outstanding after the offering......... Up to 99,635,509 shares.
Use of proceeds........................................... We will not receive any proceeds from
the sale of the common stock. However,
we will receive the exercise price for
any shares of common stock delivered in
connection with the exercise of
warrants. We expect to use the proceeds
received from the exercise of the
warrants, if any, for general working
capital purposes. See "Use of Proceeds"
for a complete description.
OTCBB Symbol.............................................. CPYE
*Represents: (a) up to 22,000,000 shares of common stock issuable upon
conversion of $1,100,000 in aggregate principal amount 5% convertible
debentures, at a per share conversion price equal to the lesser of $0.05 or 70%
of the average of the five lowest closing bid prices for our common stock for
the 30 trading days prior to a conversion date; (b) up to 2,200,000 shares
issuable upon conversion of the convertible debentures with respect to interest
accrued thereon through the maturity date thereof on the second anniversary of
their issuance; (c) up to 5,800,000 shares of common stock representing our
current good faith estimate of additional shares issuable to the holders of the
convertible debentures as liquidated damages through the projected effective
date of this registration statement or as a result of adjustments, as
contemplated by certain provisions of the Securities Purchase Agreement or the
related Registration Rights Agreement; (d) up to 8,000,000 shares of common
stock issuable upon exercise of Class A warrants with an exercise price of $0.20
per share, issued in connection with the 5% convertible debentures; (e) up to
22,000,000 shares of common stock issuable upon exercise of Class B warrants
with an exercise price equal to the lesser of $0.05 per share, issued in
connection with the 5% convertible debentures; (f) 1,250,000 shares of common
stock issuable upon exercise of warrants issued to a consultant; and (g) 600,000
shares of common stock issued pursuant to various consulting agreements.
1
RISK FACTORS
Any investment in our shares of common stock involves a high degree of
risk. You should carefully consider the following information about these risks,
together with the other information contained in this prospectus before you
decide to buy our common stock. Each of the following risks may materially and
adversely affect our business, results of operations and financial condition.
These risks may cause the market price of our common stock to decline, which may
cause you to lose all or a part of the money you paid to buy our common stock.
We provide the following cautionary discussion of risks, uncertainties
and possible inaccurate assumptions relevant to our business and our products.
These are factors that we think could cause our actual results to differ
materially from expected results.
Risks Related To Our Business:
WE HAVE HISTORICALLY INCURRED SIGNIFICANT LOSSES AND OUR FINANCIAL
SITUATION CREATES DOUBT WHETHER WE WILL CONTINUE AS A GOING CONCERN. For the
years ended December 31, 2004 and December 31, 2003, we incurred net losses of
$2,539,477 and $2,252,444, respectively. For the six months ended June 30, 2005
we incurred a net loss of $1,061,309. For the six months ended June 30, 2004 we
had net income of $1,956,099 principally related to forgiveness of debt from
SWING! Entertainment Media AG as part of its bankruptcy proceedings in Germany.
As of June 30, 2004, we had a working capital deficiency of $1,675,520 (current
assets less current liabilities) and an accumulated deficit of $8,719,043. 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 March 24, 2005, 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.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDING, WE MAY NOT BE ABLE TO
EXPAND OUR OPERATIONS AS ANTICIPATED. We will require additional funds to expand
our operations. While we secured financing in the third quarter of 2004, we
anticipate that we will require up to approximately $500,000 in 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 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.
IF WE ARE ABLE TO OBTAIN ADDITIONAL FUNDING, OUR THEN EXISTING
STOCKHOLDERS MAY SUFFER SUBSTANTIAL DILUTION. As discussed above, we anticipate
requiring up to approximately $500,000 in additional financing to expand our
operations over the next twelve months. If additional funds are raised through
the issuance of equity or convertible debt securities, the percentage ownership
of our current stockholders will be reduced and these securities may have rights
and preferences superior to those of our current stockholders. If we raise
capital through debt financing, we may be forced to accept restrictions
affecting our liquidity, including restrictions on our ability to incur
additional indebtedness or pay dividends.
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 Sony's PlayStation 2. 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.
2
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) 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.
Risks Related to Our Current Financing Arrangement
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 September
13, 2005, we had 37,785,509 shares of common stock issued and outstanding. There
are 61,250,000 shares of common stock being offered pursuant to this prospectus
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.
3
THE ISSUANCE OF SHARES UPON CONVERSION OF THE CONVERTIBLE DEBENTURES
AND UPON EXERCISE OF WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO
OUR EXISTING STOCKHOLDERS. The issuance of shares upon conversion of the
convertible debentures and exercise of warrants may result in substantial
dilution to the interests of other stockholders since the selling stockholders
may ultimately convert or exercise and sell the full amount issuable on
conversion or exercise.
IF WE ENGAGE IN A LOWER PRICED TRANSACTION THAN OUR CURRENT FINANCING
ARRANGEMENT WHILE THE CONVERTIBLE DEBENTURES ARE OUTSTANDING, THEN THE
CONVERSION AND EXERCISE PRICE OF OUR CONVERTIBLE DEBENTURES AND WARRANTS WILL BE
ADJUSTED TO THE LOWER TRANSACTION PRICE. IF THIS OCCURS, THE NUMBER OF SHARES
ISSUABLE UPON CONVERSION OF OUR CONVERTIBLE DEBENTURES WILL INCREASE AND THE
SHARES OF COMMON STOCK ALLOCATED FOR CONVERSION OF THE CONVERTIBLE DEBENTURES
WHICH ARE REGISTERED PURSUANT TO THIS PROSPECTUS WILL NOT BE ADEQUATE.
ACCORDINGLY, WE MAY BE REQUIRED TO FILE A SUBSEQUENT REGISTRATION STATEMENT
COVERING ADDITIONAL SHARES. IF THE SHARES WE HAVE ALLOCATED AND ARE REGISTERING
HEREWITH ARE NOT ADEQUATE AND WE ARE REQUIRED TO FILE AN ADDITIONAL REGISTRATION
STATEMENT, WE MAY INCUR SUBSTANTIAL COSTS IN CONNECTION THEREWITH. We have
allocated and registered 61,250,000 shares of common stock to cover the
conversion of convertible debentures and the exercise of warrants in this
offering. Our current financing arrangement includes restrictions on engaging in
a subsequent financing that is priced lower than the current arrangement. If we
engage in a lower priced transaction while the convertible debentures are
outstanding, then the conversion and exercise price of our convertible
debentures and warrants will be adjusted to the lower transaction price. If this
occurs, the number of shares issuable upon conversion of the convertible
debentures which are registered herewith will not be adequate. Accordingly, we
may be required to file a subsequent registration statement covering additional
shares. If the shares we have allocated to the registration statement are not
adequate and we are required to file an additional registration statement, we
may incur substantial costs in connection with the preparation and filing of
such registration statement.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING CONVERTIBLE
DEBENTURES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE,
OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE CONVERTIBLE DEBENTURES, IF
REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE
OF SUBSTANTIALLY ALL OUR ASSETS. On August 31, 2004, we entered into a
Securities Purchase Agreement for the sale of an aggregate of $1,050,000
principal amount of convertible debentures to accredited investors. On October
6, 2004, a supplement to the Securities Purchase Agreement was closed, for the
sale of an additional $50,000 principal amount convertible debenture. On
February 9, 2005, completed the sale of an aggregate of $650,000 principal
amount of 5% Secured convertible debentures. The convertible debentures have a
term of two years and are due and payable, with 5% interest, unless sooner
converted into shares of our common stock. Any event of default such as our
failure to repay the principal or interest when due, our failure to issue shares
of common stock upon conversion by the holder, our failure to timely file a
registration statement or have such registration statement declared effective,
breach of any covenant, representation or warranty in the Securities Purchase
Agreement or related convertible debenture, and the commencement of a
bankruptcy, insolvency, reorganization or liquidation proceeding against us
could require the early repayment of the convertible debentures if the default
is not cured with the specified grace period. We anticipate that the full amount
of the convertible debentures, together with accrued interest, will be converted
into shares of our common stock, in accordance with the terms of the convertible
debentures. If we are required to repay the convertible debentures, we would be
required to use our limited working capital and raise additional funds. If we
were unable to repay the debentures when required, the debenture holders could
commence legal action against us and foreclose on all of our assets to recover
the amounts due. Any such action would require us to curtail or cease
operations.
Risks Related To Our Common Stock:
OUR HISTORIC STOCK PRICE HAS BEEN VOLATILE AND THE FUTURE MARKET PRICE
FOR OUR COMMON STOCK IS LIKELY TO CONTINUE TO BE VOLATILE. FURTHER, THE LIMITED
MARKET FOR OUR SHARES WILL MAKE OUR PRICE MORE VOLATILE. THIS MAY MAKE IT
DIFFICULT FOR YOU TO SELL OUR COMMON STOCK FOR A POSITIVE RETURN ON YOUR
INVESTMENT. The public market for our common stock has historically been very
volatile. During the period from January 1, 2003 through September June 30,
2005, the market price for our common stock has ranged from $0.002 to $1.88 (See
"Market for Common Equity and Related Stockholder Matters" on page 9 of this
Prospectus). Any future market price for our shares is likely to continue to be
very volatile. This price volatility may make it more difficult for you to sell
shares when you want at prices you find attractive. We do not know of any one
particular factor that has caused volatility in our stock price. However, the
stock market in general has experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance
of companies. Broad market factors and the investing public's negative
perception of our business may reduce our stock price, regardless of our
operating performance. Further, the market for our common stock is limited and
we cannot assure you that a larger market will ever be developed or maintained.
As of September 13, 2005, the average daily trading volume of our common stock
over the past three months was approximately 34,934 shares. The last reported
sales price for our common stock onSeptember 13, 2005, was $0.035 per share.
Market fluctuations and volatility, as well as general economic, market and
political conditions, could reduce our market price. As a result, this may make
it difficult or impossible for you to sell our common stock.
4
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND
THE TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK. The
Securities and Exchange Commission has adopted Rule 3a51-1 which establishes the
definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, Rule 15g-9 require:
o that a broker or dealer approve a person's account for
transactions in penny stocks; and
o the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased
In order to approve a person's account for transactions in penny
stocks, the broker or dealer must:
o obtain financial information and investment experience
objectives of the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has
sufficient knowledge and experience in financial matters to be
capable of evaluating the risks of transactions in penny
stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the SEC relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement
from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market
value of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
Forward-Looking Statements
Information in this prospectus contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements can be identified by the use of words such as
"believes," "estimates," "could," "possibly," "probably," "anticipates,"
"projects," "expects," "may," or "should" or other variations or similar words.
No assurances can be given that the future results anticipated by the
forward-looking statements will be achieved. The following matters constitute
cautionary statements identifying important factors with respect to those
forward-looking statements, including certain risks and uncertainties that could
cause actual results to vary materially from the future results anticipated by
those forward-looking statements. Among the key factors that have a direct
bearing on our results of operations are the effects of various governmental
regulations, the fluctuation of our direct costs and the costs and effectiveness
of our operating strategy.
5
USE OF PROCEEDS
We will receive proceeds from the resale of shares of common stock in
this offering only to the extent that shares are acquired by the selling
stockholders through the exercise of warrants for cash. We may receive up to a
maximum of $5,000,000 from the exercise of the warrants. Such proceeds, if any,
will be used for working capital.
SELLING STOCKHOLDERS
The following table sets forth the shares beneficially owned, as of
September 13, 2005, by the selling stockholders prior to the offering
contemplated by this prospectus, the number of shares each selling stockholder
is offering by this prospectus and the number of shares which each would
beneficially own if all such offered shares are sold. Except for selling
stockholders with an asterisk (*) next to their names, the selling stockholders
acquired their beneficial interests in the shares being offered hereby in
private placements in which each such selling stockholder advised us that it
purchased the relevant securities solely for investment and not with a view to
or for resale or distribution of such securities.
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 and for which the selling stockholder has a
right to acquire such shares within the next 60 days. However, except for the
selling stockholders with an asterisk (*) next to their names, each of the
selling stockholders is subject to certain limitations on the conversion of its
convertible debentures and the exercise of its warrants issued to it in
connection with the August 31 or October 6, 2004 financings and/or the February
9, 2005 financing. While each of such convertible debentures and warrants is
currently exercisable, the selling stockholder may not convert its debentures or
exercise its warrants, if such conversion or exercise would cause such holder's
beneficial ownership of our common stock (excluding shares underlying any of
their unconverted debentures or unexercised warrants) to exceed 4.99% of the
outstanding shares of our common stock immediately after the conversion or
exercise. If the holder subsequently disposes of some or all of its holdings, it
can again convert its debenture or exercise its warrant, subject to the same
4.99% limitation. The table below also includes the number of shares which might
be issuable on the occurrence of certain events, such as the accrual of
interest, which has not yet occurred and may not occur. Therefore, although they
are included in the table below, the number of shares of common stock for some
listed persons may include shares that are not subject to purchase during the
60-day period. None of the selling stockholders currently has or has had within
the past three years a material relationship with us or any of our predecessors
or affiliates.
Shares Beneficially Owned
Shares Beneficially Number of Shares After the Offering
Owned Prior Offered Pursuant -------------------------
Selling Stockholder to the Offering to this Prospectus Number Percent
------------------- --------------- ------------------ ------ -------
Alpha Capital AG (1) 45,000,000 27,272,728 17,727,272 17.8%
* Mac Caughern, Scott (2) 1,250,000 1,250,000 0 *
* Marina Ventures (3) 500,000 500,000 0 *
* Sol Financial, Inc. (4) 100,000 100,000 0 *
Stonestreet Limited Partnership (5) 30,000,000 19,090,908 10,909,092 11.0%
Whalehaven Capital Fund Limited (6) 18,000,000 2,727,272 15,272,728 15.3%
Whalehaven Fund Limited (7) 6,000,000 5,454,546 545,454 *
Whalehaven Capital LP (8) 6,000,000 5,454,546 545,454 *
TOTAL 61,850,000
==========
* Less than 1%.
6
(1) Number of shares offered pursuant to this prospectus includes: (a) up
to 10,000,000 shares issuable upon conversion of a $500,000 principal
amount 5% convertible debenture at a per share conversion price equal
to the lesser of $0.05 or 70% of the average of the five lowest closing
bid prices for our common stock for the 30 trading days prior to a
conversion date; (b) up to 1,000,000 shares issuable upon conversion of
the convertible debentures with respect to interest accrued thereon
through the maturity date thereof on the second anniversary of their
issuance; (c) up to 3,636,364 shares issuable upon exercise of Class
2004-A warrants issued in connection with the 5% convertible
debentures; (d) up to 10,000,000 shares issuable upon exercise of Class
2004-B warrants issued in connection with the 5% convertible
debentures; and (e) up to 2,636,364 shares representing our good faith
estimate of additional shares issuable as liquidated damages through
the projected effective date of the registration statement, as
contemplated by certain provisions of the Registration Rights
Agreement. Konrad Ackerman and Rainer Posch have voting and dispositive
control over the securities held by Alpha Capital AG.
(2) Includes up to 1,250,000 shares of common stock issuable upon exercise
of outstanding common stock purchase warrants.
(3) Includes 500,000 shares of common stock issued to Marina Ventures in
consideration for financial consulting services. Moshe Hartstein has
voting and dispositive control over the securities held by Marina
Ventures
(4) Includes 100,000 shares of common stock issued to Sol Financial, Inc.
in consideration for financial consulting services. Shlomo Stein has
voting and dispositive control over the securities held by Sol
Financial, Inc.
(5) Number of shares offered pursuant to this prospectus includes: (a) up
to 7,000,000 shares issuable upon conversion of a $350,000 principal
amount 5% convertible debenture at a per share conversion price equal
to the lesser of $0.05 or 70% of the average of the five lowest closing
bid prices for our common stock for the 30 trading days prior to a
conversion date; (b) up to 700,000 shares issuable upon conversion of
the convertible debentures with respect to interest accrued thereon
through the maturity date thereof on the second anniversary of their
issuance; (c) up to 2,545,454 shares issuable upon exercise of Class
2004-A warrants issued in connection with the 5% convertible
debentures; (d) up to 7,000,000 shares issuable upon exercise of Class
2004-B warrants issued in connection with the 5% convertible
debentures; and (e) up to 1,845,454 shares representing our good faith
estimate of additional shares issuable as liquidated damages through
the projected effective date of the registration statement, as
contemplated by certain provisions of the Registration Rights
Agreement. Michael Finkelstein has voting and dispositive control over
the securities held by Stonestreet Limited Partnership.
(6) Number of shares offered pursuant to this prospectus includes: (a) up
to 1,000,000 shares issuable upon conversion of a $50,000 principal
amount 5% convertible debenture at a per share conversion price equal
to the lesser of $0.05 or 70% of the average of the five lowest closing
bid prices for our common stock for the 30 trading days prior to a
conversion date; (b) up to 100,000 shares issuable upon conversion of
the convertible debentures with respect to interest accrued thereon
through the maturity date thereof on the second anniversary of their
issuance; (c) up to 363,636 shares issuable upon exercise of Class
2004-A warrants issued in connection with the 5% convertible
debentures; (d) up to 1,000,000 shares issuable upon exercise of Class
2004-B warrants issued in connection with the 5% convertible
debentures; and (e) up to 263,636 shares representing our good faith
estimate of additional shares issuable as liquidated damages through
the projected effective date of the registration statement, as
contemplated by certain provisions of the Registration Rights
Agreement. Evan Schemenauer, Arthur Jones and Jennifer Kelly have
voting and dispositive control over the securities held by Whalehaven
Capital Fund Limited.
(7) Number of shares offered pursuant to this prospectus includes: (a) up
to 2,000,000 shares issuable upon conversion of a $100,000 principal
amount 5% convertible debenture at a per share conversion price equal
to the lesser of $0.05 or 70% of the average of the five lowest closing
bid prices for our common stock for the 30 trading days prior to a
conversion date; (b) up to 200,000 shares issuable upon conversion of
the convertible debentures with respect to interest accrued thereon
through the maturity date thereof on the second anniversary of their
issuance; (c) up to 727,273 shares issuable upon exercise of Class
2004-A warrants issued in connection with the 5% convertible
debentures; (d) up to 2,000,000 shares issuable upon exercise of Class
2004-B warrants issued in connection with the 5% convertible
debentures; and (e) up to 527,273 shares representing our good faith
estimate of additional shares issuable as liquidated damages through
the projected effective date of the registration statement, as
contemplated by certain provisions of the Registration Rights
Agreement. Evan Schemenauer, Arthur Jones and Jennifer Kelly have
voting and dispositive control over the securities held by Whalehaven
Fund Limited.
(8) Number of shares offered pursuant to this prospectus includes: (a) up
to 2,000,000 shares issuable upon conversion of a $100,000 principal
amount 5% convertible debenture at a per share conversion price equal
to the lesser of $0.05 or 70% of the average of the five lowest closing
bid prices for our common stock for the 30 trading days prior to a
conversion date; (b) up to 200,000 shares issuable upon conversion of
the convertible debentures with respect to interest accrued thereon
through the maturity date thereof on the second anniversary of their
issuance; (c) up to 727,273 shares issuable upon exercise of Class
2004-A warrants issued in connection with the 5% convertible
debentures; (d) up to 2,000,000 shares issuable upon exercise of Class
2004-B warrants issued in connection with the 5% convertible
debentures; and (e) up to 527,273 shares representing our good faith
estimate of additional shares issuable as liquidated damages through
the projected effective date of the registration statement, as
contemplated by certain provisions of the Registration Rights
Agreement. Evan Schemenauer, Arthur Jones and Jennifer Kelly have
voting and dispositive control over the securities held by Whalehaven
Capital LP.
7
PLAN OF DISTRIBUTION
The selling stockholders may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and
regulations of any state or the United States;
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders may also engage puts, calls and other
transactions in our securities or derivatives of our securities and may sell or
deliver shares in connection with these trades.
The selling stockholders may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. We
cannot assure that all or any of the shares offered in this prospectus will be
issued to, or sold by, the selling stockholders. The selling stockholders and
any brokers, dealers or agents, upon effecting the sale of any of the shares
offered in this prospectus, may be deemed to be "underwriters," as that term is
defined under the Securities Exchange Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, or the rules and regulations of such acts.
Accordingly, any commissions received by such broker-dealers or agents and any
profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling stockholders, but excluding brokerage commissions or underwriter
discounts. We have agreed to indemnify the selling stockholders against certain
losses, claims, damages and liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments to which such
selling stockholders may be required to make in respect thereof.
The selling stockholders, alternatively, may sell all or any part of
the shares offered in this prospectus through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling stockholder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
8
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
If the selling stockholders notify us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholders and the broker-dealer.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock is quoted on the Over-The-Counter Bulletin Board under
the symbol CPYE. 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 2005 Fiscal 2004 Fiscal 2003
-------------------------- ------------------------- --------------------------
COMMON STOCK High Low High Low High Low
- -------------------------------------------- ------------- ------------ ------------ ------------ ------------ -------------
First Quarter ended March 31 $0.11 $0.03 $1.88 $1.02 $0.02 $0.02
Second Quarter ended June 30 $0.07 $0.03 $1.62 $0.16 $1.62 $1.62
Third Quarter ended September 30 --- --- $0.22 $0.08 $1.85 $1.85
Fourth Quarter ended December 31 --- --- $0.17 $0.07 $1.88 $1.88
* No reliable data is available for this period.
As of September 13, 2005, we had 37,785,509 shares of common stock
outstanding and held by approximately 457 stockholders of record. The transfer
agent of our common stock is Madison Stock Transfer, Inc.
Dividends
We have not previously declared or paid any dividends on our common
stock and we do not anticipate declaring any dividends in the foreseeable
future. There are no restrictions in our articles of incorporation or bylaws
that restrict us from declaring dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table shows information with respect to each equity
compensation plan under which the Company's common stock is authorized for
issuance as of the fiscal year ended December 31, 2003.
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------ ------------------------ ----------------------- ---------------------------
Plan category Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance under
outstanding options, warrants and rights equity compensation plans
warrants and rights (excluding securities
reflected in column (a)
- ------------------------------------ ------------------------ ----------------------- ---------------------------
(a) (b) (c)
- ------------------------------------ ------------------------ ----------------------- ---------------------------
Equity compensation plans approved
by security holders -0- -0- -0-
- ------------------------------------ ------------------------ ----------------------- ---------------------------
- ------------------------------------ ------------------------ ----------------------- ---------------------------
Equity compensation plans not
approved by security holders
-0- -0- -0-
- ------------------------------------ ------------------------ ----------------------- ---------------------------
- ------------------------------------ ------------------------ ----------------------- ---------------------------
Total -0- -0- -0-
- ------------------------------------ ------------------------ ----------------------- ---------------------------
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Forward-Looking Statements
The information in this registration statement 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 registration statement 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 our financial statements, 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
Quarter Ended June 30, 2005 Compared to the Quarter Ended June 30, 2004
Revenues for the quarter ended June 30, 2005 were $410,555, compared to
$338,237 for the quarter ended June 30, 2004. This represents an increase of
$73,318, or 21.4% comparing the two periods. The major components of revenues
are product sales and license revenue. Product sales represent revenues for
products manufactured and sold to distributors. License revenue represents
license fees earned for the sale of certain products under 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. License
revenues for the quarters ended June 30, 2005 and June 30, 2004 were both $0
since we did not have any agreements to license product during those periods.
The increase in revenue for the three months ended June 30, 2005 is primarily
the result of $284,729 of sales recognized in the quarter due to the expiration
of Deferred Revenue. We had agreements with our distributor to reduce future
royalties on products in exchange for advances on future sales (Deferred
Revenue). These agreements have expiration dates where if the sales are not
recognized within a certain time frame, the distributor would lose the advances
paid.
The below table provides a comparison of the nature and source of our
revenue for the periods indicated.
Quarter Ended
June 30, 2004 June 30, 2005
Number of New Titles Released 0 0
Number of Titles Reordered 6 2
Average Price Per Title 5.19 5.72
Revenue From Internally Developed Titles 115,668 93,600
Partially Complete Sales 0 0
Translated Sales 222,569 32,226
License Revenue 0 0
Other Revenue 0 284,729
Gross profit increased by $242,959, or 1,189%, to $263,391 for the
three months ended June 30, 2005 compared to $20,432 for the three months ended
June 30, 2004. The increase in gross profit is primarily due to the expiration
of Deferred Revenue. We had agreements with our distributor to reduce future
royalties on products in exchange for advances on future sales (Deferred
Revenue). These agreements have expiration dates where if the sales are not
recognized within a certain time frame, the distributor would lose the advances
paid. Since these royalties were converted to Sales without the manufacturing of
any goods, the gross profit is 100% of the sales amount.
For the quarter ended June 30, 2005, selling, general and
administrative expenses totaled $228,450. This was a decrease of $95,728, or
29.5% from selling, general and administrative expenses of $324,178 in the
quarter ended June 30, 2004. We had no additional consulting fees since there
were no fund raising transactions for the quarter which represented a reduction
10
of $43,860 from $43,860 for the three months ended June 30, 2004. In addition,
attorney fees related to the Bravado/Sega legal matters decreased $43,094 from
$53,094 in 2004 to $10,000 in 2005. As we are nearing settlement in both of
these legal matters, the amount of work put in by our attorneys has been greatly
reduced. Payroll was reduced from $158,059 for the three months ended June 30,
2005 to $132,129 for the three months ended March 31, 2005 representing a
reduction of $25,930. Outside service was reduced from $12,499 in the three
months ended June 30, 2004 to $3,990 in the three months ended June 30, 2005, a
reduction of $8,509 which was a result of the company's employees taking on more
work internally as opposed to hiring temporary outside assistance. These were
the only expenses to decrease substantially over the same period in 2004.
Insurance costs were increased from $2,763 for the three months ended June 30,
2004 to $5,562 for the three months ended June 30, 2005 and Marketing costs
increased from $3,522 for the three months ended June 30, 2004 to $15,200 for
the three months ended June 30, 2005 a result of our efforts to prepare for the
release of our upcoming Puzzle and Pool games for the PSP.
Other income (expense) is income or 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 quarter ended June 30,
2005, we had total other expense of $161,551 compared to total other income of
$2,437,847 for the quarter ended June 30, 2004. The $161,338 of other expense
consisted of interest expense related to the company's fund raising during the
first quarter 2005. Total other income for the quarter ended June 30, 2004
consisted of forgiven debt totaling $2,438,188, offset by $341 of interest
expense. We received $2,438,188 in forgiveness of debt from SWING! Entertainment
Media AG which was part of SWING! Media AG's bankruptcy proceedings in Germany.
Our net loss was $126,611 for the quarter ended June 30, 2005 compared
to net income of $2,134,101 for the quarter ended June 30, 2004. We operated at
a profit in the quarter ended June 30, 2005 with the exception of the $161,337
in interest fees incurred relating to the our fund raising in first quarter of
2005. The principal reason for the net income of $2,134,101 in the quarter ended
June 30, 2004 is the $2,438,188 from debt forgiveness discussed above.
Six Months Ended June 30, 2005 Compared to the Six Months Ended June 30, 2004
Revenues for the six-month period ended June 30, 2005 were $562,363,
compared to $760,589 for the six months ended June 30, 2004. This represents a
decrease of $198,226, or 26.1%, comparing the two periods. The major components
of revenues are product sales and license revenue. License revenues for the
six-month periods ended June 30, 2005 and June 30, 2004 were both $0 since we
did not have any agreements to license product during those periods. For the six
month period ended June 30, 2005, we had product sales of $277,634 as compared
to $760,589 for the six months ended June 30, 2004. The reason for the $482,955,
or 63.5%, decrease in product sales was that we released two new products, Road
Trip - Shifting Gears for Gameboy Advance and Road Trip - Arcade Edition for
Game Cube, in the six month period ended June 30, 2004, while sales in the six
months ended June 30, 2005 represented only reorders of previously released
products. New product releases generally represent higher sales units and price
per unit. In addition, we had $284,729 of sales recognized due to the expiration
of Deferred Revenue for the six months ended June 30, 2005 as compared to $0 for
the same period in 2004. We had agreements with our distributor to reduce future
royalties on products in exchange for advances on future sales (Deferred
Revenue). These agreements have expiration dates where if the sales are not
recognized within a certain time frame, the distributor would lose the advances
paid.
The below table provides a comparison of the nature and source of our
revenue for the periods indicated.
Six-Month Period Ended
June 30, 2004 June 30, 2005
Number of New Titles Released 2 0
Number of Titles Reordered 6 3
Average Price Per Title 7.23 5.90
Revenue From Internally Developed Titles 115,668 210,881
Partially Complete Sales 0 0
Translated Sales 644,921 66,753
License Revenue 0 0
Other Revenue 0 284,729
Gross profit increased by $135,723, or 52.3%, to $280,726 for the six
months ended June 30, 2005 compared to $145,003 for the six months ended June
30, 2004. The increase in gross profit is primarily due to the expiration of
Deferred Revenue. We had agreements with our distributor to reduce future
royalties on products in exchange for advances on future sales (Deferred
Revenue). These agreements have expiration dates where if the sales are not
recognized within a certain time frame, the distributor would lose the advances
paid. Since these royalties were converted to Sales without the manufacturing of
any goods, the gross profit is 100% of the sales amount.
11
For the six months ended June 30, 2005, selling, general and
administrative expenses totaled $652,281. This was an increase of $11,591, or
1.8%, from selling, general and administrative expenses of $640,690 in the six
months ended June 30, 2004. Consulting fees related to our February 2005
financing and attorney fees related to the Bravado/Sega legal matters as well as
our fundraising during the first quarter 2005 increased professional fees by
$76,296 from $141,954 in 2004 to $218,250 in 2005. Marketing increased $16,919
from $12,931 for the six months ended June 30, 2004 to $29,850 for the six
months ended June 30, 2005. Marketing consists of fees paid for packaging,
manual preparation and overall promotion of our upcoming Puzzle and Pool titles.
These were the only expenses to increase substantially over the same period in
2004. Payroll was reduced from $324,293 for the six months ended June 30, 2004
to $264,531 for the six months ended June 30, 2005 representing a reduction of
$59,762. Outside service was reduced from $41,569 for the six months ended June
30, 2004 to $7,740 for the six months ended June 30, 2005, a reduction of
$33,829 which was a result of the company employees taking on more work
internally as opposed to hiring temporary outside assistance.
Other income (expense) is income or 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. In the six months ended June
30, 2005, we had total other expense of $689,753 compared to total other income
of $2,451,786 for the six months ended June 30, 2004. Total other expense for
the six months ended June 30, 2005 consisted of $510,000 of financing costs
related to the beneficial conversion feature of the convertible debentures and
warrants sold in our first quarter 2005 fundraising and $179,753 in interest
expense related to the convertible debentures. Total other income for the six
months ended June 30, 2004 consisted of forgiven debt totaling $2,438,188
(described above) and $50,000 in consulting revenue from Giant Mobile
Corporation, offset by $36,402 of interest expense related to fundraising
efforts over the previous six months. We received $2,438,188 in forgiveness of
debt from SWING! Entertainment Media AG as part of its bankruptcy proceedings in
Germany.
Our net loss was $1,061,309 for the six months ended June 30, 2005
compared to net income of $1,956,099 for the quarter ended June 30, 2004. The
principal reason for the net income of $1,956,099 in the six months ended June
30, 2004 is the $2,438,188 from debt forgiveness discussed above. The net loss
for the six months ended June 30, 2005 consisted of gross profit of $280,726,
less selling, general and administrative expenses of $652,495, Interest of
$179,539 related the our fund raising and Financing Costs of $510,000 related to
the beneficial conversion feature from our fundraising in the first quarter of
2005.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
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. Conspiracy
Entertainment Europe has not entered into any such publishing license agreements
and Conspiracy Entertainment Europe has not generated any revenues to date.
During 2004, we advanced $60,000 to Conspiracy Entertainment Europe to cover
operating expenses. The financial statements of Conspiracy Entertainment Europe
are consolidated with our financial statements, with a minority interest
adjustment.
For the fiscal year ended December 31, 2004 we had total revenue of
$1,425,649 compared to revenue of $2,377,107 for the fiscal year ended December
31, 2003. The major components of revenues are product sales and license
revenue. 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, 2003 we
earned $493,478 in license revenue for the products Enclave on Xbox and Rally
Championship on Game Cube as compared to $0 license revenue earned in 2004.
There was no license revenue in 2004 because sales of Enclave ceased and the
Rally Championship license fee was a one-time fee with no required royalty
payments. Product sales for the period ended December 31, 2003 was $1,881,629 as
compared to $1,425,649 for the period ended December 31, 2004. The decrease in
product sales revenue of $455,951, or 24%, is primarily the result of the cease
and desist order received from SEGA with regard to our 10-in-1 project. We had
received a verbal order for 300,000 units of the 10-in-1 project which
management believed would have generated $4.5 million in revenues.
The below table provides a comparison of the nature and source of our
revenue for the periods indicated.
Fiscal Year Ended
December 31, 2003 December 31, 2004
Number of New Titles Released 2 2
Number of Titles Reordered 7 12
Average Price Per Title $5.37 $6.33
Revenue From Internally Developed Titles $635,990 $505,542
Partially Complete Sales 0 0
Translated Sales $1,245,639 $919,107
License Revenue $493,478 $0
Other Revenue (packaging) $2,000 $0
12
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, 2003, we had
license/development costs of $417,211 as compared to $482,716 for the period
ended December 31, 2004. The increase in license/development costs of $65,505,
or 16%, is due to the cancellation of the Shooting Stars, Eminem, and Party
Animals games. These products required license advances and development costs,
but they were cancelled; we determined that Shooting Stars was no longer a
profitable project; for the Eminem project, the licensor terminated our
agreement; and we were not able to obtain Microsoft approval for Party Animals.
For the period ended December 31, 2003, we had production costs of $1,186,407
representing 350,616 units manufactured, compared to $1,091,976 of production
costs for the period ended December 31, 2004 which represented 225,268 units
manufactured.
Gross loss totaled $169,595 for the fiscal year ended December 31, 2004
as compared to gross profit of $123,088 for the fiscal year ended December 31,
2003, a decrease of $292,683 or 238%. Gross loss as a percentage of sales for
the fiscal year ended December 31, 2004 was -11.9% as compared to gross profit
as a percentage of sales of 5% for the fiscal year ended December 31, 2003. The
decrease in our gross profit percentage is a result of the cease and desist
order received from SEGA with regard to our 10-in-1 project as well as the
project cancellations of Road Trip 2 (PS2), Eminem (PSX), and Party Animals
(XBO). Regarding Road Trip 2 and Party Animals projects, management determined
that these projects would no longer be profitable based on additional changes
required to make the games suitable for release. As we are in litigation with
Bravado and Cousins over the Eminem title, it is likely this project will not be
release and therefore was cancelled as well.
Total operating expenses in each of the fiscal years ended December 31,
2004 and December 31, 2003 were comprised of selling, general and administrative
expenses. Operating expenses for the fiscal years ended December 31, 2004 and
2003 were $1,940,466 and $2,394,425, respectively, which constituted a decrease
of $453,959, or 19%. The decrease in operating expenses is attributable to
efforts to reduce selling, general and administrative fees, including wages and
salaries and insurance costs. As part of our effort to reduce expenses we have
reduced our full time staff from six to three employees, and rental space from
3,800 sq. feet to 1,900 sq. feet. Accordingly, compared to the fiscal year ended
December 31, 2003, our wages and salaries were reduced $186,052, medical
insurance $10,744 and office rent $53,738. In addition, management decided not
to attend the annual industry trade show E3 which reduced marketing expenses
$150,208.
Other income is income 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. We received "other income" of $50,000 in the fiscal
year ended December 31, 2004 compared to other income of $70,000 in the fiscal
year ended December 31, 2003. The $70,000 recorded as other income for the
fiscal year ended December 31, 2003 was for consulting services valued at
$20,000 and gain on the settlement of a debt. We had an agreement with Discovery
Licensing to develop a game with the Crocodile Hunter license. It was later
determined that Discovery was unable to grant these rights and paid us company
$50,000 to waive any and all potential claims against Discovery.
Our net loss was $2,539,477 in the fiscal year ended December 31, 2004
compared to $2,252,444 in the fiscal year ended December 31, 2003. This increase
in our net loss was due to the cease and desist order received from SEGA with
regard to our 10-in-1 project. We had received a verbal order for 300,000 units
of the 10-in-1 project which management believed would have generated $4.5
million in revenues and approximately $900,000 in gross profit. In addition, we
expensed $2,882,766 in financing costs in connection with the issuance of
warrants during 2004. The fair value of these warrants was estimated at the date
of grant using the Black-Scholes pricing model with the following weighted
average assumptions for 2004: expected volatility of 146%; risk-free interest
rate of 4%; and expected life of five years. The weighted average fair value of
warrants granted was $0.14 in 2004. A corresponding expense for the issuance of
warrants in 2004 totaling $2,882,766 was recorded as a financing fee in the
accompanying Consolidated Statements of Operations.
Seasonality and Other Trends
The interactive entertainment software industry is a seasonal and
cyclical industry. The majority of sales is 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.
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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, 2004 and 2003.
Contractual Obligations
The following table summarizes our contractual obligations as of June
30, 2005:
Payments due by period
--------------------------------------------------------------
Less than More
Contractual Obligations Total One Year Years 1-2 than 2 years
- ----------------------- ----- -------- --------- ------------
Notes Payable $1,960,128 $210,128 $1,750,000
Operating Lease Obligations $42,830 $42,830 0
Capital Lease Obligations $2,966 $2,966 0
License Fee Obligations $80,000 $80,000 0
Total $2,085,924 $335,924 $1,750,000
In August and October 2004, we entered into two convertible notes
payable agreements totaling $1.1 million. Although we expect these notes to be
converted into shares of our common stock, the notes if called would be payable
in 2006.
2006 $1,100,000
In August 2003, we obtained an unsecured loan from an individual in the
amount of $355,000 including interest. We have repaid approximately $145,000
with the remaining balance to be paid in the year 2005.
2005 $210,128
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:
2005 $25,698
2006 $17,132
We also lease equipment and a vehicle under non-cancelable capital
lease agreements that expire through September 2005. Through the remainder of
the lease term, our minimum lease payments are as follows:
2005 $2,966
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.
2005 $80,000
In February 2005, we completed the sale of convertible notes totaling
$650,000. Although we expect these notes to be converted into shares of our
common stock, the notes if called would be payable in 2006.
2007 $650,000
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Liquidity and Capital Resources
June 30, 2005
As of June 30, 3005 our cash balance was $8,325. At June 30, 2005, our
current assets totaled $75,295 and we had a working capital deficiency of
$1,675,520. A major portion of our debt is attributed to consulting fees,
attorney fees, and payroll taxes payable. We currently plan to use the cash
balance and cash generated from operations for increasing our working capital
reserves and, along with additional 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 2005 will be
sufficient to cover our working capital requirements for the next twelve months.
For the six months ended June 30, 2005, net cash used in operating
activities was $428,877, compared to net cash used in operating activities of
$260,166 for the six months ended June 30, 2004. The increase in cash used in
operating activities by $168,711, or 64.8%, was primarily the result of a
decrease in net income of $3,017,408, an increase in Discount on Convertible
Notes Payable of $650,000, an increase in Services Paid with Common Stock of
$24,000, an increase in accounts receivable by $153,573, a decrease in deferred
compensation by $339,237, an increase in accounts payable and accrued expenses
of $2,425,694, and a decrease in deferred revenue of $106,644..
For the six months ended June 30, 2005, net cash used in investing
activities was $318,121, compared to net cash used in investing activities of
$117,494 for the six months ended June 30, 2004. The increase in cash used in
investing activities of $200,627, or 170.8%, was due to the acquisition of Sony
PSP tools, accounting for $15,695 in increased investing activities costs, and
the following increases in products and licenses: Hustler World Championship
Pool (PSP) increased investing activities costs by $235,000, GT Cube (PSP)
increased investing activities costs by $40,000, Defenders (PS2) increased
investing activities costs by $10,000, and JRF increased investing activities
costs by $40,000 against the amortization of SEGA Ages of $24,346.
For the six months ended June 30, 2005, net cash provided by financing
activities totaled $643,500. This compares to cash provided by financing
activities of $480,313 for the six months ended June 30, 2004. The increase in
net cash provided by financing activities is the result of $650,000 gross
proceeds from convertible notes payable in relation to the monies received from
investors in February 2005 less payment for Capital Leases of $6,440.
As of June 30, 2005, $9,489 of the cash proceeds from our August 31,
2004, October 6, 2004 and February 9, 2005 private placements (described below)
remains in escrow. Before these funds will be disbursed to us, we must give
assurances to the investors the funds will be used for fees, costs or other
expenses in relation to publishing or distribution of our products.
Our accounts receivable at June 30, 2005 was $66,971, compared to
$167,261 at December 31, 2004. The change in accounts receivable is primarily
due to the Company receiving payment for invoices covering the Christmas holiday
season. Current receivables consist of invoices for reorders received late
second quarter 2005.
The current portion of long-term debt at June 30, 2005 was $2,966
compared to $9,406 as of December 31, 2004. We expect to pay off the entire
$2,966 by year-end 2005. We plan to pay this with proceeds generated from normal
operational cash flow.
As of June 30, 2005, we owed payroll taxes to the IRS in the amount of
$374,524. We are making periodic payments of this liability in cooperation with
the IRS.
At June 30, 2005 we had no bank debt.
December 31, 2004
As of December 31, 2004, our cash balance was $165,762, as compared to
$44,329 at December 31, 2003. Total current assets at December 31, 2004 were
$330,024, as compared to $75,888 at December 31, 2003. 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 2005
will be sufficient to cover our working capital requirements for fiscal 2005.
For the period ended December 31, 2004 net cash used in operating
activities was $1,158,080, compared to net cash used in operating activities of
15
$443,926 for the period ended December 31, 2004. The increase in net cash used
in operating activities of $714,154, or 62%, was primarily the result of a
decrease in accounts receivable of $2,385,131, an increase in accounts payable
of $1,166,400 and an increase in deferred revenue of $536,165.
For the period ended December 31, 2004 net cash used in investing
activities totaled $293,151, compared to net cash used in investing activities
of $514,412 for the period ended December 31, 2003. The decrease of $221,261, or
75%, is due to reduced acquisition of products and licenses from $514,412 in
2003 as compared to $284,346 in 2004.
For the period ended December 31, 2004 net cash provided by financing
activities totaled $1,572,665, compared to net cash provided by financing
activities of $886,673 for the period ended December 31, 2003. The increase of
net cash provided by financing activities of $685,992, or 44%, was the result of
$1,281,500 of proceeds from the sale of convertible notes. This compares to
$523,800 of proceeds received from the sale of common stock during 2003.
As of December 31, 2004, $134,450 of the cash proceeds from our August
31, 2004 and October 9, 2004 private placements (described below) remains in
escrow. Before these funds will be disbursed to us, we must give assurances to
the investors the funds will be used for fees, costs or other expenses in
relation to publishing or distribution of our products.
Our accounts receivable at December 31, 2004 was $167,261, as compared
to $20,000 at December 31, 2003. The change in accounts receivable is primarily
due to reorders to SVG Distribution, Inc. shipped in late December 2004.
As of December 31, 2004 we had a working capital deficiency of
$1,635,220. 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 December 31, 2004 consisted of
$9,406 as opposed to $15,906 at December 31 2003. We expect to pay off the
entire $9,406 by year-end 2005. We plan to pay this with proceeds generated from
normal operational cash flow.
As of December 31, 2004, we owed payroll taxes to the IRS in the amount
of $198,976. We are making periodic payments of this liability in cooperation
with the IRS.
At December 31, 2004 and December 31, 2003 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 will require up to approximately $500,000 in
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 will restrict our
ability to grow and may reduce our ability to continue to conduct business
operations. If we are unable to obtain additional financing, we will likely be
required to curtail our marketing and development plans.
On January 16, 2004, we received $50,000 from Calluna Capital
Corporation under the terms of a February 25, 2003 convertible notes payable
agreement bringing the total amount borrowed from Calluna Capital Corporation to
$500,000.
On May 17, 2004, we sold 2,792,200 shares of common stock to accredited
investors for $.10 per share, or an aggregate of $279,220.
On August 31, 2004, we sold an aggregate of $1,050,000 principal amount
of 5% Secured Convertible Debentures, Class A Common Stock Purchase Warrants to
purchase 21,000,000 shares of our common stock, and Class B Common Stock
Purchase Warrants to purchase 21,000,000 shares of our common stock, to four
institutional investors. We received gross proceeds totaling $1,050,000 from the
sale of the Debentures and the Warrants.
On October 6, 2004, we sold a $50,000 principal amount 5% Secured
Convertible Debenture, Class A Common Stock Purchase Warrants to purchase
1,000,000 shares of our common stock, and Class B Common Stock Purchase Warrants
to purchase 1,000,000 shares of our common stock, to one institutional investor.
We received gross proceeds totaling $50,000 from the sale of the Debentures and
the Warrants.
16
On February 9, 2005, we sold an aggregate of $650,000 principal amount
of 5% Secured Convertible Debentures, 13,000,000 Class A Common Stock Purchase
Warrants, and 13,000,000 Class B Common Stock Purchase Warrants, to four
accredited institutional investors for gross proceeds totaling $650,000.
Each Class A Warrant is currently exercisable at a price of $0.20 per
share until expiration on August 31, 2009. Each Class B Warrant is currently
exercisable at a price of $0.05 per share until expiration 18 months after the
date on which the resale of the shares of common stock issuable upon exercise of
the Class B Warrants are registered under the Securities Act of 1933 (subject to
extension under certain circumstances).
We do not have any current plans to obtain additional debt or equity
financing. We plan to satisfy our capital expenditure commitments and other
capital requirements through cash generated from operations and through funds
received upon exercise of outstanding warrants. We believe the proceeds from
exercise of our outstanding warrants will be sufficient to fund any need for
additional capital. We currently have outstanding 35,000,000 Class A Warrants
with exercise prices of $0.20 per share and 35,000,000 Class B Warrants with
exercise prices of $0.05 per share. Exercise of all of these warrants would
provide gross proceeds of $8,750,000. However, at recent market prices of our
common stock, none of these warrants are in the money. Thus, if the market price
of our common stock does not increase and warrant holders do not exercise their
warrants, we may be required to seek additional debt or equity financing. If
additional financing is required and we cannot obtain additional financing in
sufficient amounts or on acceptable terms when needed, our financial condition
and operating results will be materially adversely affected.
Subsequent Event
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 due February 1, 2006. Under the terms of the
loans, we agreed to share 50% of the profit earned from the development,
production and commercialization of the videogame originally released under the
name `Kollon' in Japan by Cyberfront Corporation on the Sony PSP platform.
In connection with the August 5, 2005 and August 8, 2005 loans, we
entered into an agreement amending the terms of our August 31, 2004, October 6,
2004 and February 9, 2005 financings. In connection with the loans, we
re-affirmed all representations and warranties made in the contained in the
August 31, 2004, October 6, 2004 and February 9, 2005 financings and all
covenants and conditions from such financings were adopted and renewed. In
addition, the $223,600 principal amount notes payable were added to the Security
Interest Agreements executed in connection with the August 31, 2004, October 6,
2004 and February 9, 2005 financings. Further, the conversion price of the
debentures issued in connection with the August 31, 2004, October 6, 2004 and
February 9, 2005 financings was amended to be the lesser of $0.05 or 70% of the
average of the five lowest closing bid prices for our common stock for the 30
trading days prior to a conversion date.
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
17
significant judgments and estimates which may be difficult and complex. We make
determinations regarding revenue that is recognized in the current period and
the revenue that will be deferred. This is performed through judgment and
estimates with regard to the software and related services to be provided to our
customers. Our assumptions and judgments regarding revenue recognition could
differ from actual events.
Funds received in advance of software completion are recorded as a
liability and deferred until the products are completed and delivered.
We utilize the completed contract method of revenue recognition as
opposed to the percentage-of-completion method of revenue recognition for
substantially all of our products since the majority of our products are
completed within six to eight months. We complete the products in a short period
of time since we obtain video game software code that may be partially complete
and/or we obtain foreign language video game software code that is published by
foreign manufacturers that are completed and we develop and market them in the
United States.
License revenue is generated when we sell an acquired license to
another publisher to develop and sell. Revenues are recorded when the royalty
payments are received from that publisher subsequent to sale of the product.
Allowance For Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
regularly review the adequacy of our accounts receivable allowance after
considering the size of the accounts receivable balance, each customer's
expected ability to pay and our collection history with each customer. We review
significant invoices that are past due to determine if an allowance is
appropriate based on the risk category using the factors described above. In
addition, we maintain a general reserve for certain invoices by applying a
percentage based on the age category. We also monitor our accounts receivable
for concentration to any one customer, industry or geographic region. The
allowance for doubtful accounts represents our best estimate, but changes in
circumstances relating to accounts receivable may result in a requirement for
additional allowances in the future. As of June 30, 2005 and at December 31,
2004, the allowance for doubtful accounts holds a zero balance as none of our
accounts receivable are deemed uncollectable.
Valuation of Long-Lived Intangible Assets Including Capitalized Development
Costs and Licenses
Capitalized development costs and licenses, net of accumulated
amortization, totaled approximately $702,771 at June 30, 2005.
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 include payments made to independent
software developers under development agreements, as well as direct costs
incurred for internally developed products. 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
18
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.
DESCRIPTION OF BUSINESS
We develop, publish and market interactive entertainment software. We
currently publish titles for many popular interactive entertainment hardware
platforms, such as Sony's PlayStation, Nintendo 64 and Nintendo's Game Boy Color
and Game Boy Advance as well as the next generation hardware platforms such as
Sony's PlayStation 2, Nintendo GameCube, Microsoft's Xbox, and also for the PC.
We were incorporated under the laws of the State of Utah on July 29,
1982 as Strategic Recovery Corporation, with the purpose of investing in real
and personal property and buying and selling strategic metals. As Strategic
Recovery Corporation, we participated in various projects including developing
and marketing an Olympic Commemorative Book and participation in a gold project
in Columbia, South America.
After determining that market prices were declining and the market was
becoming increasingly more competitive with low profit margins, we determined to
change our business focus and on February 16, 1987, we entered into a merger
agreement with Lance, Inc. Prior to the merger, Lance, Inc. owned a software
program used to assist managers of HUD qualified projects to complete the proper
forms and reports to maintain HUD qualification for rental payments. Under the
Certificate of Merger, we were the surviving corporation and subsequent to the
merger we changed our name to Lance, Inc. After the merger we intended to
distribute software applications to assist managers of HUD qualified projects to
complete required forms and reports to maintain HUD qualification for rental
payments. This project eventually failed and we ceased operations until May 29,
2003, when we entered into a Share Exchange Agreement with Conspiracy
Entertainment Corporation and its stockholders.
Pursuant to the Share Exchange Agreement, we acquired all of the issued
and outstanding common stock of Conspiracy Entertainment Corporation in exchange
for 21,552,900 shares of our common stock. Based on the closing price of our
common stock on May 29, 2003 of $0.002, the dollar value of the merger was
approximately $43,106. We entered into the Share Exchange Agreement to acquire
Conspiracy Entertainment Corporation because our management believed the
acquisition was an attractive business venture and because our prior operations
had failed. Conspiracy Entertainment Corporation and its stockholders entered
into the Share Exchange Agreement in order to provide the stockholders increased
liquidity and to provide the business greater access to capital markets.
Conspiracy Entertainment Corporation was formed on November 21, 1997 under the
laws of the State of California. Conspiracy Entertainment Corporation originally
operated as a licensing agent specializing in purchasing and selling
entertainment licenses suitable for video game publishers. In 2001, Conspiracy
Entertainment Corporation became an approved publisher of video game software
with Nintendo and with Sony Computer Entertainment, and then in 2002, the
company became an approved Microsoft publisher. After closing of the Share
Exchange Agreement, we changed our name to Conspiracy Entertainment Holdings,
Inc. and began developing, publishing and marketing interactive entertainment
software.
The share exchange with Conspiracy Entertainment Corporation and its
shareholders was recorded as a reverse acquisition using the purchase method of
business combination. In a reverse acquisition all accounting history becomes
that of the accounting acquirer. Since Conspiracy Entertainment Corporation was
the accounting acquirer, all historical information in the accompanying
financial statements prior to the acquisition is that of Conspiracy
Entertainment Corporation.
In early 2004, we formed Conspiracy Entertainment Europe, Ltd., a
United Kingdom corporation. We currently own a 51% interest in Conspiracy
Entertainment Europe. Conspiracy Entertainment Europe was formed with the
purpose of eventually obtaining publishing license agreements for European
regions and eventually distributing our products throughout Europe. Conspiracy
Entertainment Europe has not entered into any such publishing license agreements
and Conspiracy Entertainment Europe has not generated any revenues to date.
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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 and PlayStation 2, Nintendo's Game Boy Color and Game Boy Advance,
Nintendo 64 and Microsoft's Xbox, and our license for Nintendo GameCube 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 is 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.
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On November 1, 2002, 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 GameCube 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.
Entertainment Licensing
While we are primarily a publisher of interactive entertainment
software, on occasion an entertainment licensing opportunity may become
available to us. We do not allocate a budget for entertainment licensing
revenue; rather, if we purchase a license it is generally for the purpose of
attaching ourselves as the publisher of the software. Because revenue from
entertainment licensing has fluctuated greatly in the past, it is not generally
determinable what percentage of our business entertainment licensing represents.
We have entered into strategic license arrangements with entertainment and media
companies that have developed well-known characters and brands and that are
producing properties that are expected to form the basis for future products.
Our agreements with licensors and developers generally require us to make
advance royalty payments.
On July 1, 2003, we entered into an agreement with Discovery Licensing,
Inc. to use certain marks, characters and content relating to "The Jeff Corwin
Experience" to produce computer and video games for Nintendo Game Boy Advance,
Sony PlayStation 1, Sony PlayStation 2 and PC platforms. The term of the
agreement is for two years. The agreement requires us to pay advance royalty
payments totaling $100,000 by December 31, 2004. To date, the advance royalty
payments have not been paid. We are also required to distribute at least one
licensed product in reasonably commercial quantities no later than May 1, 2004.
This project is temporarily on hold until we find a developer and game design
that meets our objectives and those of Discovery. The agreement provides that if
we (a) fail to distribute a particular licensed product by May 1, 2004 and/or
(b) are not making regular sales of more than a nominal amount of a particular
licensed product for any 120-day period or more after May 1, 2004 and do not
have plans to make regular sales of more than a nominal amount of such licensed
products within the 120 days after May 1, 2004, then Discovery Licensing has the
right upon 30 days written notice to terminate our rights for such particular
licensed product for the term of the agreement. We have not met these
requirements and, to date, Discovery Licensing has not notified us that it is
terminating our rights under the agreement. We must obtain Discovery Licensing's
approval for all licensed products to be manufactured, created, sold,
distributed or otherwise used under the agreement. The agreement requires us to
pay royalties to Discovery Licensing based on our net revenue derived from
licensed products through various distribution channels, which are payable
within 30 days of the end of each calendar quarter.
On July 1, 2003, we entered into an agreement with Discovery Licensing,
Inc. to use certain marks, characters and content relating to "Monster Garage"
to produce computer video games for Nintendo Game Boy Advance, Sony PlayStation
1 and Sony PlayStation 2. The term of the agreement is for two years. The
agreement requires us to pay advance royalty payments totaling $50,000 by
December 31, 2004. We are also required to distribute at least one licensed
product in reasonably commercial quantities no later than May 1, 2004. It is
currently uncertain whether we will proceed with this agreement because there is
a legal issue between Discovery and Monster Cables over the rights to the name
"Monster." This project is on hold until the matter between Discovery and
Monster Cables is resolved and until we find a developer and game design that
meets our objectives and those of Discovery. The agreement provides that if we
(a) fail to distribute a particular licensed product by May 1, 2004 and/or (b)
are not making regular sales of more than a nominal amount of a particular
licensed product for any 120-day period or more after May 1, 2004 and do not
have plans to make regular sales of more than a nominal amount of such licensed
products within the 120 days after May 1, 2004, then Discovery Licensing has the
right upon 30 days written notice to terminate our rights for such particular
licensed product for the term of the agreement. We have not met these
requirements and, to date, Discovery Licensing has not notified us that it is
terminating our rights under the agreement. We must obtain Discovery Licensing's
approval for all licensed products to be manufactured, created, sold,
distributed or otherwise used under the agreement. The agreement requires us to
pay royalties to Discovery Licensing based on our net revenue derived from
licensed products through various distribution channels, which are payable
within 30 days of the end of each calendar quarter.
On July 7, 2003, we entered into two software licensing agreements with
Constant Entertainment LLP - SEGA Limited to manufacture, market and otherwise
exploit (including via online sales) various games for the Sony PlayStation 2
platform. One agreement covers the territories of North America, Canada, Mexico,
and South America. The other agreement covers the territories of Europe. The
21
term of each agreement is for 48 months after release of the products. Each
agreement requires us to make royalty advances to Constant Entertainment in the
amount of $60,000 per each title, or a total of $840,000 for 14 titles covered
by the agreement. The schedule for royalty advances is as follows: (a) 30%, or
$252,000 upon signing each agreement; (b) 30% upon concept approval for each
product by Sony Computer Entertainment of America; and (c) 40% upon concept
approval for each product by Sony Computer Entertainment of America for
commercial production. To date, only the $252,000 advance royalty payment for
the European territories has been paid. The royalty advances are credited
against royalties which are payable under each agreement of $1.15 per each unit
sold by us. This agreement calls for multiple titles to be release individually.
With the full knowledge and instructions of SEGA, we presented this project
first as a 4-in-1 package and ultimately as a 10-in-1 package which was approved
by Sony on April 16, 2004. Recently, Constant Entertainment received a
termination letter from 3D AGES/SEGA for the US Publishing rights to the titles
under our agreement because the project was presented as a 10-in-1 package. On
September 28, 2004 we received a cease and desist email notification from SEGA
US who is apparently the new publisher of these game titles. We believe the
actions of SEGA/3D AGES are not valid and in fact our agreement with Constant
may be have been infringed by a third party (SEGA US).
Development
We design and develop our titles primarily through third parties with
whom we have relationships. We typically select these independent third-party
developers based on their expertise in developing products in a specific
category and use the same developer to produce the same game for multiple
platforms. We contract with the third-party developers for specific or multiple
titles. We do not currently have any contracts for the design or development of
any titles since we do not have any new titles in development. The development
cycle for a new title typically ranges from 24 to 36 months and products are
sold to mass merchandisers and through outsourced distributors. The majority of
our products are completed within six to eight months. We complete the products
in a short period of time since we obtain video games that are partially
complete or we obtain foreign language video games published by foreign
manufacturers that are completed. Partially complete refers to projects that may
have been cancelled by another publisher or sold by a publisher who is no longer
solvent. It is often times more efficient to revive such a project instead of
starting anew. All of our products are manufactured by third parties. In order
to maintain protection over their hardware technologies, publishers of hardware
platforms generally specify or control the manufacturing of the finished
products. We deliver the master materials to the licensor or its approved
replicator, which then manufactures the finished goods and delivers them to us
and/or our warehouse facility for distribution to our customers.
We also develop and market foreign game titles that have been
successfully released in other countries to make them suitable for production in
the United States. This process is generally shorter in time and allows us to
quickly market these products. For every game the process of making foreign
titles suitable for production in the United States is different. Some games
only require language translations and packaging edits. These games would
require translators to localize the games, and marketing firms to modify the
packaging. Other games require additional features to be added to the games in
order to make them compatible with the formats they will be published on. These
would require the assistance of the original developers or additional developers
to add the necessary content or modifications. In some instances, a decision is
made to make the entire game more "Americanized" or appealing to the United
States customers we intend to reach. These games would require translators,
marketing firms, and the help of the existing developer and sometimes additional
developers. Generally these products are released at "budget" pricing, taking
advantage of impulse buyers in retail outlets. "Budget" pricing means selling
games at reduced prices from full retail prices. The normal course for
publishers is to release "new" games at full retail price, and subsequently
reduce the price gradually to meet demand. In many instances the shelf life for
these games is 4-6 months. Our approach is to release the game at an already
reduced price, hoping to attract "impulse" buys. Since these games have
generally already been released in other markets, they are not considered "new"
and cannot command the full retail pricing. By releasing these products at a
budget price we hope to generate both large unit sales, as well as long term
sales via reorders.
Our Business Strategy
Our objective is to become a leading independent developer and
publisher of interactive entertainment software. It is generally recognized that
the interactive entertainment industry is nearing the end of the last major
growth cycle of publishing. The PS2, Xbox, Nintendo GameCube and Gameboy Advance
platforms have all been in the market for quite some time now and the industry
is eagerly awaiting PS3, Xbox2, Nintendo DS and other platforms to enter the
market. Sony also recently introduced its portable platform PSP. 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. 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
22
third-party game developers. Titles are created around our licenses with third
party developers and our own proprietary content. This model allows us to create
game ideas utilizing the latest technologies and consumer trends and enables us
to better manage production efforts in a cost-effective manner.
Plan to Take Direct Control Over Distribution Channels. Our sales and
marketing efforts are designed to broaden product distribution and increase the
penetration of our products. Currently, our titles are sold to many mass
merchandisers such as Toys "R" Us, Target, Kmart, Wal-Mart and Best Buy through
distributors such as SVG and Universal. In 2004, distribution by SVG
Distribution represented 100% of our revenues. It is not determinable who and
what amount of these revenues that different retail outlets represent. We do not
have formal written distribution agreements with any distributors. In the
long-term, we plan to take more direct control of the sales marketing and
distribution process by establishing our own direct distribution and sales
organization.
Our current distribution channels guarantee units of sales since we
sell to distributors on a minimum unit basis, guarantee receipt of cash in
advance of manufacturing since distributors are required to pay for
manufacturing of the product, and guarantee payment regardless of subsequent
sales to consumers. While our current distribution method presents minimal risk,
we do not believe it is the most profitable method of distribution.
Once our capital resources increase and our product line becomes more
established, we plan to take direct control of the marketing and distribution
aspects of our business for the following reasons:
1. More "face" time with retailers. Often, distributors represent
many product lines to the buyers of retail chains and the
unique features of our games may not be presented as well as
we can present them ourselves. We believe this would increase
our sales revenue.
2. Increased profitability. Without third party distributors
involved we believe our profit margins will increase since we
will distribute directly to the retailers, thus eliminating
the higher prices we have to sell product to distributors for
their subsequent resale.
Enter international markets. In early 2004 we founded Conspiracy
Entertainment Europe, Ltd., a United Kingdom corporation, and we own 51% of this
entity. The other 49% of Conspiracy Entertainment Europe is owned by Michael
Hayward. Conspiracy Entertainment Europe's operations are consolidated with our
financial statements included at the end of this prospectus. Conspiracy
Entertainment Europe has not generated any revenues to date. The primary goal of
founding a European subsidiary was to obtain publishing license agreements with
Sony for PS2 and PSP for European regions, which is in process, and to establish
distribution channels for our products in Europe. We expect Conspiracy
Entertainment Europe to enter into publishing license agreements by the end of
the fiscal year ending December 31, 2005. Conspiracy Entertainment Europe will
be our sole European presence and therefore it will require multiple
distribution channels, for each European country we eventually choose to sell
our product.The size of the European market is approximately 80% of the United
States market, providing an incremental revenue growth opportunity for
distribution of our interactive titles.
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 2005/2006. Over the next several years, we plan
to transition from licensing and subcontracting the development of our products
to internal development. Because of the 24-36 month development cycle for new
titles, our products for 2005/2006 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. Sometimes when hiring
subcontractors there is a disconnect with regard to vision of the product. In
addition, egos are often involved. The costs of internal development are
considerable, as first Executive Producers, Producers, Product Managers,
23
Artists, Designers and Programmers would need to be hired. Continual training
would be necessary to keep everyone up to date with the latest technology.
Additional hardware and office space would also be needed to maintain the
development `team.' We plan to focus on developing titles that target specific
segments of the interactive entertainment industry. We identify popular
properties that we believe have the potential to become successful titles,
evaluate the demographic segment that the titles are most likely to appeal to
and begin the development process. In this way, we believe we are able to
develop titles with brand name recognition that appeal to targeted segments of
the interactive entertainment software market.
Competition
The interactive entertainment software industry is intensely
competitive and is characterized by the frequent introduction of new hardware
platforms and titles. We are a small publisher that represents less than 1% of
the video game publishing market. Our competitors vary in size from small
companies to large corporations, including the manufacturers of the hardware
platforms. We must obtain a license from and compete with hardware platform
manufacturers in order to develop and sell titles for their respective
platforms. Each hardware platform manufacturer is the largest publisher and
seller of software products for its own hardware platforms. As a result of their
commanding market positions, these manufacturers generally have better
bargaining positions with respect to retail pricing, shelf space and purchases
than do any of their licensees.
In addition to the hardware platform manufacturers, we compete with
other interactive entertainment software companies. Significant competitors
include Acclaim Entertainment, Inc., Activision, Inc., Bandai America
Incorporated, Capcom USA, Inc., Eidos PLC, Electronic Arts Inc., Infogrames,
Inc., Interplay Entertainment Corp., Konami Corporation of America, Inc., Midway
Games Inc., Namco Ltd., Sega Enterprises, Inc. (USA), Take-Two Interactive
Software, Inc., THQ, Inc., BAM Entertainment, Ubi Soft Entertainment, Vivendi
Universal S.A. and The 3DO Company. Many of these competitors are large
corporations that have significantly greater financial, marketing, personnel and
product development resources than us. Due to these greater resources, certain
of these competitors are able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies, pay higher fees to licensors of
desirable motion picture, television, sports and character properties and pay
more to third-party software developers than we can.
We believe that we are able to successfully compete with regard to the
principal factors of the interactive entertainment software industry, including
product features, brand name recognition, rights to properties, access to
distribution channels, product quality and ease of use, price, marketing
support, independent product reviews and quality of customer service. However,
any significant increase in the development, marketing and sales efforts of our
competitors could harm our business. With respect to product features, any game
released must meet the specific guidelines set forth by the first party hardware
manufacturers. To date we have released products on almost every hardware
platform available. With respect to brand name recognition, our product line has
been established as a quality budget product line by SVG Distribution who
specifically requested we package certain budget titles with distinctive artwork
designating the products as a "Premium Value Product," or "PVP." With respect to
rights to properties, we have outbid and earned the licensing rights to many
licenses including, but not limited to, Tiny Toons, Animaniacs, and The Jeff
Corwin Experience. With respect to access to distribution channels, we have sold
products to some major industry distributors including, but not limited to, SVG
Distribution, Jack of All Games, Vivendi/Universal, and Encore. With respect to
product quality, we have received first party approval for all games released
and we have won awards at the annual E3 Trade Show including, but not limited
to, Best Action Game (Enclave), Best Xbox Game (Enclave) and Best Technology
(Stretch Panic). Our games are all accompanied by complete detailed operating
manuals consistent with those of our competitors, which makes 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 September 13, 2005, we had three full time employees. We intend
to hire additional employees as needed. We retain independent contractors from
time to time to provide various services, primarily in connection with our
software development and sales activities. None of our employees are covered by
a collective bargaining agreement. We consider our relations with our employees
to be good.
DESCRIPTION OF PROPERTY
We maintain an office located at 612 Santa Monica Blvd., Santa Monica,
California. We occupy approximately 1,900 square feet of office space at this
location under a lease that expires in April 2006. Our current rent under the
lease is $4,038 per month.
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LEGAL PROCEEDINGS
Except as discussed below, we are not currently a party to, nor is 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.
On July 22, 2003, we filed a lawsuit in the Superior Court of
California, County of Los Angeles, against Bravado International Group, Inc. and
Cousins Entertainment, Inc. seeking damages in an amount of not less than
$5,000,000 in connection with the breach of a contract for the development and
exploitation of a computer game. The complaint states causes of action based on
fraud and deceit, conspiracy to defraud, breach of contract, and breach of the
covenant of good faith and fair dealing. On December 24, 2003, we filed an
amended complaint alleging the above claims and adding claims based on tortuous
interference with contractual relations and tortuous interference with
prospective economic advantage against Cousins Entertainment, Inc. The
conspiracy to defraud and tortuous interference with prospective economic
advantage claims were against Cousins Entertainment were dismissed. We are
proceeding against Bravado International Group based on claims for fraud and
deceit, conspiracy to defraud, breach of contract and breach of the covenant of
good faith and fair dealing, and against Cousins Entertainment on the claim for
tortuous interference with contractual relations, reserving our right to
re-allege the conspiracy to defraud claim against Cousins Entertainment should
subsequent discovery indicate the viability of such claim. On September 16,
2003, Bravado International Group filed its answer with a cross-complaint
alleging breach of contract against us and seeking damages of $50,000 plus
interest, attorney's fees and costs. On April 9, 2004, Cousins Entertainment
filed its answer with a cross-complaint alleging unauthorized use of name, image
and likeness under California Civil Code section 3344 and common law
misappropriation of the right of publicity against us and seeking damages in
excess of $10,000,000, disgorgement of profits, proceeds or other consideration
received by us, punitive damages, attorney's fees and costs. On July 6, 2005, we
entered into a settlement agreement and mutual release with Bravado pursuant to
which both parties, while not admitting any liability or admitting the validity
of any claim, agreed to cause the dismissal of the action in its entirety
without prejudice. On July 13, 2005,we entered into a settlement agreement and
mutual release with Cousins pursuant to which both parties, while not admitting
any liability or admitting the validity of any claim, agreed to cause the
dismissal of the action in its entirety without prejudice. On July 15, 2005 the
lawsuits involving Bravado and Cousins were dismissed.
On September 28, 2004 we received a cease and desist email notification
from SEGA US who is apparently the new publisher of game titles under our July
7, 2003 software licensing agreement with Constant Entertainment LLP - SEGA
Limited. The agreement with Constant Entertainment LLP provides for multiple
titles to be released individually. With the full knowledge and instructions of
SEGA, we presented a project to release titles as a 10-in-1 package. Constant
Entertainment received a termination letter from 3D AGES/SEGA for the US
publishing rights to the titles under our agreement due to the proposal to
release titles as a 10-in-1 package, rather than individually. On June 28, 2005,
we entered into a settlement agreement and mutual release with Sega Corporation
(successor-in-interest to 3D Ages), Sega of America and Constant Entertainment,
pursuant to which we received $112,500 in August 2005.
We withhold 10% of all foreign sales intended to be remitted to the
Internal Revenue Service. As of December 31, 2004 and 2003 the Company withheld
$136,080 and $117,400, respectively. As of June 30, 2005, 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 are currently no arrangements in place
for payment of these withholdings. The amount due at March 31, 2005 is included
in accounts payable and accrued expenses in the balance sheet.
MANAGEMENT
Directors and Executive Officers
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 34 Chief Executive Officer and Director
--------------------------------------- --------------------------------- ----------------------------------------------
Keith Tanaka 41 Chief Financial Officer, Principal
Accounting Officer, Secretary and Director
--------------------------------------- --------------------------------- ----------------------------------------------
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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 opertaions. Mr. Tanaka is currently a member of the Board of Directors of
Giant Mobile Corporation, a wireless gaming company.
All directors hold office until the next annual meeting of stockholders
and until their successors have been duly elected and qualified. There are no
agreements with respect to the election of directors. We do not compensate our
directors. Officers are appointed annually by the Board of Directors and each
executive officer serves at the discretion of the Board of Directors. The
Company does not have any standing committees at this time.
No director, Officer, affiliate or promoter of the Company has, within
the past five years, filed any bankruptcy petition, been convicted in or been
the subject of any pending criminal proceedings, or is any such person the
subject or any order, judgment or decree involving the violation of any state or
federal securities laws.
Audit Committee
We do not have a separately designated standing audit committee, or a
committee performing similar functions. We also do not have an audit committee
financial expert, as that term is defined in Item 401 of Regulation S-B.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the total
compensation that we have paid or that has accrued on behalf of our chief
executive officer and other executive officers with annual compensation
exceeding $100,000 during the fiscal years ending December 31, 2003, 2002 and
2001.
Long-Term
Compensation
------------------------------ ------------
Annual Compensation Awards Payouts
------------------------------------- ------------------------------ ------------
Securities
Other Under- All
Annual Restricted lying Other
Name and Compen- Stock Award(s) Options/ LTIP Compen-
Principal Position Year Salary ($) Bonus ($) sation ($) ($) SARs (#) Payouts ($) sation ($)
- -------------------------- ---------- ------------- ---------- ------------ ----------------- ------------ ------------ -----------
Sirus Ahmadi 2004 (1) $324,000 --- --- --- --- --- ---
2003 (1) $324,000 --- --- --- --- --- ---
2002 (1) $324,000 --- --- --- --- --- ---
Keith Tanaka
2004 (2) $134,000 --- --- --- --- --- ---
2003 (2) $134,400 --- --- --- --- --- ---
2002 (2) $134,400 --- --- --- --- --- ---
1. During the fiscal years ended December 31, 2004, 2003 and
2002, $319,000, $74,672 and $204,000, respectively, of Mr.
Ahmadi's salary was deferred. During the fiscal year ended
December 31, 2004, $362,794 of Mr. Ahmadi's deferred
compensation was forgiven.
2. During the fiscal years ended December 31, 2004, 2003 and
2002, $26,900, $27,258 and $74,400, respectively, of Mr.
Tanaka's salary was deferred. During the fiscal year ended
December 31, 2004, $51,206 of Mr. Tanaka's deferred
compensation was forgiven.
26
Executive Employment Agreements
On January 1, 2002, we entered into three-year employment agreements
with Sirus Ahmadi, our Chief Executive Officer, and Keith Tanaka, our Chief
Financial Officer, providing for annual salaries of $324,000, plus benefits, and
$134,400, plus benefits, respectively. In addition, per the agreements, each
employee is entitled to a corporate vehicle monthly allowance of $800 and $500,
respectively. Mr. Tanaka is also entitled to 10% of our total issued and
outstanding common shares as of the date of the agreement.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 2004, we entered into an agreement with Giant Mobile Corporation, a
wireless content provider, to perform consulting services. We provided
consultant services with regard to establishment of business, introduction to
developers and entertainment license agents, assisted with the initial
accounting and computer network establishment and Keith Tanaka, our Chief
Financial Officer, Principal Accounting Officer, Secretary and a director, and
Sirus Ahmadi, our Chief Executive Officer and a director, were appointed
non-paid board positions with the company. Messrs. Tanaka and Ahmadi currently
remain directors of Giant Mobile Corporation. By performing these services, we
earned $50,000 in consulting revenues as well as the opportunity to gain
knowledge in the mobile gaming industry.
On _June 15, 2002, we entered into a development agreement with one of
our shareholders, ELO Interactive, for the development of Marble Master (PS
One). The owner of ELO Interactive owned 11.43% of our common stock on June 15,
2002, while we were a private company. As of March 31, 2005, the owner of ELO
Interactive owned 6.73% of our common stock. The development agreement
terminated pursuant to its terms on December 31, 2002 after Marble Master was
approved for manufacturing. As of March 31, 2005, we had $3,501 of accounts
payable due to ELO Interactive pursuant to the development agreement, which is
included in "Accounts Payable - Related Party" in the accompanying balance
sheets.
While we were a private company, one of our directors, Thomas Brockhage
partially developed certain earlier games for us which were never completed
including Sky Surfer (PS2), Hidden Invasion (PS2), Viva Rock Vegas (PS2). Mr.
Brokhage also completed development of games including Logical (Gameboy Color
published by Classified Games), Puzzled (Gameboy Color) and Land Before Time
(Gameboy Color in conjunction with Full Fat Developers). As of December 31,
2003, we owed $262,801 to Mr. Brockhage. The outstanding debt was forgiven by
Mr. Brockhage on August 23, 2004.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of September 13, 2005. The information in this
table provides the ownership information for:
o each person known by us to be the beneficial owner of more
than 5% of our common stock;
o each of our directors;
o each of our executive officers; and
o 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 Percentage of
Common Stock Common Stock Common Stock
Name of Beneficial Owner (1) Beneficially Owned (2) Before Offering (2) After Offering (3)
--------------------------------------- ------------------------- ------------------------ ----------------------
Sirus Ahmadi 14,779,131 39.1% 14.8%
Keith Tanaka 2,155,290 5.7% 2.2%
Volker Eloesser 2,463,189 6.5% 2.5%
--------------------------------------- ------------------------- ------------------------ ----------------------
Jonathan Jevons 2,155,299 5.7% 2.2%
--------------------------------------- ------------------------- ------------------------ ----------------------
All Directors and Executive Officers
as a Group (2 persons) 16,934,421 44.8% 17.0%
--------------------------------------- ------------------------- ------------------------ ----------------------
(1) The address of the listed beneficial owners is c/o Conspiracy
Entertainment Holdings, Inc., 612 Santa Monica Blvd., Santa
Monica, California 90401
(2) Applicable percentage ownership is based on 37,785,509 shares
of common stock outstanding as ofSeptember 13, 2005, together
with securities exercisable or convertible into shares of
common stock within 60 days of September 13, 2005 for each
stockholder. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and
27
generally includes voting or investment power with respect to
securities. Shares of common stock that are currently
exercisable or exercisable within 60 days of September 13,
2005 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.
(3) Based on 99,635,509 shares of common stock outstanding.
DESCRIPTION OF SECURITIES
The following description of our capital stock is a summary and is
qualified in its entirety by the provisions of our Articles of Incorporation,
with amendments, all of which have been filed as exhibits to our registration
statement of which this prospectus is a part.
Dividend Policy
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.
Our Board of Directors has no present intention of declaring any cash
dividends, as we expect to re-invest all profits in the business for additional
working capital for continuity and growth. The future declaration and payment of
dividends will be determined by our Board of Directors after considering the
conditions then existing, including the our earnings, financial condition,
capital requirements, and other factors.
Capital Structure
Our authorized capital consists of 140,000,000 shares of common stock,
par value $.001 per share, and no shares of preferred stock. Of our authorized
common stock, we are authorized to issue up to 40,000,000 shares of Class B
Common Stock. As of September 13, 2005, we had 37,785,509 shares of common stock
outstanding. Stockholders: (i) have general ratable rights to dividends from
funds legally available therefor, when, as and if declared by the Board of
Directors; (ii) are entitled to share ratably in all assets of the Company
available for distribution to stockholders upon liquidation, dissolution or
winding up of the affairs of the Company; (iii) do not have preemptive,
subscription or conversion rights, nor are there any redemption or sinking fund
provisions applicable thereto; and (iv) are entitled to one vote per share on
all matters on which stockholders may vote at all stockholder meetings. The
common stock does not have cumulative voting rights, which means that the
holders of more than fifty percent of the common stock voting for election of
directors can elect one hundred percent of the directors of the Company if they
choose to do so.
Consulting Agreements
On August 24, 2004, we entered into a consulting agreement with Moshe
Hartstein. Under the consulting agreement, we paid Mr. Hartstein $55,250 cash
and agreed to issue Mr. Hartstein 500,000 shares of our common stock and Mr.
Hartstein agreed to provide us advisory and consulting services relating to
financial matters and sales and marketing as reasonably requested by us. The
term of the consulting agreement is from August 24, 2004 through November 31,
2004. The shares under the consulting agreement were issued in the name of
Marina Ventures, an entity owned by Mr. Hartstein. We are registering in this
prospectus the 500,000 shares of common stock that we issued to Marina Ventures.
On August 26, 2004, we entered into a consulting agreement with Sol
Financial, Inc. Under this agreement, we paid Sol Financial $15,000 cash and
issued Sol Financial 100,000 shares of our common stock and Sol Financial agreed
to provide us advisory and consulting services relating to financial matters and
sales and marketing as reasonably requested by us. The term of this agreement is
from August 26, 2004 through October 31, 2004. We are registering in this
prospectus the 100,000 shares of common stock that we issued to Sol Financial,
Inc.
On September 28, 2004, we entered into a consulting agreement with
Scott Mac Caughern. Under this agreement, we issued Mr. Mac Caughern: (1) a
common stock purchase warrant to purchase up to 625,000 shares of our common
stock, exercisable until August 31, 2009 at a price of $0.20 per share; and (2)
a common stock purchase warrant to purchase up to 625,000 shares of our common
stock, exercisable until August 31, 2009 at a price of $0.40 per share. Such
warrants are exercisable on a cashless basis unless the share of common stock
underlying the warrants have been registered pursuant to an effective
registration statement under the Securities Act of 1933. We are registering in
this prospectus up to 1,250,000 shares of common stock issuable upon exercise of
these warrants.
28
August 31, 2004 Financing and October 6, 2004 Financing
On August 31, 2004, we sold an aggregate of $1,050,000 principal amount
of 5% Secured Convertible Debentures, 21,000,000 Class 2004-A Common Stock
Purchase Warrants, and 21,000,000 Class 2004-B Common Stock Purchase Warrants,
to four institutional investors. On October 6, 2004, we issued an additional
$50,000 principal amount of 5% Secured Convertible Debentures, 1,000,000 Class
2004-A Common Stock Purchase Warrants and 1,000,000 Class 2004-B Common Stock
Purchase Warrants to one institutional investor. We received gross proceeds
totaling $1,100,000 from the sale of the Secured Convertible Debentures and the
Class 2004-A and Class 2004-B Common Stock Purchase Warrants in the foregoing
transactions. The purchasers of the Debentures and Warrants were as follows:
Principal Class Class B
Amount of 2004-A 2004-B
Investor Debentures Warrants Warrants
- -------- ---------- -------- --------
Alpha Capital AG $500,000 10,000,000 10,000,000
Stonestreet Limited
Partnership $350,000 7,000,000 7,000,000
Whalehaven Fund Limited $100,000 2,000,000 2,000,000
Whalehaven Capital LP $100,000 2,000,000 2,000,000
Whalehaven Capital Fund
Limited $ 50,000 1,000,000 1,000,000
Principal and accrued interest on each of the Debentures is due and
payable on August 30, 2006. Interest is payable on the earlier of a conversion
of the Debentures (as described below) or on the maturity date. At our election
accrued interest on the Debentures may be paid by us in shares of common stock
at the conversion price then in effect; provided, however, that we may only make
this election if the registration statement covering the resale of such shares
is then effective. The conversion ratio is the lesser of $0.05 per share or 70%
of the average of the five lowest closing bid prices for our common stock for
the 30 trading days prior to a conversion date, subject to adjustment for
subsequent lower price issuances by us, as well as customary adjustment
provisions for stock splits, combinations, dividends and the like. We are
registering under this prospectus 22,000,000 shares of common stock issuable
upon conversion of the Debentures, 2,200,000 shares issuable upon conversion of
the convertible debentures with respect to interest accrued thereon through the
maturity date thereof on the second anniversary of their issuance, and 5,800,000
shares of common stock representing our current good faith estimate of
additional shares issuable to the holders of the Debentures as liquidated
damages through the projected effective date of this registration statement, as
contemplated by certain provisions of the Registration Rights Agreement. Payment
of all amounts due pursuant to the Debentures, as well as our other obligations
to these selling stockholders, is secured by a lien on all of our assets.
Each Class 2004-A Warrant is currently exercisable at a price of $0.20
per share and is exercisable until expiration on August 31, 2009. Each Class
2004-B Warrant is currently exercisable at a price of $0.05 per share and, based
on an amendment to Class 2004-B Warrant terms entered into in connection with
the February 9, 2005 financing discussed below, is exercisable until expiration
18 months after the date on which the resale of the shares of common stock
issuable upon exercise of the Class 2004-B Warrants are registered under the
Securities Act of 1933 (subject to extension under certain circumstances). The
exercise price of each of the Warrants is subject to adjustment for subsequent
lower price issuances by the Company, as well as customary adjustment provisions
for stock splits, combinations, dividends and the like. We are registering under
this prospectus 8,000,000 shares of common stock issuable upon exercise of
8,000,000 of the total of 22,000,000 Class 2004-A Warrants and 22,000,000 shares
of common stock issuable upon exercise of the Class 2004-B Warrants.
The Debentures and the Warrants were issued in a private placement
transaction pursuant to Section 4(2) under the Securities Act of 1933. Pursuant
to the terms of a registration rights agreement, we agreed to include the shares
of common stock issuable upon conversion of the Debentures and upon exercise of
the Warrants in a registration statement under the Securities Act of 1933 to be
filed no later than October 15, 2004 and to use our best efforts to cause such
registration statement to be declared effective no later than November 29, 2004.
These deadlines have not been met. Accordingly, we will be required to issue
additional shares of common stock and/or pay cash liquidated damages to the
investors under the terms of the registration rights agreement.
February 9, 2005 Financing
On February 9, 2005, we completed the sale of an aggregate of $650,000
principal amount of 5% Secured Convertible Debentures, 13,000,000 Class 2005-A
29
Common Stock Purchase Warrants, and 13,000,000 Class 2005-B Common Stock
Purchase Warrants, to three accredited institutional investors. We received
gross proceeds totaling $650,000 from the sale of the Secured Convertible
Debentures and the Class 2005-A and Class 2005-B Common Stock Purchase Warrants
in the foregoing transactions. The purchasers of the Debentures and Warrants
were as follows:
Principal
Amount of Class A Class B
Investor Debentures Warrants Warrants
- -------- ---------- -------- --------
Alpha Capital AG $250,000 5,000,000 5,000,000
Stonestreet Limited
Partnership $150,000 3,000,000 3,000,000
Whalehaven Capital Fund
Limited $250,000 5,000,000 5,000,000
Interest is payable on the earlier of a conversion of the Secured
Convertible Debentures (as described below) or on the maturity date of February
9, 2007. At our election, accrued interest on the Secured Convertible Debentures
may be paid by us in shares of common stock at the conversion price then in
effect; provided, however, that we may only make this election if the
registration statement covering the resale of such shares is then effective. The
conversion price is the lower of $0.05 per share or 70% of the average of the
five lowest closing bid prices for our common stock for the 30 trading days
prior to a conversion date, subject to adjustment for subsequent lower price
issuances, as well as customary adjustment provisions for stock splits,
combinations, dividends and the like. Payment of all amounts due pursuant to the
Secured Convertible Debentures, as well as our other obligations to the
investors, is secured by a lien on all of our assets.
Each Class 2005-A Warrant is currently exercisable at a price of $0.20
per share and is exercisable until expiration on February 28, 2010. Each Class
2005-B Warrant is currently exercisable at a price of $0.05 per share until
expiration 18 months after the date on which the resale of the shares of common
stock issuable upon exercise of the Class 2005-B Warrants are registered under
the Securities Act of 1933 (subject to extension under certain circumstances).
The exercise price of each of the Warrants is subject to adjustment for
subsequent lower price issuances, as well as customary adjustment provisions for
stock splits, combinations, dividends and the like.
The Secured Convertible Debentures and the Warrants were issued in a
private placement transaction pursuant to Section 4(2) and Regulation D under
the Securities Act of 1933. Pursuant to the terms of a registration rights
agreement, we agreed to include the shares of common stock issuable upon
conversion of the Secured Convertible Debentures and upon exercise of the
Warrants in a registration statement under the Securities Act of 1933 to be
filed not later than 30 days after the effective date of the registration
statement, as amended, originally filed by us on November 24, 2004 (the
"Required Filing Date") and to use our best efforts to cause such registration
statement to be declared effective no later than 60 days after the Required
Filing Date. In the event we do not meet these deadlines, we may be required to
issue additional shares of common stock to the investors under the terms of the
registration rights agreement.
Palladium Capital Advisors, LLC acted as placement agent in connection
with the sale of Debentures, Class 2005-A Common Stock Purchase Warrants and
Class 2005-B Common Stock Purchase Warrants. In consideration for its services,
we (i) paid Palladium Capital Advisors, LLC a cash amount equal to 5.5% of the
total purchase price of the Debentures and Warrants; (ii) issued Palladium
Capital Advisors, LLC or its designees 300,000 shares of common stock with
piggy-back registration rights; and (iii) agreed to pay Palladium Capital
Advisors, LLC a cash fee equal to 10% of the cash exercise price of any Warrants
that are exercised for cash.
In connection with the February 9, 2005 financing, we agreed to extend
the expiration date of the 2004-B Common Stock Purchase Warrants to a date which
is 18 months after the effective date of the registration statement covering the
resale of those warrant shares.
August 5, 2005 Financing and Amendments to Secured Convertible Debentures
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 due February 1, 2006. Under the terms of the
loans, we agreed to share 50% of the profit earned from the development,
production and commercialization of the videogame originally released under the
name `Kollon' in Japan by Cyberfront Corporation on the Sony PSP platform.
In connection with the August 5, 2005 and August 8, 2005 loans, we
entered into an agreement amending the terms of our August 31, 2004, October 6,
2004 and February 9, 2005 financings. In connection with the loans, we
re-affirmed all representations and warranties made in the contained in the
August 31, 2004, October 6, 2004 and February 9, 2005 financings and all
30
covenants and conditions from such financings were adopted and renewed. In
addition, the $223,600 principal amount notes payable were added to the Security
Interest Agreements executed in connection with the August 31, 2004, October 6,
2004 and February 9, 2005 financings. Further, the conversion price of the
debentures issued in connection with the August 31, 2004, October 6, 2004 and
February 9, 2005 financings was amended from $0.05 per share to be the lesser of
$0.05 or 70% of the average of the five lowest closing bid prices for our common
stock for the 30 trading days prior to a conversion date.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Bylaws require that we indemnify and hold harmless our officers and
directors for any obligations arising out of any acts or conduct performed on
our behalf. Specifically, our Bylaws provide that we shall and do hereby
indemnify and hold harmless each person and his heirs and administrators who
shall serve at any time hereafter as a director or officer from and against any
and all claims, judgments and liabilities to which such persons shall become
subject by reason of his having heretofore or hereafter been a director or
officer, or by reason of any action alleged to have been heretofore or hereafter
taken or omitted to have been taken by him as such director or officer, and
shall reimburse each such person for all legal and other expenses reasonably
incurred by him in connection with any such claim or liability; including power
to defend such person from all suits as provided for under the provisions of the
Utah Revised Business Corporation Act; provided, however, that no such person
shall be indemnified against, or be reimbursed for, any expense incurred in
connection with any claim or liability arising out of his own negligence or
willful misconduct.
The indemnification provision of our Bylaws do not exclude any other
right to which our officers or directors may lawfully be entitled and it does
not restrict our right to indemnify or reimburse such persons in a proper case,
even though not specifically provided for in the Bylaws. Further, our Bylaws
provide that our directors, officers, employees and agents shall be fully
protected in taking any action or making any payment or in refusing to do so in
reliance on the advice of counsel. These indemnification rights are exclusive of
any other rights to which those seeking indemnification may be entitled under
any Bylaw, agreement, vote of stockholders, or disinterested directors, or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer or employee and shall inure to the
benefit of the heirs, executors and administrators of such a person.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Conspiracy Entertainment Holdings' Change in Accountants from HJ & Associates,
LLC to Chisholm and Associates
On July 22, 2003, our Board of Directors dismissed HJ & Associates, LLC
and engaged Chisholm and Associates (n/k/a Chisholm, Bierwolf & Nilson, LLC) as
our independent accountants for the fiscal year ended June 30, 2003. The
decision to change accountants was approved by our Board of Directors. During
the most recent fiscal year and any subsequent interim period prior to engaging
Chisholm and Associates, we did not consult with Chisholm and Associates
regarding either (i) the application of accounting principals to a specified
transaction, either completed or proposed; or the type of audit opinion that
might be rendered on our financial statements; or (ii) any matter that was
either the subject matter of a disagreement (as defined in Item 304(a)(1)(iv) of
Regulation S-B) and the related instructions) or a reportable event (as defined
in Item 304(a)(1)(v) of Regulation S-B).
Chisholm and Associates reviewed the disclosure required by Item 304(a)
before it was filed with the Commission and has been provided an opportunity to
furnish us with a letter addressed to the Commission containing any new
information, clarification of the expression of our views, or the respects in
which it does not agree with the statements made by us in response to Item
304(a).
HJ & Associates' auditor's reports on the financial statements for
either of the past two years contained no adverse opinion or disclaimer of
opinion, nor were modified as to uncertainty, audit scope or accounting
principles. During the two most recent fiscal years and later interim period
through the termination of the client-auditor relationship, there were no
disagreements of the type described under Item 304(a)(1)(iv)(A) of Regulation
S-B.
31
Conspiracy Entertainment Corporation's Change in Accountants from Singer, Lewak,
Greenbaum & Goldstein LLP to Chisholm and Associates
On July 22, 2003, Conspiracy Entertainment Corporation engaged Chisholm
and Associates to serve as its independent accountants for the fiscal year ended
December 31, 2003. On November 13, 2003, Conspiracy Entertainment Corporation
dismissed Singer, Lewak, Greenbaum & Goldstein LLP as its independent
accountants. The decision to change accountants was approved by Conspiracy
Entertainment Corporation's Board of Directors.
During the two fiscal years ended December 31, 2002 and 2001, and
through November 13, 2003, (i) there were no disagreements between Conspiracy
Entertainment Corporation and Singer, Lewak, Greenbaum & Goldstein on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure which, if not resolved to the satisfaction of
Singer, Lewak, Greenbaum & Goldstein would have caused Singer, Lewak, Greenbaum
& Goldstein to make reference to the matter in its reports on Conspiracy
Entertainment Corporation's financial statements, and (ii) Singer, Lewak,
Greenbaum & Goldstein's reports on Conspiracy Entertainment Corporation's
financial statements did not contain an adverse opinion or disclaimer of
opinion, or was modified as to uncertainty, audit scope or accounting
principles. During the two fiscal years ended December 31, 2002 and 2001 and
through November 13, 2003, there were no reportable events as the term described
in Item 304(a)(1)(iv) of Regulation S-B.
During the two fiscal years ended December 31, 2002 and 2001 and
through July 22, 2003, Conspiracy Entertainment Corporation did not consult with
Chisholm and Associates regarding either:
1. The application of accounting principles to any specific transaction,
either completed or proposed, or the type of audit opinion that might
be rendered on Conspiracy Entertainment Corporation's financial
statements, and neither a written report was provided to Chisholm and
Associates nor oral advice was provided that Chisholm and Associates
concluded was an important factor considered by Conspiracy
Entertainment Corporation in reaching a decision as to the accounting,
auditing or financial reporting issue; or
2. Any matter that was either subject of disagreement or event, as defined
in Item 304(a)(1)(iv)(A) of Regulation S-B and the related instruction
to Item 304 of Regulation S-B, or a reportable event, as that term is
explained in Item 304(a)(1)(iv)(A) of Regulation S-B.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be
passed upon for us by Sichenzia Ross Friedman Ference LLP, New York, New York.
EXPERTS
Our financial statements at December 31, 2004 and 2003 appearing in
this prospectus and registration statement have been audited by Chisholm,
Bierwolf & Nilson, LLC, independent registered public accounting firm, as set
forth on their report thereon appearing elsewhere in this prospectus, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the
Securities Act of 1933, as amended, relating to the shares of common stock being
offered by this prospectus, and reference is made to such registration
statement. This prospectus constitutes the prospectus of Conspiracy
Entertainment Holdings, Inc., filed as part of the registration statement, and
it does not contain all information in the registration statement, as certain
portions have been omitted in accordance with the rules and regulations of the
Securities and Exchange Commission.
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, which requires us to file reports, proxy
statements and other information with the Securities and Exchange Commission.
Such reports, proxy statements and other information may be inspected by public
reference facilities of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Because we file documents
electronically with the SEC, you may obtain this information by visiting the
SEC's Internet website at http://www.sec.gov.
32
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
PERIODS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED)
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-4
Consolidated Statements of Cash Flows F-5
Notes to Unaudited Consolidated Financial Statements F-7
YEARS ENDED DECEMBER 31, 2004 AND 2003 (AUDITED)
Independent Registered Public Accountant's Report F-15
Consolidated Balance Sheets F-16
Consolidated Statement of Operations F-17
Consolidated Statements of Other Comprehensive Income F-18
Consolidated Statements of Stockholders' Deficit and
Other Comprehensive Income F-19
Consolidated Statement of Cash Flows F-20
Notes to Consolidated Financial Statements F-22
F-1
Conspiracy Entertainment Holdings, Inc.
Consolidated Balance Sheets
ASSETS
June 30, December 31,
2005 2004
---------- ----------
(Unaudited)
Current Assets:
Cash $ 8,325 $ 165,762
Accounts Receivable, net of allowance
for doubtful accounts of zero in 2004 and 2005 66,971 167,262
---------- ----------
Total Current Assets 75,295 333,024
Property and Equipment, Net 26,515 25,951
Other Assets:
Capitalized Development Costs and Licenses, Net 702,771 400,346
Deposits 8,025 8,025
---------- ----------
Total Other Assets 710,796 408,371
---------- ----------
Total Assets $ 812,607 $ 767,346
---------- ----------
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
Conspiracy Entertainment Holdings, Inc.
Consolidated Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
2005 2004
----------- -----------
(Unaudited)
Current Liabilities:
Accounts Payable $ 768,527 $ 812,762
Accounts Payable - Related Party 3,501 3,501
Accrued Expenses 57,966 18,739
Payroll Taxes Payable 374,524 312,376
Deferred Compensation 252,736 236,136
Deferred Revenue 80,468 365,197
Lease Obligations - Current 2,966 9,406
Notes Payable 210,128 210,128
----------- -----------
Total Current Liabilities 1,750,815 1,968,244
Long-Term Liabilities:
Convertible Notes Payable, net of discount
of zero in 2005 and $140,000 in 2004 1,750,000 1,100,000
----------- -----------
Total Long-Term Liabilities 1,750,000 1,100,000
----------- -----------
Total Liabilities 3,500,815 3,068,244
----------- -----------
Stockholders' Equity:
Common Stock, 100,000,000 Shares Authorized,
$.001 Par Value, 37,785,509 Shares
Issued and Outstanding 37,786 37,486
Additional Paid in Capital 6,067,339 5,393,639
Other Comprehensive Income (44,890) (44,890)
Minority Interest (29,400) (29,400)
Accumulated Deficit (8,719,043) (7,657,733)
----------- -----------
Total Stockholders' Equity (2,688,208) (2,300,898)
----------- -----------
Total Liabilities and Stockholders' Equity $ 812,607 $ 767,346
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Conspiracy Entertainment Holdings, Inc.
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues $ 410,555 $ 338,237 $ 562,363 $ 760,589
Cost of Sales 147,164 317,805 281,637 615,586
------------ ------------ ------------ ------------
Gross Profit (Loss) 263,391 20,432 280,726 145,003
------------ ------------ ------------ ------------
Operating Expenses:
Depreciation Expense 8,560 7,881 15,131 16,261
Professional Fees 14,550 96,954 218,250 141,954
Salaries & Wages 132,129 158,059 264,531 324,293
General & Administrative 73,211 61,284 154,369 158,182
------------ ------------ ------------ ------------
Total Operating Expenses 228,450 324,178 652,281 640,690
------------ ------------ ------------ ------------
Net Operating Income (Loss) 34,940 (303,746) (371,556) (495,687)
------------ ------------ ------------ ------------
Other Income(Expense)
Interest Expense (161,551) (341) (179,753) (36,402)
Forgiveness of Debt -- 2,438,188 -- 2,438,188
Financing Costs -- -- (510,000) --
Miscellaneous Income -- -- -- 50,000
------------ ------------ ------------ ------------
Total Other Income(Expense) (161,551) 2,437,847 (689,753) 2,451,786
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes (126,611) 2,134,101 (1,061,309) 1,956,099
Income Tax Expense -- -- -- --
------------ ------------ ------------ ------------
Net Income (Loss) $ (126,611) $ 2,134,101 $ (1,061,309) $ 1,956,099
============ ============ ============ ============
Net Income (Loss) Per Share - Basic and Diluted $ (0.00) $ 0.06 $ (0.03) $ 0.06
============ ============ ============ ============
Weighted Average Shares Outstanding:
Basic and Diluted 37,485,509 33,212,157 37,636,338 31,882,298
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Conspiracy Entertainment Holdings, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
--------------------------
2005 2004
----------- -----------
Cash Flows from Operating Activities:
Net Income(Loss) $(1,061,309) $ 1,956,099
Adjustments to Reconcile Net Loss to Net Cash
Used in Operations:
Depreciation & Amortization 15,131 16,261
Discount on Convertible Notes Payable 650,000 --
Services Paid with Common Stock 24,000 --
Change in Operating Assets and Liabilities:
Accounts Receivable 100,291 (53,282)
Prepaid Expenses -- 11,559
Accounts Payable and Accrued Expenses 57,139 (2,368,555)
Deferred Revenue (284,729) 54,508
Deferred Compensation 16,600 123,244
----------- -----------
Net Cash Used in Operating Activities (482,877) (260,166)
Cash Flows from Investing Activities:
Payments for Development Costs and Licenses (302,425) (117,494)
Purchases of Property and Equipment (15,696) --
----------- -----------
Net Cash Used in Investing Activities (318,121) (117,494)
Cash Flows from Financing Activities:
Proceeds from Notes Payable -- 120,000
Proceeds from Convertible Notes Payable 650,000 25,000
Proceeds from Exercise of Stock Warrant -- 210,000
Proceeds from Issuance of Common Stock -- 278,800
Payments for Capital Leases (6,440) (3,487)
Principal Payments on Notes Payable -- (150,000)
----------- -----------
Net Cash Provided by Financing Activities 643,560 480,313
----------- -----------
Increase (Decrease) in Cash (157,438) 102,653
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Conspiracy Entertainment Holdings, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Cash and Cash Equivalents at Beginning of Period 165,762 44,329
----------- -----------
Cash and Cash Equivalents at End of Period $ 8,324 $ 146,982
============ ============
Cash Paid For:
Interest $ -- $ --
============ ============
Income Taxes $ -- $ --
============ ============
Supplemental Cash Flow Data
Non-cash Investing and Financing Activities
During the six months ended June 30, 2004, the Company issued 300,000 shares
for consulting services valued at $24,000.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
Conspiracy Entertainment Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements June 30, 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles of the
United States of America for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles of the United States of America for complete financial
statements. In the opinion of management, all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation have been
included. It is suggested that these condensed consolidated financial statements
be read in conjunction with the December 31, 2004 audited consolidated financial
statements and notes thereto for Conspiracy Entertainment Holdings, Inc. The
results of operations for the periods ended June 30, 2005 and 2004 are not
necessarily indicative of the operating results for the year ending December 31,
2005.
a. Organization
The financial statements presented are those of Conspiracy Entertainment
Holdings, Inc., (formerly Lance Systems, Inc.) (the Company). The Company as
incorporated under the laws of the state of Utah on July 29, 1982 as Strategic
Recovery Corporation. On February 16, 1987, the Company merged with Lance, Inc.,
(a Utah Corporation), and changed its name to Lance Systems, Inc. The Company
was organized for the purpose of acquiring investments. However, subsequent to
the merge, the Company changed its purpose from acquiring investments to
creating, developing and selling micro computer software.
On October 7, 2003, the Company effected a reorganization and acquisition
agreement with Conspiracy Entertainment Corporation (CEC), organized in November
1997. The reorganization agreement provided for the issuance of 21,552,900
shares of common stock to the shareholder of CEC, for all outstanding shares of
CEC. Pursuant to the acquisition, CEC became a wholly-owned subsidiary of the
Company, and the name of the Company was changed to Conspiracy Entertainment
Holdings, Inc. The reorganization was recorded as a reverse acquisition using
the purchase method of business combination. In a reverse acquisition all
accounting history becomes, that of the accounting acquirer, therefore all
historical information prior to the acquisition is that of CEC. The shares
issued to the shareholders of CEC have been stated retroactively, as though a
1,026 for 1 stock split occurred on January 1, 2003. The reverse merger
adjustment is therefore all the shares held by the Lance shareholders prior to
the acquisition.
In early 2004, the Company acquired a 51% interest in Conspiracy Entertainment
Europe, LTD (CEE), a United Kingdom Corporation, to develop and distribute
certain game titles in Europe. During 2004, the Company advanced $60,000 to this
majority owned subsidiary to cover operating expenses. The financial statements
of CEE are consolidated with the Company, with a minority interest adjustment.
All intercompany balances and transactions have been eliminated in
consolidation.
F-7
Conspiracy Entertainment Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements June 30, 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
b. Accounting Method
The Company recognizes income and expense on the accrual basis of accounting.
The Company has elected a December 31 year end.
c. Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less to be cash equivalents.
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.
e. Assignment of Accounts Receivable
Regularly, the Company assigns its receivables to vendors with recourse and
accounts for such assignments in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Assigned accounts
receivable are shown on the accounts receivable section of the balance sheet
until collected by the beneficiary. Should the accounts receivable become
uncollectible, the Company is ultimately responsible for paying the vendor and
recording an allowance for potential credit losses as deemed necessary. The
assigned accounts receivable are generally collected within 90 days; therefore,
the balance shown approximates its fair value.
f. Capitalized Development Costs and Licenses
Capitalized development costs include payments made to independent software
developers under development agreements, as well as direct costs incurred for
internally developed products.
The Company accounts for software development costs in accordance with SFAS No.
86 "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." Software development costs are capitalized once
technological feasibility of a product is established and such costs are
determined to be recoverable. Technological feasibility of a product encompasses
both technical design documentation and game design documentation.
F-8
Conspiracy Entertainment Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements June 30, 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
f. 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. At June 30, 2005, the majority of the titles related to capitalized
development costs and licenses have not been released. As such, approximately
$24,000 of amortization expense has been included in cost of sales for the six
months ended June 30, 2005.
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.
F-9
Conspiracy Entertainment Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements June 30, 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
f. 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 June 30, 2005, the majority of the titles related to capitalized development
costs and licenses have not been released. As such, approximately $24,000 of
amortization expense has been included in cost of sales for the six months ended
June 30, 2005.
g. Property and Equipment
Provision for depreciation of software and equipment is computed on the
straight-line method for financial reporting purposes. Depreciation is based
upon estimated useful lives as follows:
Computer equipment 5 Years
Software and loan costs 3 Years
Office equipment 6 Years
Furniture and fixtures 10 Years
Leasehold improvements 5 Years
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 $15,131 and $16,261 for June 30, 2005 and
2004, respectively.
In accordance with Financial Accounting Standards Board Statement No. 144, the
Company records impairment of long-lived assets to be held and used or to be
disposed of when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the carrying
amount. At June 30, 2005 and 2004, no impairments were recognized.
F-10
Conspiracy Entertainment Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements June 30, 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
h. Revenue Recognition
Revenue from video game distribution contracts, which provide for the receipt of
non-refundable guaranteed advances, is recognized when the games are delivered
to the distributor by the manufacturer under the completed contract method,
provided the other conditions of sale as established by the Securities and
Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101 (revised SAB No.
104), "Revenue Recognition," are satisfied:
i. Persuasive evidence of an arrangement exists.
ii. Delivery has occurred or services have been rendered.
iii. The seller's price to the buyer is fixed or determinable.
iv. Collectibility is reasonably assured
Until all of the conditions of the sale have been met, amounts received on such
distribution contracts are recorded as deferred income. Although regularly the
Company enters into the assignment of accounts receivable to vendors, the
Company presents revenues on gross basis per Emerging Issues Task Force ("EITF")
No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent,"
since the Company:
i. Acts as the principal in the transaction.
ii. Takes title to the products.
iii. Has risks and rewards of ownership, such as the risk of loss for
collection, delivery, or returns.
iv. Does not act as an agent or broker.
At all times, the Company maintains control of the development process and is
responsible for directing the vendor. Other than for payment, the customer does
not communicate with the vendor.
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.
F-11
Conspiracy Entertainment Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements June 30, 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
h. Revenue Recognition - continued
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.
i. Advertising and Marketing Expense
The Company expenses advertising and marketing costs as incurred.
j. Earnings (Loss) Per Share of Common Stock
The Company reports loss per share in accordance with SFAS No. 128 "Earnings per
Share." Basic net loss per common share is computed by dividing net loss
available to common stockholder by the weighted average number of common shares
outstanding. Diluted net loss per common share is computed by dividing net loss
available to common stockholders by the weighted average number of common shares
and dilutive potential common share equivalents then outstanding. Potential
common shares consist of shares issuable upon the exercise of stock options and
warrants. The calculation of the net income (loss) per share available to common
stockholders for June 30, 2005 and 2004 does not include potential shares of
common stock equivalents, as their impact would be antidilutive.
For the Periods Ended
June 30,
Basic and Diluted ----------------------------
Earnings per share: 2005 2004
------------ ------------
Income (Loss) (numerator) $ (1,061,309) $ 1,956,099
Shares (denominator) 37,636,338 31,882,298
------------ ------------
Per Share Amount $ (0.03) $ 0.06
============ ============
k. 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.
F-12
Conspiracy Entertainment Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements June 30, 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
l. 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.
m. Functional Currency and Foreign Currency Translation
The Company's functional currency is the U.S. dollar. In accordance with
Statement of Financial Accounting Standard No. 52, "Foreign Currency
Translation", the assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at the current rate of exchange existing at
period-end and revenues and expenses are translated into U.S. dollars at the
average monthly exchange rate. Related translation adjustments are reported as a
separate component of Stockholders' Equity, whereas gains and losses from
foreign currency transactions are included in results of operations.
The cumulative effect of currency translation adjustments to a note payable (in
British Pounds) held by the Company is included in Other Comprehensive Income in
Stockholders' Equity.
NOTE 2 - GOING CONCERN
The accompanying 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. During the period
ended June 30, 2005, the Company incurred a net loss of $ $1,061,309. In
addition, the Company had an accumulated deficit of $8,719,043 as of June 30,
2005. 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 2005. The 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.
F-13
Conspiracy Entertainment Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements June 30, 2005
NOTE 3 - CONVERTIBLE NOTE PAYABLE
On February 9, 2005, the Company closed a Securities Purchase Agreement for 5%
Secured Convertible Debentures having a total principal amount of $650,000,
convertible into 13,000,000 shares of the Company's common stock at a price of
$0.05 per share, plus Class A Common Stock Purchase Warrants to purchase a total
of 13,000,000 shares of common stock at a price of $0.20 per share; and Class B
Common Stock Purchase Warrants to purchase a total of 13,000,000 shares of
common stock at a price of $0.05 per share. Interest and principal of the note
is due on February 9, 2007.
The $650,000 in proceeds has been recorded as paid in capital based on the
intrinsic and relative fair values of $195,000, $130,000 and $325,000, for the
beneficial conversion feature of the Secured Convertible Notes Payable, Class A
Common Stock Purchase Warrants and Class B Common Stock Purchase Warrants,
respectfully. The Company upon issuance recorded an initial discount on the note
of $650,000 and $650,000 has accreted through June 30, 2005.
The intrinsic value of the beneficial conversion feature is $0.03 as the fair
market value of common stock was $0.08 on the date of the agreement. The
relative fair values of the warrants were estimated using the Black Scholes
pricing model with volatility of 80.86%, risk free interest rate of 2.1%,
expected yield of 0% and estimated lives of two years.
During the six months ended June 30, 2005, the Company incurred professional
fees to advisory firms for agent services related to the placement of the
Convertible Note Payable. The professional fees totaled $100,500 and were paid
by issuing 300,000 shares of the Company's common stock valued at $24,000 and
$76,500 in cash.
NOTE 4 - SUBSEQUENT EVENTS
On June 28, 2005, the Company entered into a Settlement Agreement and Mutual
Release with a software publisher related to a dispute. Pursuant to the
agreement, the Company received $112,500 from the customer to settle the dispute
in August 2005.
On August 8, 2005 the Company entered into notes payable agreements with two
capital funds for a total of $223,600 in proceeds. Under the terms of the loans
the Company also agreed to share 50% of the profit earned by the Company on a
new product that is scheduled to release in late 2005 for a maximum of $300,000.
The note is due on February 1, 2006 and bears no interest (other than the profit
sharing arrangement). The Company has agreed to pay a consultant $5,000 and
200,000 restricted shares of its common stock in exchange for services provided
relating to the notes payable agreement.
In August 2005, the Company amended the conversion terms of all existing
convertible notes payable ($1,750,000 as of June 30, 2005). The amendment
changes the conversion rates from $0.05, to the lesser of $0.05 or 70% of the
average five lowest closing bid prices for the Company's Common Stock for the 30
trading days prior to a conversion date.
F-14
INDEPENDENT REGISTERED PUBLIC ACCOUNTANT'S REPORT
To the Board of Directors and Stockholders of Conspiracy Entertainment Holdings,
Inc.
We have audited the accompanying consolidated balance sheets of Conspiracy
Entertainment Holdings, Inc. as of December 31, 2004 and the related
consolidated statement of operations, stockholders' equity and comprehensive
income and cash flows for the years ended December 31, 2004 and 2003. 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 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 misstatement. The Company
is not required to have, nor were we engaged to perform, audits of its 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 also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 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, 2004 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2004 and 2003, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
ongoing operating losses and does not currently have financing commitments in
place to meet expected cash requirements through 2005. Additionally, the Company
is in default on its debt obligations. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classifications of liabilities that may result from the outcome of this
uncertainty.
/s/ Chisholm, Bierwolf & Nilson, LLC
------------------------------------
Chisholm, Bierwolf & Nilson, LLC
Bountiful, Utah
March 24, 2005
F-15
Conspiracy Entertainment Holdings, Inc.
Consolidated Balance Sheet
ASSETS
December 31,
2004
-----------
Current Assets
Cash $ 165,762
Accounts Receivable (net of allowance of $0) 167,262
-----------
Total Current Assets 333,024
-----------
Property & Equipment (Net) 25,950
-----------
Other Assets
Capitalized software development and licenses 400,346
Deposits 8,025
Investments --
-----------
Total Other Assets 408,371
-----------
Total Assets $ 767,346
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
December 31,
2004
-----------
Current Liabilities
Accounts Payable $ 812,762
Accounts Payable-related party 3,501
Payroll Taxes Payable 312,376
Accrued Expenses 18,739
Advances Received --
Deferred Compensation 236,136
Deferred Revenue 365,197
Current Portion of Lease Obligations 9,406
Notes Payable - Current 210,128
-----------
Total Current Liabilities 1,968,244
Long-Term Liabilities
Convertible Notes Payable 1,100,000
Capital Lease Obligations 9,406
Less Current Portion (9,406)
-----------
Total Long-Term Liabilities 1,100,000
-----------
Total Liabilities 3,068,244
Stockholders' Equity
Common Stock, Authorized 100,000,000 Shares, $.001 Par Value,
Issued and Outstanding 37,485,509 shares 38,061
Additional Paid in Capital 5,393,064
Other Comprehensive Income (44,890)
Minority Interest (29,400)
Accumulated Deficit (7,657,733)
-----------
Total Stockholders' Deficit (2,300,898)
-----------
Total Liabilities and Stockholders' Equity $ 767,346
===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
Conspiracy Entertainment Holdings, Inc.
Consolidated Statements of Operations
For the Year Ended
December 31,
------------------------------
2004 2003
------------ ------------
Revenues, Net
Product Sales $ 1,425,649 $ 1,881,629
License Revenue -- 495,478
------------ ------------
Total Revenues 1,425,649 2,377,107
------------ ------------
Cost of Sales
Product Costs 1,360,432 1,161,808
License Development 234,812 1,092,211
------------ ------------
Total cost of sales 1,595,244 2,254,019
------------ ------------
Gross Profit (Loss) (169,595) 123,088
------------ ------------
Operating Expenses
Selling, General & Administrative 450,193 689,144
Professional Fees 861,191 890,148
Wages & Salaries 629,082 815,133
Impairment -- --
------------ ------------
Total Operating Expenses 1,940,466 2,394,425
------------ ------------
Net Operating Loss (2,110,060) (2,271,337)
------------ ------------
Other Income(Expense)
Interest Income -- 2
Interest Expense (60,792) (50,309)
Forgiveness of Debt 2,451,282 --
Financing Costs (2,882,766) --
Loss on Investment (11,272) --
Foreign Currency Transaction Loss (5,269) --
Other Income (Expense) 50,000 70,000
------------ ------------
Total Other Income(Expense) (458,817) 19,693
------------ ------------
Net Loss Before Income Taxes (2,568,877) (2,251,644)
Provision for Income Taxes -- 800
Minority Interest 29,400 --
------------ ------------
Net Loss $ (2,539,477) $ (2,252,444)
============ ============
Net Loss Per Share - Basic and Diluted $ (0.07) $ (0.10)
============ ============
Weighted Average Shares
Outstanding - Basic and Diluted 34,141,270 21,857,762
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
Conspiracy Entertainment Holdings, Inc.
Statements of Other Comprehensive Income
For the Year Ended
December 31,
-------------------------------
2004 2003
------------ ------------
Net Loss $ (2,539,477) $ (2,252,444)
Other Comprehensive Income
Loss on Foreign Currency Translation (14,808) (30,082)
------------ ------------
Net Comprehensive Loss (2,554,285) (2,282,526)
------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
Conspiracy Entertainment Holdings, Inc.
Consolidated Statements of Stockholders' Deficit and
Other Comprehensive Income For the year ended December 31, 2004
Common Stock Committed Additional Other
------------------------- Common Paid-in Comprehensive Accumulated
Shares Amount Stock Capital Income Deficit
---------- ----------- --------- ----------- ----------- -----------
Balance, December 31, 2002 19,090,500 $ 19,091 $ 3,112 $ 12,182 $ -- $(2,865,813)
Reverse merger adjustement (note 1) 8,606,646 8,606 (8,606) --
Issuance of committed shares 2,462,400 2,462 (3,112) 650 -- --
Foreign currency translation adjustment
to notes payable (British pound to USD) -- -- -- -- (30,082) --
Net loss for the year ended
December 31, 2003 -- -- -- -- -- (2,252,444)
------------------------------------------------------------------------------------
Balance, December 31, 2003 30,159,546 30,159 -- 4,226 (30,082) (5,118,256)
Shares issued for conversion of debt 1,492,536 1,492 -- 998,508 -- --
Shares issued for warrant exercise 245,000 245 -- 244,755 -- --
Shares issued for cash at $0.10 2,215,177 2,792 -- 276,007 -- --
-----------
Shares issued for relief of payables 648,250 648 -- 258,652 -- --
Forgiveness of deferred comp -- -- -- 450,000 -- --
Shares issued for services at $0.14 600,000 600 -- 83,400 -- --
Shares issued for services at $0.10 1,500,000 1,500 -- 148,500 -- --
Shares issued for services at $0.075 625,000 625 -- 46,250 -- --
Warrants issued for Financing costs -- -- -- 2,882,766 -- --
Foreign currency translation adjustment -- -- -- -- (14,808) --
Net loss for the year ended
December 31, 2004 (2,539,477)
------------------------------------------------------------------------------------
Balance, December 31, 2004 37,485,509 $ 38,061 $ -- $ 5,393,064 $ (44,890) $(7,657,733)
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
Conspiracy Entertainment Holdings, Inc.
Consolidated Statements of Cash Flows
For the Year Ended
December 31,
--------------------------
2004 2003
----------- -----------
Cash Flows from Operating Activities:
Net Loss $(2,539,477) $(2,252,444)
Adjustments to Reconcile Net Loss to Net Cash
Used by Operations:
Minority Interest (29,400) --
Depreciation & Amortization 30,665 38,410
Amortization of Capitalized Development Costs and Licenses 125,398 1,188,726
Impairment of Capitalized Development Costs and Licenses 329,812 --
Loss on Equity Method Investment 11,272 --
Foreign Currency Transaction Loss
Financing Fees and Services Paid with Equity 3,168,910 --
Change in Operating Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (147,262) 2,237,869
Prepaid Expenses 287 (562)
Increase (Decrease) in:
Accounts Payable and Accrued Expenses (2,474,610) (1,308,210)
Due to Related Party -- (20,000)
Deferred Compensation 269,806 111,930
Deferred Revenue 96,520 (439,645)
----------- -----------
Net Cash Used by Operating Activities (1,158,080) (443,926)
Cash Flows from Investing Activities:
Purchase of Investments (8,805) --
Purchase of Development Costs and Licenses (284,346) (514,412)
----------- -----------
Net Cash Provided (Used) by Investing Activities (293,151) (514,412)
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Payable -- 265,128
Proceeds from Convertible Notes Payable 1,281,500 650,000
Principal Payments on Notes Payable (216,730) (15,700)
Principal Payments on Capital Lease Obligations (15,905) (12,755)
Proceeds from Issuance of Common Stock 523,800 --
----------- -----------
Net Cash Provided (Used) by Financing Activities 1,572,665 886,673
----------- -----------
Increase (Decrease) in Cash 121,433 (71,665)
Cash and Cash Equivalents at Beginning of Period 44,329 115,994
----------- -----------
Cash and Cash Equivalents at End of Period $ 165,762 $ 44,329
=========== ===========
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
Conspiracy Entertainment Holdings, Inc.
Consolidated Statements of Cash Flows (Continued)
For the Year Ended
December 31,
-----------------------------
2004 2003
------------- -------------
Cash Paid For:
Interest $ -- $ --
Income Taxes 800 800
Non-Cash Investing and Financing Activities:
Capital contributed for financing fees $2,882,766.00 $ --
Common stock issued for services 280,875.00 --
Notes payable converted to common stock 1,000,000.00 --
Accounts payable settled with common stock 259,300.00 --
Forgiveness of deferred compensation by officer 450,000.00 --
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
Conspiracy Entertainment Holdings, Inc.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
The financial statements presented are those of Conspiracy Entertainment
Holdings, Inc., (formerly Lance Systems, Inc.) (the Company). The Company was
incorporated under the laws of the state of Utah on July 29, 1982 as Strategic
Recovery Corporation. On February 16, 1987, the Company merged with Lance, Inc.,
(a Utah Corporation), and changed its name to Lance Systems, Inc. The Company
was organized for the purpose of acquiring investments. However, subsequent to
the merge, the Company changed its purpose from acquiring investments to
creating, developing and selling micro computer software.
On October 7, 2003, the Company effected a reorganization and acquisition
agreement with Conspiracy Entertainment Corporation (CEC), organized in November
1997. The reorganization agreement provided for the issuance of 21,552,900
shares of common stock to the shareholder of CEC, for all outstanding shares of
CEC. Pursuant to the acquisition, CEC became a wholly-owned subsidiary of the
Company, and the name of the Company was changed to Conspiracy Entertainment
Holdings, Inc. The reorganization was recorded as a reverse acquisition using
the purchase method of business combination. In a reverse acquisition all
accounting history becomes, that of the accounting acquirer, therefore all
historical information prior to the acquisition is that of CEC. The shares
issued to the shareholders of CEC have been stated retroactively, as though a
1,026 for 1 stock split occurred on January 1, 2003. The reverse merger
adjustment is therefore all the shares held by the Lance shareholders prior to
the acquisition.
In early 2004, the Company acquired a 51% interest in Conspiracy Entertainment
Europe, LTD (CEE), a United Kingdom Corporation, to develop and distribute
certain game titles in Europe. During 2004, the Company advanced $60,000 to this
majority owned subsidiary to cover operating expenses. The financial statements
of CEE are consolidated with the Company, with a minority interest adjustment.
b. Accounting Method
The Company recognizes income and expense on the accrual basis of accounting.
The Company has elected a December 31 year end.
c. Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less to be cash equivalents.
F-22
Conspiracy Entertainment Holdings, Inc.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
e. Assignment of Accounts Receivable
Regularly, the Company assigns its receivables to vendors with recourse and
accounts for such assignments in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Assigned accounts
receivable are shown on the accounts receivable section of the balance sheet
until collected by the beneficiary. Should the accounts receivable become
uncollectible, the Company is ultimately responsible for paying the vendor and
recording an allowance for potential credit losses as deemed necessary. The
assigned accounts receivable are generally collected within 90 days; therefore,
the balance shown approximates its fair value.
f. Capitalized Development Costs and Licenses
Capitalized development costs include payments made to independent software
developers under development agreements, as well as direct costs incurred for
internally developed products.
The Company accounts for software development costs in accordance with SFAS No.
86 "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." Software development costs are capitalized once
technological feasibility of a product is established and such costs are
determined to be recoverable. Technological feasibility of a product 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, 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.
F-23
Conspiracy Entertainment Holdings, Inc.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
f. Capitalized Development Costs and Licenses - continued
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 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 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.
F-24
Conspiracy Entertainment Holdings, Inc.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
g. Property and Equipment
Software and equipment as of December 31, 2004 and 2003 consists of the
following and are recorded at cost:
2004
--------
Development tools $ 25,910
Furniture and fixtures 70,878
Equipment held under capital lease agreements 72,199
Leasehold improvements 24,457
--------
Total fixed assets 193,444
Accumulated depreciation 167,493
--------
Net software and equipment $ 25,950
========
Provision for depreciation of software and equipment is computed on the
straight-line method for financial reporting purposes. Depreciation is based
upon estimated useful lives as follows:
Computer equipment 5 Years
Software and loan costs 3 Years
Office equipment 6 Years
Furniture and fixtures 10 Years
Leasehold improvements 5 Years
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 $30,665 and $38,410 for the years ended
December 31, 2004 and 2003, respectively.
In accordance with Financial Accounting Standards Board Statement No. 144, the
Company records impairment of long-lived assets to be held and used or to be
disposed of when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the carrying
amount. At December 31, 2004 and 2003, no impairments were recognized.
F-25
Conspiracy Entertainment Holdings, Inc.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
h. Revenue Recognition
Revenue from video game distribution contracts, which provide for the receipt of
non-refundable guaranteed advances, is recognized when the games are delivered
to the distributor by the manufacturer under the completed contract method,
provided the other conditions of sale as established by the Securities and
Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101 (revised SAB No.
104), "Revenue Recognition," are satisfied:
i. Persuasive evidence of an arrangement exists.
ii. Delivery has occurred or services have been rendered.
iii. The seller's price to the buyer is fixed or determinable.
iv. Collectibility is reasonably assured
Until all of the conditions of the sale have been met, amounts received on such
distribution contracts are recorded as deferred income. Although regularly the
Company enters into the assignment of accounts receivable to vendors, the
Company presents revenues on gross basis per Emerging Issues Task Force ("EITF")
No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent,"
since the Company:
i. Acts as the principal in the transaction.
ii. Takes title to the products.
iii. Has risks and rewards of ownership, such as the risk of loss for
collection, delivery, or returns.
iv. Does not act as an agent or broker.
At all times, the Company maintains control of the development process and is
responsible for directing the vendor. Other than for payment, the customer does
not communicate with the vendor.
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.
F-26
Conspiracy Entertainment Holdings, Inc.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
i. Advertising and Marketing Expense
The Company expenses advertising and marketing costs as incurred. Advertising
and marketing expense for the years ended December 31, 2004 and 2003 was $17,975
and $184,731, respectively.
j. Earnings (Loss) Per Share of Common Stock
The Company reports loss per share in accordance with SFAS No. 128 "Earnings per
Share." Basic net loss per common share is computed by dividing net loss
available to common stockholder by the weighted average number of common shares
outstanding. Diluted net loss per common share is computed by dividing net loss
available to common stockholders by the weighted average number of common shares
and dilutive potential common share equivalents then outstanding. Potential
common shares consist of shares issuable upon the exercise of stock options and
warrants. The calculation of the net loss per share available to common
stockholders for the years ended December 31, 2004 and 2003 does not include
potential shares of common stock equivalents, as their impact would be
antidilutive.
For the Years Ended
December 31,
---------------------
Basic Earnings per share: 2004 2003
------------- -------------
Income (Loss)(numerator) $ (2,539,477) $ (2,252,444)
Shares (denominator) 34,141,270 23,704,561_
------------- -------------
Per Share Amount $ (0.07) $ (0.10)
============= =============
k. 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.
l. 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.
F-27
Conspiracy Entertainment Holdings, Inc.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
m. Functional Currency and Foreign Currency Translation
The Company's functional currency is the U.S. dollar. In accordance with
Statement of Financial Accounting Standard No. 52, "Foreign Currency
Translation", the assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at the current rate of exchange existing at
period-end and revenues and expenses are translated into U.S. dollars at the
average monthly exchange rate. Related translation adjustments are reported as a
separate component of Stockholders' Equity, whereas gains and losses from
foreign currency transactions are included in results of operations.
The cumulative effect of currency translation adjustments to a note payable (in
British Pounds) held by the Company is included in Other Comprehensive Income in
Stockholders' Equity and consists of the following at December 31, 2004 and
2003:
Balance at December 31, 2002 $ --
Effect of translation (30,082)
--------
Balance at December 31, 2003 (30,082)
Effect of translation (14,808)
--------
Balance at December 31, 2004 $(44,890)
========
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. However, during the
year ended December 31, 2004, the Company incurred a net loss of $2,563,608. In
addition, the Company had an accumulated deficit of $7,681,864 as of December
31, 2004. 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 2005. The financial statements do no include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence
F-28
Conspiracy Entertainment Holdings, Inc.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 3 - INVESTMENTS
On January 1, 1998, the Company signed a stock purchase agreement with a
shareholder in return for a 49% investment in ELO Interactive Media Co. ("ELO")
for $11,272. The Company accounts for this investment using the equity method of
accounting. Due to the immateriality of the balance, this amount is included in
other assets on the accompanying balance sheet.
During 2004, the investment in ELO has been impaired in full and a loss has been
recorded for $11,272.
NOTE 4- CAPITALIZED DEVELOPMENT COSTS AND LICENSES
Capitalized development costs and licenses at December 31, 2004 consisted of the
following:
Development
Costs Licenses
--------- ---------
Costs $ 137,346 $ 822,846
Less impairment (95,000) (234,812)
Less accumulated amortization -- (230,034)
--------- ---------
Total $ 42,346 $ 358,000
========= =========
Amortization expense was $125,398 and $1,188,726 for the years ended December
31, 2004 and 2003, respectively.
The estimated amortization of capitalized license fees are as follows for the
next five years:
2005 $173,790
2006 138,000
2007 46,210
2008 --
Thereafter --
--------
$358,000
========
During the period ended December 31, 2004, capitalized licenses were impaired
due to the lack of product sales and management's assessment of future sales.
During the years ended December 31, 2004 and 2003, a total of $234,812 and
$675,000, respectively were expensed under the caption "Cost of Sales - License
Development" due to the impairment.
F-29
Conspiracy Entertainment Holdings, Inc.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 5 - ACCOUNTS PAYABLE - SWING ENTERTAINMENTSWING! ENTERTAINMENT MEDIA AG
Historically, the Company has obtained most of its financing for development
costs through Swing EntertainmentSwing! Entertainment Media AG. The Company had
entered into various licensing agreements with Swing EntertainmentSwing!
Entertainment Media AG for the development of games. Based on these agreements,
the Company received advances from the vendor in order to finance specific
project operations.
In April 2004, the Company entered into a forgiveness and settlement agreement
with Swing Entertainment MediaSwing! Entertainment Media AG (SWING). Pursuant to
the agreement the Company was released of all obligations to or from SWINGSwing!
Entertainment Media AG approximating $2,400,000 in payables.
As of December 31, 2004, the Company had no accounts payable to Swing
EntertainmentSwing! Entertainment Media AG.
NOTE 6 - NOTES PAYABLE
The Company has the following additional note payable obligations:
December 31,
2004
------------
September 22, 2004 - Convertible debentures to
partnerships and funds; 5%
interest payable annually; secured by
the Company's assets, due August 2006,
convertible anytime at
a rate of $0.05 per common share 1,100,000
August 7, 2003 - Note Payable, to an
individual, total interest of
$88,000(50,000 pounds) due, principal and
interest due upon receipt of first
$355,000 of product sales from British
publisher, unsecured 210,128
Total Notes Payable 1,310,128
Less Current Maturities (210,128)
Total Long-Term Notes Payable $1,100,000
==========
Following are maturities of long-term debt for each of the next five years:
Year Amount
----------- -----------
2005 $ 210,128
2006 1,100,000
2006 --
-----------
Total $ 1,310,128
===========
F-30
Conspiracy Entertainment Holdings, Inc.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 6 NOTES PAYABLE (continued)
On February 25, 2003, the Company entered into a convertible notes payable
agreement with Calluna Capital Corporation for $450,000. The convertible note
payable was secured by the general credit of the Company, the personal guarantee
of the Company's Chief Executive Officer, and 9,000 shares of outstanding common
stock held by the Chief Executive Officer. During 2004, Calluna advanced an
additional $50,000 for convertible notes payable and the entire $500,000 was
converted to 746,269 shares of the Company's common stock at a conversion price
of $0.67 per share.
On August 5, 2003, the Company entered into a convertible notes payable
agreement with Fraser Lakes Enterprises, Ltd. for $500,000. The convertible note
payable was secured by the general credit of the Company and the personal
guarantee of the Company's Chief Executive Officer, and Chief Operations
Officer. During 2004, the $500,000 was converted to 746,269 shares of the
Company's common stock at a conversion price of $0.67 per share.
On August 31, 2004, we sold an aggregate of $1,050,000 principal amount of 5%
Secured Convertible Debentures, Class A Common Stock Purchase Warrants to
purchase 21,000,000 shares of our common stock, and Class B Common Stock
Purchase Warrants to purchase 21,000,000 shares of our common stock, to four
institutional investors. We received gross proceeds totaling $1,050,000 from the
sale of the Debentures and the Warrants.
On September 28, 2004, we sold a $50,000 principal amount 5% Secured Convertible
Debenture, Class A Common Stock Purchase Warrants to purchase 1,000,000 shares
of our common stock, and Class B Common Stock Purchase Warrants to purchase
1,000,000 shares of our common stock, to one institutional investor. We received
gross proceeds totaling $50,000 from the sale of the Debentures and the
Warrants.
F-31
Conspiracy Entertainment Holdings, Inc.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 7 LEASE COMMITMENTS
The Company leases certain facilities for its corporate and operations offices
under a non-cancelable operating lease agreement that expires in April 2006. The
Company also leases certain office equipment and a vehicle under non-cancelable
capital lease arrangements that expire through September 2005. Future minimum
lease payments under non-cancelable operating and capital leases with initial or
remaining terms of one year or more at December 31, 2004 were as follows:
Year Ending Operating Capital
December 31, Leases Leases
------------ --------- ---------
2005 50,900 10,630
2006 17,132 --
Thereafter -- --
--------- ---------
$ 117,456 10,630
=========
Less amount representing interest (1,224)
---------
9,406
Less current portion (9,406)
---------
Long-term portion $ 9,406
=========
Included in property and equipment is capitalized leased equipment of $72,199
with accumulated depreciation of $59,734 at December 31, 2004.
Rent expense was $46,478 and $89,226 for the years ended December 31, 2004 and
2003, respectively.
NOTE 8 - AGREEMENTS
Employment Agreements
On January 1, 2002, the Company entered into three-year employment agreements
with its President and its Chief Operating Officer, 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 Chief Operating Officer is
also entitled to 10% of the Company's total issued and outstanding common shares
as of the date of the agreement. During 2004 and 2003, the Company recorded
$629,082 and $812,589 of compensation expense, respectively related to these
agreements. Of the compensation expense amounts, zero and $1,556 are related to
committed common stock, and $236,136 and $416,330 of deferred compensation as
related to these agreements during 2004 and 2003, respectively.
F-32
Conspiracy Entertainment Holdings, Inc.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 8 - AGREEMENTS - (continued)
Withholding Tax Payable
The Company withholds 10% of all foreign sales intended to be remitted to the
Internal Revenue Service ("IRS"). As of December 31, 2004 and 2003 the Company
withheld $136,080 and $117,400, respectively. As of December 31, 2004, the
Company had not remitted any of the 2001 through 2004 withholdings to the IRS
which is most likely subject to penalties and interest. As of December 31, 2004,
the Company had not been audited or invoiced by the IRS. The amount due at
December 31, 2004 is included in accounts payable and accrued expenses in the
accompanying balance sheet.
Vacation Accrual
During the years ended December 31, 2004 and 2003, the Company did not accrue
liabilities for vacation payable to employees. The Company's management believes
all vacation earned during and prior to 2004 was utilized by the employees of
the Company as of December 31, 2004, and accordingly, has not recorded an
accrued liability.
NOTE 9 - INCOME TAXES
The provision for income taxes is based on income and expense reported in the
financial statements, which differs from that reported for income tax purpose.
Accordingly, deferred income taxes are provided in recognition of such
differences. Temporary differences include differences between book and tax
depreciation and benefits derived from net operating losses. At December 31,
2004, the Company had net operating losses totaling approximately $7,700,000
which begin to expire in the year 2016.
Income tax liabilities, expense and deferred taxes are computed by following the
procedures outlined in Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes." The applicable federal and state tax rates in
effect at December 31, 2004 and 2003 were used in calculating the income tax
liabilities, expense, and deferred taxes.
F-33
Conspiracy Entertainment Holdings, Inc.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 9 - INCOME TAXES - (continued)
The actual tax benefit differs from the expected tax benefit computed by
applying the United States federal corporate tax rate of 34% to loss before
income taxes as follows for the years ended December 31, 2004 and 2003:
2004 2003
----------- -----------
Expected tax benefit $ (871,500) $ (765,800)
State income taxes, net of federal benefit (128,000) (112,600)
Changes in valuation allowance 1,000,300 879,200
Other -- --
----------- -----------
Total $ 800 $ 800
=========== ===========
The following table summarizes the significant components of the Company's
deferred tax asset at December 31, 2004:
2004
-----------
Deferred tax assets
Deferred revenue $ 124,000
State taxes --
Net operating lo ss carry-forwards 2,618,000
Valuation allowance (2,742,000)
-----------
Net deferred tax asset $ --
===========
The Company has recorded a valuation allowance to reflect the estimated amount
of deferred tax assets which may not be realized, principally due to the
expiration of net operating loss carry forwards. As of December 31, 2004 and
2003, a valuation allowance has been recorded in the amount of $2,742,000 and
$1,825,300, respectively.
F-34
Conspiracy Entertainment Holdings, Inc.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 10 - CONCENTRATIONS AND UNCERTAINTIES
Amounts due to one major vendor represented 0% and 74% of the net accounts
payable balance at December 31, 2004 and 2003. Total net sales earned from one
and two customers constituted 100 % of total net sales earned for the years
ended December 31, 2004 and 2003, respectively.
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.
NOTE 11 - SHAREHOLDERS' EQUITY
Common Stock
On October 7, 2003, the Company effected a reorganization and acquisition
agreement with Conspiracy Entertainment Corporation (CEC). The reorganization
agreement provided for the issuance of 21,552,900 shares of common stock to the
shareholder of CEC, for all outstanding shares of CEC. 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.
During February and March 2004, shareholders of the Company exercised their
stock warrants in the Company. The Company issued 245,000 shares of common stock
at a exercise price of $1.00 per share.
In March 2004, the Company issued 1,492,536 shares of common stock in
satisfaction of $1,000,000 in convertible notes payable.
In May 2004, the Company issued 2,215,177 shares of common stock for cash at a
price of $0.10 per share.
In August 2004, the Company issued 648,250 shares of common stock to relieve
$259,300 in accounts payable
In August 2004, the Company issued 1,500,000 shares of common stock for
consulting services at a price of $0.10 per share.
In September 2004, the Company issued 600,000 shares of common stock for private
placement services at a price of $0.14 per share.
In September 2004, the Company issued 625,000 shares of common stock for
marketing consulting services at a price of $0.075 per share.
F-35
Conspiracy Entertainment Holdings, Inc.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 11 - SHAREHOLDERS' EQUITY - (continued)
Warrants
In 2003, pursuant to the acquisition agreement between Lance Systems, Inc.
(`Lance") and Conspiracy Entertainment Corporation ("Conspiracy"), Lance
guaranteed a private placement to raise $1 million for Conspiracy. The funds
were to be raised through the issuance of 1 common share at $0.67 per share with
one attached warrant to purchase 1 share of common stock at $1 per share. In
January 2004, the funding was completed and 1,500,000 warrants were issued.
During February and March 2004 warrants were exercised for 245,000 shares of
common stock at a price of $1.00 per share.
On August 31, 2004, we sold an aggregate of $1,050,000 principal amount of 5%
Secured Convertible Debentures, Class A Common Stock Purchase Warrants to
purchase 21,000,000 shares of our common stock, and Class B Common Stock
Purchase Warrants to purchase 21,000,000 shares of our common stock, to four
institutional investors. We received gross proceeds totaling $1,050,000 from the
sale of the Debentures and the Warrants.
On September 28, 2004, we sold a $50,000 principal amount 5% Secured Convertible
Debenture, Class A Common Stock Purchase Warrants to purchase 1,000,000 shares
of our common stock, and Class B Common Stock Purchase Warrants to purchase
1,000,000 shares of our common stock, to one institutional investor. We received
gross proceeds totaling $50,000 from the sale of the Debentures and the
Warrants.
The fair value of these warrants was estimated at the date of grant using the
Black-Scholes American pricing model with the following weighted-average
assumptions for 2004: expected volatility of 146%; risk-free interest rate of
4.00 %; and expected life of five years. The weighted-average fair value of
warrants granted was $0.14 in 2004. A corresponding expense for the issuance of
warrants in 2004 totaling $2,882,766 was recorded as a financing fee in the
Statement of Operations.
Warrant pricing models require the input of highly sensitive assumptions,
including expected stock volatility. Also, the Company's warrants have
characteristics significantly different from those of traded warrants, and
changes in the subjective input assumptions can materially affect the fair value
estimate. Management believes the best input assumptions available were used to
value the warrants and that the resulting warrant values are reasonable.
F-36
Conspiracy Entertainment Holdings, Inc.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 12 - SUBSEQUENT EVENT
On February 9, 2005, the Company entered into a Securities Purchase Agreement
for the sale of an aggregate of $650,000 principal amount of 5% Secured
Convertible Debentures, 13,000,000 Class A Common Stock Purchase Warrants, and
13,000,000 Class B Common Stock Purchase Warrants, to four accredited
institutional investors. The Company received gross proceeds totaling $650,000
from the sale of the Secured Convertible Debentures and the Class A and Class B
Common Stock Purchase Warrants in the foregoing transactions.
Interest is payable on the earlier of a conversion of the Debentures (as
described below) or on the maturity date of February 9, 2007. At the Company's
election, accrued interest on the Debentures may be paid by the Company in
shares of common stock at the conversion price then in effect; provided,
however, that we may only make this election if the registration statement
covering the resale of such shares is then effective. The conversion price is
$0.05 per share, subject to adjustment for subsequent lower price issuances by
the Company, as well as customary adjustment provisions for stock splits,
combinations, dividends and the like. Payment of all amounts due pursuant to the
Debentures, as well as the Company's other obligations to the investors, is
secured by a lien on all of the Company's assets.
Each Class A Warrant is exercisable at a price of $0.20 per share from the
earlier of 65 days after its original issuance or the date on which the shares
of common stock issuable upon exercise of the Class A Warrants are registered
under the Securities Act of 1933. The Class A Warrants are exercisable until
expiration on February 28, 2010. Each Class B Warrant is exercisable at a price
of $0.05 per share from the earlier of 65 days after its original issuance or
the date on which the shares of common stock issuable upon exercise of the Class
B Warrants are registered under the Securities Act of 1933. The Class B Warrants
are exercisable until expiration 18 months after effectiveness of a registration
statement covering the resale of the shares issuable upon exercise of the Class
B Warrants (subject to extension under certain circumstances). The exercise
price of each of the Warrants is subject to adjustment for subsequent lower
price issuances by the Company, as well as customary adjustment provisions for
stock splits, combinations, dividends and the like.
Pursuant to the terms of a registration rights agreement, the Company agreed to
include the shares of common stock issuable upon conversion of the Debentures
and upon exercise of the Warrants in a registration statement under the
Securities Act of 1933 to be filed not later than 30 days after the effective
date of the registration statement, as amended, originally filed by the Company
on November 24, 2004 (the "Required Filing Date") and to use its best efforts to
cause such registration statement to be declared effective no later than 60 days
after the Required Filing Date. In the event the Company does not meet these
deadlines, it may be required to issue additional shares of common stock to the
investors under the terms of the registration rights agreement.
F-37
Conspiracy Entertainment Holdings, Inc.
Notes to the Consolidated Financial Statements
December 31, 2004 and 2003
NOTE 12 - SUBSEQUENT EVENT (continued)
The placement agent assisted the Company in connection with the sale of
Debentures, Class A Common Stock Purchase Warrants and Class B Common Stock
Purchase Warrants. In consideration for its services, the Company agreed to (i)
pay the placement agent a cash amount equal to 5.5% of the total purchase price
of the Debentures and Warrants; (ii) issue the placement agent or its designees
300,000 shares of the Company's common stock with piggy-back registration
rights; and (iii) pay the placement agent cash fee equal to 10% of the cash
exercise price of any Warrants that are exercised for cash.
The sale of the Class A Common Stock Purchase Warrants and Class B Common Stock
Purchase Warrants caused an adjustment to the expiration date of the Company's
outstanding Class 2004-B Common Stock Purchase Warrants. Each Class 2004-B
Common Stock Purchase Warrants will now expire 18 months after the effective
date of the Company's registration statement, as amended, originally filed by
the Company on November 24, 2004.
F-38
Up to 61,850,000
Shares of
Common Stock
of
Conspiracy Entertainment Holdings, Inc.
PROSPECTUS
The date of this prospectus is __________, 2005
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Our Bylaws require that we indemnify and hold harmless our officers and
directors for any obligations arising out of any acts or conduct performed on
our behalf. Specifically, our Bylaws provide that we shall and do hereby
indemnify and hold harmless each person and his heirs and administrators who
shall serve at any time hereafter as a director or officer from and against any
and all claims, judgments and liabilities to which such persons shall become
subject by reason of his having heretofore or hereafter been a director or
officer, or by reason of any action alleged to have been heretofore or hereafter
taken or omitted to have been taken by him as such director or officer, and
shall reimburse each such person for all legal and other expenses reasonably
incurred by him in connection with any such claim or liability; including power
to defend such person from all suits as provided for under the provisions of the
Utah Revised Business Corporation Act; provided, however, that no such person
shall be indemnified against, or be reimbursed for, any expense incurred in
connection with any claim or liability arising out of his own negligence or
willful misconduct.
The indemnification provision of our Bylaws do not exclude any other
right to which our officers or directors may lawfully be entitled and it does
not restrict our right to indemnify or reimburse such persons in a proper case,
even though not specifically provided for in the Bylaws. Further, our Bylaws
provide that our directors, officers, employees and agents shall be fully
protected in taking any action or making any payment or in refusing to do so in
reliance on the advice of counsel. These indemnification rights are exclusive of
any other rights to which those seeking indemnification may be entitled under
any Bylaw, agreement, vote of shareholders, or disinterested directors, or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer or employee and shall inure to the
benefit of the heirs, executors and administrators of such a person.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth an itemization of all estimated
expenses, all of which we will pay, in connection with the issuance and
distribution of the securities being registered:
Nature of Expense Amount
----------------- ------
SEC Registration fee $ 251.15
Accounting fees and expenses 5,000.00*
Legal fees and expenses 45,000.00*
----------
TOTAL $50,251.15*
* Estimated
II-1
Item 26. Recent Sales of Unregistered Securities.
The following sets forth information regarding all sales of our
unregistered securities during the past three years.
On February 25, 2003, we entered into a convertible notes payable
agreement with Calluna Capital Corporation for $450,000 of which $300,000 was
received on December 10, 2002. The convertible note was secured by our general
credit, the personal guarantee of our Chief Executive Officer, and 9,000 shares
of outstanding common stock held by our Chief Executive Officer. This
transaction was exempt from registration requirements pursuant to Regulation S
under the Securities Act of 1933, as amended. The investor is not a U.S. person
as defined in Rule 902(k) of Regulation S, and no sales efforts were conducted
in the U.S., in accordance with Rule 903(c). The investor represented that it
was not acquiring the securities for the account or benefit of a U.S. person.
The investor acknowledged that the securities purchased must come to rest
outside the U.S., and the certificates contain a legend restricting the sale of
such securities in accordance with the requirements of the Securities Act of
1933.
On August 5, 2003, we entered into a convertible notes payable
agreement with Fraser Lakes Enterprises, Ltd. for $500,000. The convertible note
is secured by our general credit and the personal guarantee of our Chief
Executive Officer and Chief Operations Officer. The convertible notes payable
are non-interest bearing and due on demand. This transaction was exempt from
registration requirements pursuant to Regulation S under the Securities Act of
1933, as amended. The investor is not a U.S. person as defined in Rule 902(k) of
Regulation S, and no sales efforts were conducted in the U.S., in accordance
with Rule 903(c). The investor represented that it was not acquiring the
securities for the account or benefit of a U.S. person. The investor
acknowledged that the securities purchased must come to rest outside the U.S.,
and the certificates contain a legend restricting the sale of such securities in
accordance with the requirements of the Securities Act of 1933.
The above convertible notes payable are non-interest bearing and due on
demand. The loans are repayable by the issuance of 1,492,537 shares of our
common stock at a preset conversion rate of $.67 per share. They were converted
and 1,492,537 shares were issued in March 2004. The conversion was exempt from
registration requirements pursuant to Regulation S under the Securities Act of
1933, as amended.
Pursuant to a Share Exchange Agreement dated May 29, 2003, we issued
21,552,900 shares of common stock to the four shareholders of Conspiracy
Entertainment Corporation, in exchange for all of the issued and outstanding
shares of common stock of Conspiracy Entertainment Corporation. This transaction
was exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were accredited investors, business associates of ours or our
executive officers, and transfer was restricted by us in accordance with the
requirements of the Securities Act of 1933.
During the first quarter of 2004, certain of our shareholders exercised
their stock purchase warrants. We issued 210,000 shares of common stock at an
exercise price of $1.00 per share, for gross proceeds of $210,000. This
transaction was exempt from registration under Section 4(2) of the Securities
Act of 1933, as amended. The offerings and sales were made to a limited number
of persons, all of whom were accredited investors, business associates of ours
or our executive officers, and transfer was restricted by us in accordance with
the requirements of the Securities Act of 1933.
On January 16, 2004, we received $50,000 from Calluna Capital
Corporation under the terms of the February 25, 2003 convertible notes payable
agreement bringing the total amount borrowed to $500,000. This transaction was
exempt from registration requirements pursuant to Regulation S under the
Securities Act of 1933, as amended. The investor is not a U.S. person as defined
in Rule 902(k) of Regulation S, and no sales efforts were conducted in the U.S.,
in accordance with Rule 903(c). The investor represented that it was not
acquiring the securities for the account or benefit of a U.S. person. The
investor acknowledged that the securities purchased must come to rest outside
the U.S., and the certificates contain a legend restricting the sale of such
securities in accordance with the requirements of the Securities Act of 1933.
On March 10, 2004, we issued 1,492,536 shares of common stock in
satisfaction of $950,000 in convertible notes payable. This transaction was
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended. The offerings and sales were made to a limited number of persons, all
of whom were accredited investors, business associates of ours or our executive
officers, and transfer was restricted by us in accordance with the requirements
of the Securities Act of 1933.
On May 17, 2004, we sold 2,792,200 shares of common stock to accredited
investors for $.10 per share, or an aggregate of $279,220. This transaction was
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended. The offerings and sales were made to a limited number of persons, all
of whom were accredited investors, business associates of ours or our executive
officers, and transfer was restricted by us in accordance with the requirements
of the Securities Act of 1933.
II-2
On August 24, 2004, we entered into a consulting agreement with Moshe
Hartstein. Under the consulting agreement, we agreed to issue Mr. Hartstein
500,000 shares of our common stock for advisory and consulting services relating
to financial matters and sales and marketing as reasonably requested by us.
These shares were issued in the name of Marina Ventures, an entity owned by Mr.
Hartstein. This transaction was exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors, business
associates of ours or our executive officers, and transfer was restricted by us
in accordance with the requirements of the Securities Act of 1933.
On August 26, 2004, we entered into a consulting agreement with Sol
Financial, Inc. Under this agreement, we issued Sol Financial 100,000 shares of
our common stock for advisory and consulting services relating to financial
matters and sales and marketing as reasonably requested by us. This transaction
was exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended. The offerings and sales were made to a limited number of persons,
all of whom were accredited investors, business associates of ours or our
executive officers, and transfer was restricted by us in accordance with the
requirements of the Securities Act of 1933.
On August 31, 2004, we sold an aggregate of $1,050,000 principal amount
of 5% Secured Convertible Debentures, Class A Common Stock Purchase Warrants to
purchase 21,000,000 shares of our common stock, and Class B Common Stock
Purchase Warrants to purchase 21,000,000 shares of our common stock, to four
institutional investors. We received gross proceeds totaling $1,050,000 from the
sale of the Debentures and the Warrants. This transaction was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, business associates of ours or our executive officers, and
transfer was restricted by us in accordance with the requirements of the
Securities Act of 1933. Each of the investors represented that the are
accredited and sophisticated investors, that they are capable of analyzing the
merits and risks of their investment, and that they understand the speculative
nature of their investment.
On October 6, 2004, we sold a $50,000 principal amount 5% Secured
Convertible Debenture, Class A Common Stock Purchase Warrants to purchase
1,000,000 shares of our common stock, and Class B Common Stock Purchase Warrants
to purchase 1,000,000 shares of our common stock, to one institutional investor.
We received gross proceeds totaling $50,000 from the sale of the Debentures and
the Warrants. This transaction was exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended. The offerings and sales were made to
a limited number of persons, all of whom were accredited investors, business
associates of ours or our executive officers, and transfer was restricted by us
in accordance with the requirements of the Securities Act of 1933. Each of the
investors represented that the are accredited and sophisticated investors, that
they are capable of analyzing the merits and risks of their investment, and that
they understand the speculative nature of their investment.
On September 28, 2004, we entered into a consulting agreement with
Scott Mac Caughern. We contracted Mr. MacCaughern to advise us on matters
including, but not limited to, developing a marketing plan for the expansion of
our business in the United States and Europe, introducing us to potential
strategic partners in the United States and Europe and investment banking
services. Under this agreement, we issued Mr. Mac Caughern: (1) a common stock
purchase warrant to purchase up to 625,000 shares of our common stock,
exercisable until August 31, 2009 at a price of $0.20 per share; and (2) a
common stock purchase warrant to purchase up to 625,000 shares of our common
stock, exercisable until August 31, 2009 at a price of $0.40 per share. The
consulting services received from Mr. Mac Caughern as consideration for the
shares of common stock and warrants were valued at $50,000. This transaction was
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended. The offerings and sales were made to a limited number of persons, all
of whom were accredited investors, business associates of ours or our executive
officers, and transfer was restricted by us in accordance with the requirements
of the Securities Act of 1933.
On February 9, 2005, we sold an aggregate of $650,000 principal amount
of 5% Secured Convertible Debentures, 13,000,000 Class A Common Stock Purchase
Warrants, and 13,000,000 Class B Common Stock Purchase Warrants, to three
accredited institutional investors for gross proceeds totaling $650,000. We also
issued 300,000 shares of common stock to Palladium Capital Advisors, LLC as a
placement agent fee in connection with these sales. These transactions were
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended. The offerings and sales were made to a limited number of persons, all
of whom were accredited investors, business associates of ours or our executive
officers, and transfer was restricted by us in accordance with the requirements
of the Securities Act of 1933. Each of the investors represented that the are
accredited and sophisticated investors, that they are capable of analyzing the
merits and risks of their investment, and that they understand the speculative
nature of their investment.
II-3
Item 27. Exhibits.
The following exhibits are included as part of this Form SB-2.
References to "the Company" in this Exhibit List mean Conspiracy Entertainment
Holdings, Inc., a Utah corporation.
Exhibit
Number Description
- -------------- ----------------------------------------------------------
2.1 Share Exchange Agreement, dated May 29, 2003, by and among
Lance Systems, Inc., Conspiracy Entertainment Corporation,
and Wallace Boyack and John Spicer (Incorporated by
reference to Definitive Information Statement on Schedule
14C, filed with the Securities and Exchange Commission on
July 2, 2003)
3.1 Articles of Incorporation (Incorporated by reference to
registration statement on Form 10-SB (File No. 000-32427),
filed with the Securities and Exchange Commission on March
9, 2001)
3.2 Articles of Amendment to Articles of Incorporation
(Incorporated by reference to registration statement on
Form 10-SB (File No. 000-32427), filed with the Securities
and Exchange Commission on March 9, 2001)
3.3 Articles of Merger (Incorporated by reference to
registration statement on Form 10-SB (File No. 000-32427),
filed with the Securities and Exchange Commission on March
9, 2001)
3.4 Articles of Amendment to Articles of Incorporation
(Incorporated by reference to Definitive Information
Statement on Schedule 14C, filed with the Securities and
Exchange Commission on July 2, 2003)
3.5 Bylaws (Incorporated by reference to registration
statement on Form 10-SB (File No. 000-32427), filed with
the Securities and Exchange Commission on March 9, 2001)
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)
II-4
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)
5.1 Opinion and Consent of Sichenzia Ross Friedman Ference LLP
10.1 Employment Agreement with Sirus Ahmadi dated January 1,
2002 (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)
10.2 Employment Agreement with Keith Tanaka dated January 1,
2002 (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)
10.3 Licensed Publisher Agreement, dated August 28, 2000, by
and between Sony Computer Entertainment America, Inc. and
Conspiracy Entertainment (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)
10.4 Publisher License Agreement, dated September 28, 2000, by
and between Microsoft Corporation and Conspiracy
Entertainment Corporation (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)
10.5 Licensed Publisher Agreement, dated October 2, 2000, by
and between Sony Computer Entertainment America, Inc. and
Conspiracy Entertainment (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)
10.6 License Agreement, dated November 9, 2001, between
Nintendo of America Inc. and Conspiracy Entertainment
Corporation (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)
10.7 License Agreement, dated November 1, 2002, between
Nintendo of America Inc. and Conspiracy Entertainment
Corporation (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)
10.8 Retail License Agreement, dated July 1, 2003, by and
between Discovery Licensing, Inc. and Conspiracy
Entertainment Corporation relating to "The Jeff Corwin
Experience" (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)
10.9 Retail License Agreement, dated July 1, 2003, by and
between Discovery Licensing, Inc. and Conspiracy
Entertainment Corporation relating to "Monster Garage"
(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)
10.10 Software License Agreement, dated July 7, 2003, between
Conspiracy Entertainment Corporation and Constant
Entertainment LLP - SEGA Limited covering North America,
Canada, Mexico and South America (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)
10.11 Software License Agreement, dated July 7, 2003, between
Conspiracy Entertainment Corporation and Constant
Entertainment LLP - SEGA Limited covering Europe
(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)
II-5
10.12 Consulting Agreement, dated August 24, 2004, between the
Company and Moshe Hartstein (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)
10.13 Consulting Agreement, dated August 26, 2004, between the
Company and Sol Financial, Inc. (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)
10.14 Consulting Agreement, dated September 28, 2004 between the
Company and Scott Mac Caughern (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)
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)
23.1 Consent of Chisholm, Bierwolf & Nilson, LLC
23.2 Consent of Sichenzia Ross Friedman Ference LLP
(incorporated in Exhibit 5.1).
Item 28. Undertakings.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and Notwithstanding the forgoing, any increase or
decrease in volume of securities offered (if the total dollar value of the
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) under the Securities Act if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement, and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned, in Santa Monica, California on
September 14, 2005.
CONSPIRACY ENTERTAINMENT HOLDINGS, INC.
By: /s/ Sirus Ahmadi
--------------------------------------
Sirus Ahmadi
Chief Executive Officer and Director
By: /s/ Keith Tanaka
--------------------------------------
Keith Tanaka
Chief Financial Officer, Principal
Accounting Officer, Secretary and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Sirus Ahmadi Chief Executive Officer September 14, 2005
----------------------------------- and Director
Sirus Ahmadi
/s/ Keith Tanaka Chief Financial Officer, Principal September 14, 2005
----------------------------------- Accounting Officer, Secretary
Keith Tanaka and Director
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