Artificial Life (ALIF) Q3 2010 Results and 2011 Product Strategy

Yesterday Artificial Life announced its third quarter results for 2010 showing again strong increases in revenues and profits.

Business Highlights for Q3, 2010:

The Company's flagship m-commerce platform Opus-M(TM) drives strong revenue growth in Q3 2010 with quarterly revenues exceeding US$10 mm for the first time (a 21% increase over 2009), and a net profit exceeding US$5 mm (a 29% growth compared to 2009).

The strongest revenue generators for the Q3 2010 were Opus-M(TM) and the mobile health care and telemedicine products Mobil Diab(R), which complements the newly released diabetes monitoring iPhone app GluCoMo(TM).

The demand for the Company's iPhone and iPad games continues to be very strong. The total number of iPhone/iPad game downloads generated in 2010 through October 31, 2010 was approximately 12 million compared to approximately 8 million for the entire fiscal year of 2009. This brings the total number of iPhone downloads generated to approximately 20 million to date.

The Company also announced its 2011 product strategy and expansion plans: more focus on Android and new social network games and business products.

The strong growth and demand for its iPhone and smartphone products encourages the Company to develop more iPhone/iPad games and apps and to expand into more mobile growth sectors globally. The Company plans to venture boldly into the social gaming and social business apps arena. Based on its powerful Opus-M(TM) platform, new engaging and innovative social network business products are scheduled for Q1 2011 release.

To satisfy the increasing demand for Android and smartphone content from its partners, the Company plans to launch Android versions for most of its existing and successful iPhone/iPad apps and games. The focus will be on engaging social network games and augmented reality games and apps.

The Company also plans to launch several groundbreaking new Android business apps and to port its GluCoMo(TM) product line to Android. The Company plans to release at least 20 Android apps and games in 2011 with the first batch of products to be released in Q1 2011. The Company plans to release more Windows Phone 7 products as well in the coming year having recently branched out onto this emerging platform.

The flagship product Opus-M(TM) will be further enhanced in 2011 with the addition of several new functional modules such as augmented reality interfaces. Further details will be announced.

In 2011, the Company's new subsidiary Green Cortex, Inc. is expected to start its full operations and to launch its first products to consumers.

"We are very satisfied with our growth and financial performance this year with another record quarter in terms of revenues and profits in Q3, 2010. We expect further strong growth for the remainder of the year and for 2011," said Frank Namyslik, CFO of Artificial Life, Inc.

"Our business is doing very well and we continue to expand, especially in the m-commerce arena with our flagship product Opus-M(TM) as the foundation of our growth. The strong demand for iPhone/iPad products coincides with the growing needs of all smartphone users for top quality applications. We see increased demand in many app outlets such as the Android Market. Therefore, in 2011, we will focus on further enhancing Opus-M(TM) and on the development of: new iPhone/iPad apps, more Android apps and ports, new augmented reality apps, and new green products for our subsidiary, Green Cortex, Inc. We will place particular focus on innovative social networking games and business apps across multiple platforms. We are preparing several substantial new partnerships and joint ventures. In short, it seems that 2011 will be a very exciting and a very busy year for us," said Eberhard Schoneburg, CEO of Artificial Life, Inc.

Financial Results

Results of Operations -- Quarter Ended September 30, 2010 compared to Quarter Ended September 30, 2009
Over $10.5 mm in revenues, over US$5 mm in net profits
Revenues:
Revenues for the quarter ended September 30, 2010 were US$10,560,747 as compared to US$8,723,481 for the quarter ended September 30, 2009. The increase of revenues of US$1,837,266 or 21% was mainly due to revenue recognized from global license deals for its m-commerce platform, Opus-M(TM), as well as license income from the sales of its Mobil-Diab(R) product.

Cost of Revenues:
Cost of revenues mainly consisted of amortization of intangible assets. Cost of revenues for the quarter ended September 30, 2010 was US$3,463,190 as compared to US$1,732,798 for the quarter ended September 30, 2009. The increase of US$1,730,392 or 100% was primarily due to the increased amortization of additional license rights acquired and write-off of certain license rights.

Gross Margin:
Gross margin for the quarter ended September 30, 2010 was US$7,097,557 as compared to US$6,990,683 for the quarter ended September 30, 2009. The increase of US$106,874 or 2% was mainly due to revenue recognized from global license deals for its m-commerce platform, Opus-M(TM), and Mobil-Diab(R), offset by amortization of license rights acquired.

General and Administrative:
General and administrative expenses consisted of salary for administrative personnel, rent, professional fees, and costs associated with employee benefits, supplies, communications, travel, and allowance for doubtful accounts. General and administrative expenses for the quarter ended September 30, 2010 were US$627,137 as compared to US$464,360 for the quarter ended September 30, 2009. The increase of US$162,777 or 35% was mainly due to increase in professional fees.

Sales and Marketing:
Sales and marketing expenses consisted of salary expenses of sales and marketing personnel, costs relating to marketing materials, advertising, trade show related expenses, traveling and public relations activities. Sales and marketing expenses for the quarter ended September 30, 2010 were US$442,475 as compared to US$527,476 for the quarter ended September 30, 2009. The decrease of US$85,001 or 16% was mostly due to decrease in consulting expenses.

Research and Development:
Research and development expenses consisted of salary, training, consulting, subcontracting and other expenses incurred to develop and fulfill the design specifications and productions of the products and services from which they derive their revenues. Research and development expenses for the quarter ended September 30, 2010 were US$651,886 as compared to US$927,212 for the quarter ended September 30, 2009. The decrease of US$275,326 or 30% was primarily due to decrease in consulting and data hosting expenses.

Depreciation and Write-off of Fixed Assets:
Depreciation and write-off of fixed assets for the quarter ended September 30, 2010 was $1,095,313 as compared to US$1,320,867 for the quarter ended September 30, 2009. The decrease of US$225,554 or 17% was primarily due to decrease in write-off of certain fixed assets.

Other Income / Expense:
Other income for the quarter ended September 30, 2010 was US$1,612,389 as compared to US$124,656 for the quarter ended September 30, 2009. Net other income of US$1,612,389 was primarily due to foreign currency transaction gain of approximately US$1,624,000 in this quarter compared to loss of approximately US$56,000 in the third quarter of 2009. The increase in foreign currency transaction gain was mostly due to the significant effect of the strengthening of the Euro relative to the United States Dollar on the trade receivables denominated in Euro.

Income from Operations and Net Income:
Income from operations for the quarter ended September 30, 2010 was US$4,280,746, an increase of 14%, as compared to income from operations of US$3,750,768 for the quarter ended September 30, 2009. The income from operations is primarily due to revenue of US$10,560,747 generated from global license deals for its m-commerce platform, Opus-M(TM) and Mobil-Diab(R), offset by the cost of revenue of US$3,463,190 and the operational cost of US$2,816,811.

Net income for the quarter ended September 30, 2010 was US$5,055,651, an increase of 29%, as compared to net income of US$3,906,424 for the quarter ended September 30, 2009. The basic and diluted net income per share for the third quarter of 2010 was US$0.08, as compared to US$0.08 for the quarter ended September 30, 2009.

Cash and Liquidity:
As of November 11, 2010, cash receipt of approximately US$10.8 million has been collected from its customers in settlement of the trade accounts and installment receivables, as compared to the cash receipt of approximately US$4.6 million collected during the full year of 2009. As of November 11, 2010 the Company has US$1.87 million in cash.

The strong growth story continues and the company expands into the social gaming and social business apps sector which we view as positive. First nine monts EPS $0.20, Q3 $0.08. We believe EPS 2010 will be around $0.26-$0.27. The company expects that cash flows generated from 2010 operations and additional financing through various sources will be sufficient to fund operations, working capital, and commitment needs for the next 12 months. The stock price just trades above book value of $1.02 and has an P/E-ratio below 5.

POSITION: LONG