Artificial Life, Inc., a Delaware corporation with global headquarters in Hong Kong, is one of the pioneers in the field of artificial intelligence and so called "intelligent" software robots (also known as "bots" or "smart bots" or "intelligent agents"). Our products are sophisticated software programs based on complex pattern matching algorithms, artificial intelligence and proprietary artificial life methods.
Since 2003 we provide leading edge entertainment products, games and technologies for the latest 2nd and 3rd generation (2G and 3G) telecommunications devices and mobile phones. In December 2004 we won the global Best Mobile Game Award by Ericsson and in March 2005 the Hong Kong Digital Entertainment Excellence Award for the Best Mobile Entertainment Product.
Artificial Life, Inc. was first incorporated in Delaware in November 1994 as Neurotec International Corp., a wholly owned subsidiary of a German multimedia and Internet solutions company, Neurotec Hochtechnologie GmbH, founded by Eberhard Schoeneburg, Artificial Life's current president, chief executive officer and chairman. In July 1997, Mr. Schoeneburg sold all of his shares of Neurotec Hochtechnologie GmbH to the remaining stockholders and contemporaneously purchased 100% of the shares of its then Boston based subsidiary Neurotec International Corp. from Neurotec Hochtechnologie GmbH (the "Management Buyout"). In August 1997, we changed our name to Artificial Life, Inc and entered the business area of intelligent agents and software robots. In December 1998 Artificial Life, Inc. had an initial public offering of its common stock on the Nasdaq Small Cap Market and now trades on the Over The Counter market (OTC) under the ticker symbol: ALIF.
INDUSTRY BACKGROUND
We have developed our ALife SmartBot(TM) products and product suites to assist in solving problems relating to information retrieval, Web navigation, customer self-help, self-service applications and direct marketing on the Internet as well as wealth building and investment portfolio management. Since 2002 we have enhanced our web technology and since 2003 we are able to also serve and handle a wide variety of mobile devices and mobile phones with a focus on leading edge 3G network applications and devices. Some of our products are designed to even allow communication in natural language and to respond "intelligently" and human like using avatar interfaces to a user's command or inquiry, and in some cases, to even act autonomously.
The SmartBot products are based on our proprietary ALife-SmartEngine technology. The ALife-SmartEngine is based on over ten years of experience with artificial intelligence and the core component that gives our products the ability to converse with their users in natural language to process and respond to natural language commands or questions. The Alife-SmartEngine gives our products the capability to act in an intelligent and human like way. It provides our products with a short-term and long-term memory, knowledge bases, contextual understanding and a sophisticated goal system. The ALife-SmartEngine contains several "intelligent" modules that process and interpret textual input. These modules work together to break down the essential components of human conversation -- detailed knowledge of certain topics, casual talk about topics of interest ("small talk"), memory of previously
discussed topics, and some emotional content and intentions that drive the conversation -- and use these components to "understand" and respond to the user in a manner that is more human-like and less machine-like than most "query-based" software. We believe that our products will allow people to interact with computers in a more natural and intelligent way -- similar to a conversation with a human being.
Historically, general natural language understanding and processing software programs (often classified under the category "artificial intelligence") have focused on understanding the meaning of a sentence in the same way as a human would, so that the software program could react appropriately to a spoken sentence or a sentence typed in at the keyboard. These programs have had only limited success. Our ALife-SmartEngine instead attempts to mimic comprehension of a sentence by using complex pattern matching techniques to determine the actual goals and intentions of the user. An important advantage of our pattern matching approach is that it is language independent and hence allows our products to communicate in any given natural language and even in double-byte encoded languages such as Chinese or Japanese. In addition, by "understanding" the user's goals and intentions, ALife-SmartEngine-based products are being designed to possess the ability to actively drive and maintain a conversation about certain topics, and not merely react to the user. Our products are thus designed to engage people in dialogues and conversations. This allows our clients to gather highly rich information and content derived from client communications.
Our ALife-SmartEngine stores information in "Knowledge Bases," databases which can be combined or exchanged to give the derived products differing sets of expertise. Customers can add information to a Knowledge Base using a special "Knowledge Editor." The ALife-SmartEngine has several linked stages that read text-based input and produce spoken or text-based output. When a user types in text, the pre-processed input is routed to a parser. The parser then converts the input from a stream of text to a series of words and phrases. An analysis module draws on the topic information in the memory section of the ALife-SmartEngine as well as the syntactic structure of the sentence derived from the Knowledge Base. The major control module of the ALife- SmartEngine is a meta-control module (the "Meta Controller") that is essential for switching between the different speech processing modules to process the input and prepare the appropriate response corresponding to a given input. The Meta Controller picks a reply appropriate to the perceived intention of the user by applying a set of rules that define the conversational strategy of the bot. All modules communicate through the Meta Controller, which also coordinates and balances the weighting of each of the separate modules as the bot prepares its composite action.
Most of our SmartBots communicate on mobile devices as on the Internet with the user via a life-like three-dimensional graphical interface known as an "avatar." Most products come with a custom human-like three dimensional animated avatar. The avatar may also be customized for specific client purposes, including using pre-existing branded icons or displays.
PRODUCTS
Artificial Life, Inc. currently offers the following main products released in 2005:
Mobile Products
"V-Girl(TM) - your virtual girlfriend" Vol I
During 2004 and 2005 we have developed and released several products for 3G mobile services. Our flagship product is "V-Girl(TM) - your virtual girlfriend" Vol I a highly interactive game for 3G phones. This product has won several major media awards such as the Best Mobile Game Award by Ericsson in December 2004 and the Hong Kong Digital Entertainment Excellence Award in March 2005 as the Best Mobile Entertainment Software. The product has received immediate global media attention after its release. It has been prominently featured and covered by dozens of TV stations around the globe and hundreds of major newspapers and magazines.
V-Girl(TM) is a very unique and innovative mobile entertainment product. It is based on thousands of high quality 3 dimensional animations and short interactive animated video clips of several virtual girls. The virtual characters "live" in a 3 dimensional animated world accessible only on mobile phones. Players can interact with the V-Girls through real time chat and several interactive game functions and dozens of build in mini games.
V-Girl(TM) is also based on a simulated real time calendar and real time events and features. Players have to interact with the virtual character to achieve access to higher levels of the game. For corporate partners and clients we offer sophisticated product placement opportunities within the game.
As of March 2006 V-Girl(TM) has been launched in Hong Kong, Taiwan, Malaysia and Brunei and is scheduled for launch in several more countries globally during 2006. V-Girl(TM) is also available in scaled down versions for 2.5G and 2.75G networks.
More details about the product are available at: WWW.V-GIRL.COM --------------
"V-boy(TM) - your virtual boyfriend"
The V-boy product is similar in concept and user experience to the V-girl product however it targets more the younger female audiences. Technically it is even more advanced then the V-girl product as it uses full scale motion capture data and motion capture technology to enhance the visual animations of the virtual characters in the game to make their appearance even more human like.
More details about this product are available at: WWW.VIRTUAL-BOYS.COM --------------------
V-disco(TM)
Our V-disco is another highly innovative 3G mobile application. Users of the V-disco can watch and create 3D dancing avatar animations that match certain songs. The V-disco therefore provides not only a high functionality for listening to modern music on a phone but also allows the users to interactively create sophisticated animations matching the selected songs. The user created animations can also be shared with other users or friends.
More details about the product are available at: WWW.V-DISCO.COM ---------------
V-penguins(TM)
The virtual penguin game is the first massive multi player game we have designed and developed. The game is also available as a single player game. The virtual penguin game mimics the life of the famous Emperor penguins in the Antarctica. Players take on the role of penguins and have to find mates, breed and hatch eggs and survive in the hostile environment. In the multi player version players can interact or compete with each other in raising as many chicks as possible.
More details about the product are available at: WWW.V-PENGUINS.COM ------------------
ALIFE - SMARTENGINE MOBILE PLATFORM (SEMP):
In 2003 we developed a next generation mobile technology platform called SmartEngine Mobile Platform (SEMP) for 2G and 3G phones and mobile devices. The technology was first launched in February 2004 with a major Hong Kong operator and was rolled out in several other countries in 2005. The SEMP is
continuously being developed further to allow the serving of new upcoming phone types and other platforms such as Brew.
The SEMP allows the use of interactive intelligent agents and interactive video applications on mobile devices such as 2G or 3G phones or personal digital assistants.
The key features of the new SmartEngine Mobile Platform are:
- automated adjustments to frame rates, resolutions and device features - automated style formatting for screen layouts - automated protocol detection and adjustment - device profile detection and management - real-time presentation formatting engine - server side user profiling - user/application specific content delivery functions - integrated billing modules with open API - full natural language interface for any given language - full integration of Artificial Intelligence SmartEngine(TM) features
The SmartEngine Mobile Platform provides a robust content delivery mechanism with powerful extensibility features to allow for the handling of new mobile devices, protocols, markup tags as well as fully customizable style formatting for specific handsets. Some of the most utilized features of the SEMP are its real-time image formatting engine which takes a high-resolution server side image and re-samples it based on the mobile profile of a connecting device. This produces the best viewing experience on any device that is recognized. Device profiles are easily added to the system to give greater support for a large number of handsets.
The SEMP's core is augmented by enabling modules such as UserProfiling and Billing. UserProfiling provides a means of storing user-specific information which remains persistent from session to session and allows the platform to provide a more unique user experience as well as to give the operators more useful information about their patrons. A billing interface with an open API gives specific implementations the ability to connect to operators and charge customers seamlessly. Furthermore, the SEMP integrates with Artificial Life's SmartEngine(TM) to provide a natural language intelligent interface especially suited for mobile entertainment and education applications.
The SEMP platform is implemented in J2EE and runs under a suitable application server which provides fault-tolerance and scalability support. SEMP is also designed to scale with the mobile network it is deployed on. As an example, if a 3G device or handset with video playback/streaming support connects to a service running on top of SEMP, then appropriate content will automatically be served. This means that frame rate, resolution, and encoding is chosen to match the capabilities of the connecting mobile device.
As a result, applications that leverage the SEMP are able to reach a wide customer base, serve and support all major handsets, provide unique viewing and interaction experiences, and automatically render out formatted pages best suited for the connecting device and allow new types of intelligent interactive mobile video applications.
All our current 3G mobile products are based on the SEMP platform.
INTERNET PRODUCTS
Artificial Life, Inc. has developed several other major Internet based products. We are still offering these to potential clients, however, the sale and development of these products is no longer part of our core business activities.
ALIFE-SMARTBOT SUITE:
The ALife SmartBot Suite addresses the needs of the eCRM (Customer Relationship Management) market and the rapidly growing self-help, self-service markets as a front-end piece or gateway and will improve the overall user experience for Web visitors, build strong and loyal customer relationships, and give companies a distinct competitive advantage in customer relationship management, sales and support through employment of the following features:
ALife-Webguide
These SmartBot versions engage the user in a "conversation" through questions and answers and, upon learning the user's interests, are designed to display Web pages that match the content of the "conversation" or to suggest links to other locations on the Web site. In an e-commerce application, the ALife-WebGuide can be designed by the Web site host to function like a human sales associate at a retail store, greeting customers coming through the door of the virtual store and assisting them with advice and background information about products and prices. This bot allows the use of a customizable animated Avatar interface. In the first quarter of 2004, we released the first mobile adaptation of our webguide technology as part of the SmartEngine Mobile Platform (SEMP).
CONSULTING AND PRODUCT SERVICES
We provide consulting and custom specific project and product development services either directly or by utilizing the resources of partners, resellers and consultants. In addition, we provide support for the creation and maintenance of our mobile products and upon request customer specific back-office tools for analyzing client profiles gathered by our bots either ourselves or through our partners and resellers.
BUSINESS STRATEGY
In 2003 we developed several new products and technologies and re-focused our efforts towards developing and selling applications for mobile communication devices. Our target markets are mostly Asia and Europe. Since 2004 the Company has become a leading provider of content, intelligent applications and technology for mobile devices with a strong focus on 3G network applications by winning the global Best Mobile Game Award.
With the successful release of a series of leading edge 3G entertainment products such as "V-Girl(TM) - your virtual girlfriend", V-boy(TM) - your virtual boyfriend, V-disco(TM) and Virtual Penguins(TM) we started targeting specifically the global 3G network operators and the countries in which 3G networks have been launched or are currently being launched. We expect this to be our main focus for 2006 and 2007.
Our business strategy for 2006 and 2007 is to roll out our new products and services and to co-operate with global as well as local channel partners and resellers in Asia, Europe and the USA, such as telecommunication operators and major content aggregators and media companies including The Walt Disney Company, to attract a larger number of end users and clients for our products and services.
We continue to work towards becoming a worldwide leader for 3G mobile games and applications and technology. To achieve this objective, our strategy includes the following key elements:
CREATE MULTIPLE REVENUE STREAMS. We believe that our product lines, corporate and local language customizations, mobile computing technologies and our potential user base in Asia will present a significant opportunity to develop and maintain multiple revenue streams resulting from product sales, licensing, revenue sharing as well as from maintenance, customization and consulting fees. As these different revenue streams mature, we will continuously monitor their revenue contribution and consequently plan to expand, localize, adapt, discontinue or replace existing programs based on their success and may introduce new programs to supplement or replace existing programs and adjust our efforts to market demands.
ESTABLISHING OF M-COMMERCE PORTAL: To be more independent from third party providers, resellers and operators we believe that establishing an m-commerce website which allows end users to purchase products directly from us is a key strategic component. Therefore we plan to launch a general m-commerce portal for most of our products in the second quarter of 2006.
PARTNERSHIP WITH MEDIA COMPANIES: We have just signed a major publishing agreement with The Walt Disney Company for the USA, Canada and the UK. The co-operation with such global media companies allows us to use their client base as well as their content. We will pursue similar publishing agreements with other media companies in the future.
FUTURE PRODUCT ENHANCEMENT
Through all of 2005 we have expanded our R&D efforts essentially to develop more leading edge 3G products and to customize and localize our products for the target markets and to develop new mobile computing server technologies. We intend to continue these efforts to achieve our goal of becoming the leader in mobile games for 3G networks. R&D expense for 2004 and 2005 was approximately $110,000 and $104,000, respectively.
MARKETING AND SALES
We are currently selling and marketing our products through a variety of methods and channels, including but not limited to direct sales, distribution and channel agreements, strategic relationships and third party providers and plan to continue to do so going forward. We believe that partner networks and strategic relationships, such as our co-operation with The Walt Disney Company, and alliances especially in Asia and Europe provide an effective means of entering targeted vertical markets while targeted direct sales are instrumental for obtaining large, must-have clients. It is our belief that this strategy will provide a cost effective means of achieving maximum exposure for our products and services.
In 2005 two European customers generated 82% of total revenues.
STRATEGIC ALLIANCES AND JOINT VENTURES
In the BENELUX countries we partner with MBE Mercier and ThinkBusiness BVBA in Brussels, Belgium, and with Mobile Digital Media B.V., in Amsterdam, Holland.
In 2003 we signed a partnership and reseller agreement with Ericsson Hong Kong for the mobile phone industry. This partnership was extended to a global co-operation with Ericsson in 2004.
In 2004 we signed up Cape Town based Maxiwise Ltd. in South Africa as a reseller for Africa and Spinova Ltd. for the North African countries.
In 2005 we signed reseller and distribution agreements with several major telecommunications operators in Asia such as Hutchison 3 in Hong Kong, Taiwan Mobile in Taiwan, Singtel in Singapore, Maxis in Malaysia and B-Mobile in Brunei. We expect to sign up more operators in several more countries during the coming months and years.
In early 2006 we signed a major and exclusive publishing agreement with The Walt Disney Company for our V-girl(TM) and V-boy(TM) games.
Furthermore, we are constantly evaluating additional strategic potential alliances with companies in Hong Kong, Taiwan, Singapore, Peoples Republic of China, Japan, Korea, the United States of America, Europe, and South East Asia for marketing and re-selling our products and applications.
PRODUCT DEVELOPMENT
In 2003 we pursued certain R&D efforts, mainly to customize and localize our products to the Asian markets and to make them available on mobile communications platforms. As a result of these efforts, we have released and are continuously improving our SmartEngine Mobile Platform(TM) (SEMP) for the deployment of 3G and other mobile applications. During 2004 and 2005 we developed our current flagship V-Girl(TM) and other sub-modules of V-Girl(TM), including our V-boy(TM), V-disco(TM) and Virtual Penguins(TM) products that we released in 2005.We intend to further adapt and improve our technology through in-house R&D efforts in the coming months and years. To date we have not generated any major revenues from these efforts and there can be no guarantee that we will be able to generate substantial revenues from sales of these new products.
COMPETITION
The market for most of our products and services is still emerging and constantly evolving. Competition may intensify as the markets mature and more established software companies may become increasingly involved. Barriers to market entry may be considered as relatively insubstantial. However, we believe that the principal competitive factors for companies seeking to become involved in the software robot and intelligent agent mobile applications business are our core technology, delivery methods and platforms, a leading edge technology, a global brand recognition for our flagship games, and the ease of use and integration in existing environments and legacy systems.
We use our core technology, the ALife-SmartEngine(TM) and SEMP, in a wide variety of business areas but mostly in the 3G network business. Although we have not yet identified any direct competitors in exactly the same areas in which we are active, companies that have overlapping activities and therefore could potentially be regarded as our competition. Such firms include, among others, Active Buddy, Inc; Anthropics; Ask Jeeves; Autonomy, Inc.; Brightware, Inc.; Cybird; Digital Marketing Concepts, Inc.; eGain, Inc.; eAssist Global Solutions, Inc; Electronic Arts, Inc.; General Magic, Inc.; GK Intelligent Systems, Inc.; Green Tomato; Haptek, Inc.; Headpedal, Inc.; Intellix A/S; Kinetoscope, Inc.; Kiwi Logic AG; Microsoft Corporation; Netsage Corp.; Nintendo, Nuance, Inc.; Novomind AG; Pulse; Sega; Sony; SRA International, Inc. THQ, Inc. and Virtual Personalities, Inc. In addition, there is also certain free-ware available such as ALICE provided and supported by universities or non-profit organizations.
In the mobile area the following companies may be considered potential competitors even though none of them has - to our knowledge - yet produced any direct competing product to us: Bandai Networks Co., Ltd.; BANPRESTO Co., Ltd.; Capcom Co., Ltd; Com2uS Corp.; CYBIRD Co., Ltd.; Digital Chocolate, Inc.; Digital-Red Mobile Software Co., Ltd.; Eidos Interactive Ltd. (under SCi Entertainment Group); Electronic Arts, Inc.; Entaz Co., Ltd.; Gameloft GAMEVIL, Inc.; Glu Mobile; G-mode Co., Ltd.; iFone Ltd.; InfoSpace, Inc.; IN-FUSIO; I-Play (under Digital Bridges Limited); Jaleco Ltd.; JAMDAT Mobile Inc.; Konami Digital Entertainment, Inc.; KongZhong Corp.; Kuju Mobile; M DREAM Co., Ltd.;
MFORMA Group, Inc.; Mr. Goodliving Ltd. by RealNetworks, Inc.;Namco Networks America Inc.; Pearl-in-Palm Information Technology Ltd.; Player One Ltd.: Reakosys, Inc.; Sammy Corp.; SEGA Mobile, division of SEGA Corporation; Square Enix Co., Ltd.; Square Enix, Inc.; Superscape Group plc; Taito Corp.; THQ Wireless Inc.; Tianjin Mammoth Technology Co., Ltd.
These lists may not be complete and may change and substantially increase over time. Some of our existing and potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than us. Such competitors are able to commit operating resources to product development and enhancement, engage in more thorough marketing campaigns for their products and services, be more aggressive from a pricing standpoint and make more attractive offers to potential employees and partners.
To the extent one or more of our competitors introduce products that more fully address customer requirements, our business could be materially adversely affected. There can be no assurance that we will be successful in customizing contracted enhancements to our existing products incorporating new technology on a timely basis, or that our products will adequately address the changing needs of the marketplace. If we are unable to customize existing products in a timely manner in response to changing market conditions or customer requirements, our business, prospects, financial condition and results of operations will be materially adversely affected.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We rely upon trade secrets, know-how, copyrights and certain continuing technological innovations to develop and maintain our competitive position. We seek to protect such information, in part, by entering into confidentiality agreements with our corporate partners, collaborators, employees and consultants. These agreements provide that all confidential information developed or made known during the course of the individual's or entity's relationship with us is to be kept confidential and not be disclosed to third parties except in specific circumstances. We have endeavored to cause our employees to execute forms of Confidentiality and Inventions Agreements which provide that, to the extent permitted by applicable law, all inventions conceived by an individual during the individual's employment will remain our exclusive property. There can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors. Further, there can be no assurance that we will be able to protect our copy-rights, trade secrets or that others will not independently develop substantially equivalent proprietary information and techniques.
In 2001 we filed for three patent applications pertaining primarily to our core ALife-SmartEngine. However, in the second half of 2002 we decided to no longer maintain two of our patent applications out of cost considerations and because we believe that our current technology has been improved, modified and enhanced strongly since we first applied for the original patent applications. The continuous change of the technology markets and especially the fast moving mobile technology markets forces technology providers to continuously enhance and improve their technology on a timely and close to market basis.
EMPLOYEES
We adjusted our employment strategy and policy during the global market downturn in 2001 and 2002 to reduce cost and overhead expenses. In 2003 we slowly and carefully re-expanded and hired new employees and consultants. We also have maintained access to former employees to assist us on a contractual basis as we may require from time to time. As of December 31, 2004 we had 11 full time employees and contractually engaged 16 full time consultants. As of December 31, 2005 full time employees and contractual consultants were 30 and 7 respectively. We expect to substantially increase the number of employees in 2006.
Our employees and consultants are not represented by any labor unions. We consider our relations with our employees and consultants to be good.
Since 2003 we provide leading edge entertainment products, games and technologies for the latest 2nd and 3rd generation (2G and 3G) telecommunications devices and mobile phones. In December 2004 we won the global Best Mobile Game Award by Ericsson and in March 2005 the Hong Kong Digital Entertainment Excellence Award for the Best Mobile Entertainment Product.
Artificial Life, Inc. was first incorporated in Delaware in November 1994 as Neurotec International Corp., a wholly owned subsidiary of a German multimedia and Internet solutions company, Neurotec Hochtechnologie GmbH, founded by Eberhard Schoeneburg, Artificial Life's current president, chief executive officer and chairman. In July 1997, Mr. Schoeneburg sold all of his shares of Neurotec Hochtechnologie GmbH to the remaining stockholders and contemporaneously purchased 100% of the shares of its then Boston based subsidiary Neurotec International Corp. from Neurotec Hochtechnologie GmbH (the "Management Buyout"). In August 1997, we changed our name to Artificial Life, Inc and entered the business area of intelligent agents and software robots. In December 1998 Artificial Life, Inc. had an initial public offering of its common stock on the Nasdaq Small Cap Market and now trades on the Over The Counter market (OTC) under the ticker symbol: ALIF.
INDUSTRY BACKGROUND
We have developed our ALife SmartBot(TM) products and product suites to assist in solving problems relating to information retrieval, Web navigation, customer self-help, self-service applications and direct marketing on the Internet as well as wealth building and investment portfolio management. Since 2002 we have enhanced our web technology and since 2003 we are able to also serve and handle a wide variety of mobile devices and mobile phones with a focus on leading edge 3G network applications and devices. Some of our products are designed to even allow communication in natural language and to respond "intelligently" and human like using avatar interfaces to a user's command or inquiry, and in some cases, to even act autonomously.
The SmartBot products are based on our proprietary ALife-SmartEngine technology. The ALife-SmartEngine is based on over ten years of experience with artificial intelligence and the core component that gives our products the ability to converse with their users in natural language to process and respond to natural language commands or questions. The Alife-SmartEngine gives our products the capability to act in an intelligent and human like way. It provides our products with a short-term and long-term memory, knowledge bases, contextual understanding and a sophisticated goal system. The ALife-SmartEngine contains several "intelligent" modules that process and interpret textual input. These modules work together to break down the essential components of human conversation -- detailed knowledge of certain topics, casual talk about topics of interest ("small talk"), memory of previously
discussed topics, and some emotional content and intentions that drive the conversation -- and use these components to "understand" and respond to the user in a manner that is more human-like and less machine-like than most "query-based" software. We believe that our products will allow people to interact with computers in a more natural and intelligent way -- similar to a conversation with a human being.
Historically, general natural language understanding and processing software programs (often classified under the category "artificial intelligence") have focused on understanding the meaning of a sentence in the same way as a human would, so that the software program could react appropriately to a spoken sentence or a sentence typed in at the keyboard. These programs have had only limited success. Our ALife-SmartEngine instead attempts to mimic comprehension of a sentence by using complex pattern matching techniques to determine the actual goals and intentions of the user. An important advantage of our pattern matching approach is that it is language independent and hence allows our products to communicate in any given natural language and even in double-byte encoded languages such as Chinese or Japanese. In addition, by "understanding" the user's goals and intentions, ALife-SmartEngine-based products are being designed to possess the ability to actively drive and maintain a conversation about certain topics, and not merely react to the user. Our products are thus designed to engage people in dialogues and conversations. This allows our clients to gather highly rich information and content derived from client communications.
Our ALife-SmartEngine stores information in "Knowledge Bases," databases which can be combined or exchanged to give the derived products differing sets of expertise. Customers can add information to a Knowledge Base using a special "Knowledge Editor." The ALife-SmartEngine has several linked stages that read text-based input and produce spoken or text-based output. When a user types in text, the pre-processed input is routed to a parser. The parser then converts the input from a stream of text to a series of words and phrases. An analysis module draws on the topic information in the memory section of the ALife-SmartEngine as well as the syntactic structure of the sentence derived from the Knowledge Base. The major control module of the ALife- SmartEngine is a meta-control module (the "Meta Controller") that is essential for switching between the different speech processing modules to process the input and prepare the appropriate response corresponding to a given input. The Meta Controller picks a reply appropriate to the perceived intention of the user by applying a set of rules that define the conversational strategy of the bot. All modules communicate through the Meta Controller, which also coordinates and balances the weighting of each of the separate modules as the bot prepares its composite action.
Most of our SmartBots communicate on mobile devices as on the Internet with the user via a life-like three-dimensional graphical interface known as an "avatar." Most products come with a custom human-like three dimensional animated avatar. The avatar may also be customized for specific client purposes, including using pre-existing branded icons or displays.
PRODUCTS
Artificial Life, Inc. currently offers the following main products released in 2005:
Mobile Products
"V-Girl(TM) - your virtual girlfriend" Vol I
During 2004 and 2005 we have developed and released several products for 3G mobile services. Our flagship product is "V-Girl(TM) - your virtual girlfriend" Vol I a highly interactive game for 3G phones. This product has won several major media awards such as the Best Mobile Game Award by Ericsson in December 2004 and the Hong Kong Digital Entertainment Excellence Award in March 2005 as the Best Mobile Entertainment Software. The product has received immediate global media attention after its release. It has been prominently featured and covered by dozens of TV stations around the globe and hundreds of major newspapers and magazines.
V-Girl(TM) is a very unique and innovative mobile entertainment product. It is based on thousands of high quality 3 dimensional animations and short interactive animated video clips of several virtual girls. The virtual characters "live" in a 3 dimensional animated world accessible only on mobile phones. Players can interact with the V-Girls through real time chat and several interactive game functions and dozens of build in mini games.
V-Girl(TM) is also based on a simulated real time calendar and real time events and features. Players have to interact with the virtual character to achieve access to higher levels of the game. For corporate partners and clients we offer sophisticated product placement opportunities within the game.
As of March 2006 V-Girl(TM) has been launched in Hong Kong, Taiwan, Malaysia and Brunei and is scheduled for launch in several more countries globally during 2006. V-Girl(TM) is also available in scaled down versions for 2.5G and 2.75G networks.
More details about the product are available at: WWW.V-GIRL.COM --------------
"V-boy(TM) - your virtual boyfriend"
The V-boy product is similar in concept and user experience to the V-girl product however it targets more the younger female audiences. Technically it is even more advanced then the V-girl product as it uses full scale motion capture data and motion capture technology to enhance the visual animations of the virtual characters in the game to make their appearance even more human like.
More details about this product are available at: WWW.VIRTUAL-BOYS.COM --------------------
V-disco(TM)
Our V-disco is another highly innovative 3G mobile application. Users of the V-disco can watch and create 3D dancing avatar animations that match certain songs. The V-disco therefore provides not only a high functionality for listening to modern music on a phone but also allows the users to interactively create sophisticated animations matching the selected songs. The user created animations can also be shared with other users or friends.
More details about the product are available at: WWW.V-DISCO.COM ---------------
V-penguins(TM)
The virtual penguin game is the first massive multi player game we have designed and developed. The game is also available as a single player game. The virtual penguin game mimics the life of the famous Emperor penguins in the Antarctica. Players take on the role of penguins and have to find mates, breed and hatch eggs and survive in the hostile environment. In the multi player version players can interact or compete with each other in raising as many chicks as possible.
More details about the product are available at: WWW.V-PENGUINS.COM ------------------
ALIFE - SMARTENGINE MOBILE PLATFORM (SEMP):
In 2003 we developed a next generation mobile technology platform called SmartEngine Mobile Platform (SEMP) for 2G and 3G phones and mobile devices. The technology was first launched in February 2004 with a major Hong Kong operator and was rolled out in several other countries in 2005. The SEMP is
continuously being developed further to allow the serving of new upcoming phone types and other platforms such as Brew.
The SEMP allows the use of interactive intelligent agents and interactive video applications on mobile devices such as 2G or 3G phones or personal digital assistants.
The key features of the new SmartEngine Mobile Platform are:
- automated adjustments to frame rates, resolutions and device features - automated style formatting for screen layouts - automated protocol detection and adjustment - device profile detection and management - real-time presentation formatting engine - server side user profiling - user/application specific content delivery functions - integrated billing modules with open API - full natural language interface for any given language - full integration of Artificial Intelligence SmartEngine(TM) features
The SmartEngine Mobile Platform provides a robust content delivery mechanism with powerful extensibility features to allow for the handling of new mobile devices, protocols, markup tags as well as fully customizable style formatting for specific handsets. Some of the most utilized features of the SEMP are its real-time image formatting engine which takes a high-resolution server side image and re-samples it based on the mobile profile of a connecting device. This produces the best viewing experience on any device that is recognized. Device profiles are easily added to the system to give greater support for a large number of handsets.
The SEMP's core is augmented by enabling modules such as UserProfiling and Billing. UserProfiling provides a means of storing user-specific information which remains persistent from session to session and allows the platform to provide a more unique user experience as well as to give the operators more useful information about their patrons. A billing interface with an open API gives specific implementations the ability to connect to operators and charge customers seamlessly. Furthermore, the SEMP integrates with Artificial Life's SmartEngine(TM) to provide a natural language intelligent interface especially suited for mobile entertainment and education applications.
The SEMP platform is implemented in J2EE and runs under a suitable application server which provides fault-tolerance and scalability support. SEMP is also designed to scale with the mobile network it is deployed on. As an example, if a 3G device or handset with video playback/streaming support connects to a service running on top of SEMP, then appropriate content will automatically be served. This means that frame rate, resolution, and encoding is chosen to match the capabilities of the connecting mobile device.
As a result, applications that leverage the SEMP are able to reach a wide customer base, serve and support all major handsets, provide unique viewing and interaction experiences, and automatically render out formatted pages best suited for the connecting device and allow new types of intelligent interactive mobile video applications.
All our current 3G mobile products are based on the SEMP platform.
INTERNET PRODUCTS
Artificial Life, Inc. has developed several other major Internet based products. We are still offering these to potential clients, however, the sale and development of these products is no longer part of our core business activities.
ALIFE-SMARTBOT SUITE:
The ALife SmartBot Suite addresses the needs of the eCRM (Customer Relationship Management) market and the rapidly growing self-help, self-service markets as a front-end piece or gateway and will improve the overall user experience for Web visitors, build strong and loyal customer relationships, and give companies a distinct competitive advantage in customer relationship management, sales and support through employment of the following features:
ALife-Webguide
These SmartBot versions engage the user in a "conversation" through questions and answers and, upon learning the user's interests, are designed to display Web pages that match the content of the "conversation" or to suggest links to other locations on the Web site. In an e-commerce application, the ALife-WebGuide can be designed by the Web site host to function like a human sales associate at a retail store, greeting customers coming through the door of the virtual store and assisting them with advice and background information about products and prices. This bot allows the use of a customizable animated Avatar interface. In the first quarter of 2004, we released the first mobile adaptation of our webguide technology as part of the SmartEngine Mobile Platform (SEMP).
CONSULTING AND PRODUCT SERVICES
We provide consulting and custom specific project and product development services either directly or by utilizing the resources of partners, resellers and consultants. In addition, we provide support for the creation and maintenance of our mobile products and upon request customer specific back-office tools for analyzing client profiles gathered by our bots either ourselves or through our partners and resellers.
BUSINESS STRATEGY
In 2003 we developed several new products and technologies and re-focused our efforts towards developing and selling applications for mobile communication devices. Our target markets are mostly Asia and Europe. Since 2004 the Company has become a leading provider of content, intelligent applications and technology for mobile devices with a strong focus on 3G network applications by winning the global Best Mobile Game Award.
With the successful release of a series of leading edge 3G entertainment products such as "V-Girl(TM) - your virtual girlfriend", V-boy(TM) - your virtual boyfriend, V-disco(TM) and Virtual Penguins(TM) we started targeting specifically the global 3G network operators and the countries in which 3G networks have been launched or are currently being launched. We expect this to be our main focus for 2006 and 2007.
Our business strategy for 2006 and 2007 is to roll out our new products and services and to co-operate with global as well as local channel partners and resellers in Asia, Europe and the USA, such as telecommunication operators and major content aggregators and media companies including The Walt Disney Company, to attract a larger number of end users and clients for our products and services.
We continue to work towards becoming a worldwide leader for 3G mobile games and applications and technology. To achieve this objective, our strategy includes the following key elements:
CREATE MULTIPLE REVENUE STREAMS. We believe that our product lines, corporate and local language customizations, mobile computing technologies and our potential user base in Asia will present a significant opportunity to develop and maintain multiple revenue streams resulting from product sales, licensing, revenue sharing as well as from maintenance, customization and consulting fees. As these different revenue streams mature, we will continuously monitor their revenue contribution and consequently plan to expand, localize, adapt, discontinue or replace existing programs based on their success and may introduce new programs to supplement or replace existing programs and adjust our efforts to market demands.
ESTABLISHING OF M-COMMERCE PORTAL: To be more independent from third party providers, resellers and operators we believe that establishing an m-commerce website which allows end users to purchase products directly from us is a key strategic component. Therefore we plan to launch a general m-commerce portal for most of our products in the second quarter of 2006.
PARTNERSHIP WITH MEDIA COMPANIES: We have just signed a major publishing agreement with The Walt Disney Company for the USA, Canada and the UK. The co-operation with such global media companies allows us to use their client base as well as their content. We will pursue similar publishing agreements with other media companies in the future.
FUTURE PRODUCT ENHANCEMENT
Through all of 2005 we have expanded our R&D efforts essentially to develop more leading edge 3G products and to customize and localize our products for the target markets and to develop new mobile computing server technologies. We intend to continue these efforts to achieve our goal of becoming the leader in mobile games for 3G networks. R&D expense for 2004 and 2005 was approximately $110,000 and $104,000, respectively.
MARKETING AND SALES
We are currently selling and marketing our products through a variety of methods and channels, including but not limited to direct sales, distribution and channel agreements, strategic relationships and third party providers and plan to continue to do so going forward. We believe that partner networks and strategic relationships, such as our co-operation with The Walt Disney Company, and alliances especially in Asia and Europe provide an effective means of entering targeted vertical markets while targeted direct sales are instrumental for obtaining large, must-have clients. It is our belief that this strategy will provide a cost effective means of achieving maximum exposure for our products and services.
In 2005 two European customers generated 82% of total revenues.
STRATEGIC ALLIANCES AND JOINT VENTURES
In the BENELUX countries we partner with MBE Mercier and ThinkBusiness BVBA in Brussels, Belgium, and with Mobile Digital Media B.V., in Amsterdam, Holland.
In 2003 we signed a partnership and reseller agreement with Ericsson Hong Kong for the mobile phone industry. This partnership was extended to a global co-operation with Ericsson in 2004.
In 2004 we signed up Cape Town based Maxiwise Ltd. in South Africa as a reseller for Africa and Spinova Ltd. for the North African countries.
In 2005 we signed reseller and distribution agreements with several major telecommunications operators in Asia such as Hutchison 3 in Hong Kong, Taiwan Mobile in Taiwan, Singtel in Singapore, Maxis in Malaysia and B-Mobile in Brunei. We expect to sign up more operators in several more countries during the coming months and years.
In early 2006 we signed a major and exclusive publishing agreement with The Walt Disney Company for our V-girl(TM) and V-boy(TM) games.
Furthermore, we are constantly evaluating additional strategic potential alliances with companies in Hong Kong, Taiwan, Singapore, Peoples Republic of China, Japan, Korea, the United States of America, Europe, and South East Asia for marketing and re-selling our products and applications.
PRODUCT DEVELOPMENT
In 2003 we pursued certain R&D efforts, mainly to customize and localize our products to the Asian markets and to make them available on mobile communications platforms. As a result of these efforts, we have released and are continuously improving our SmartEngine Mobile Platform(TM) (SEMP) for the deployment of 3G and other mobile applications. During 2004 and 2005 we developed our current flagship V-Girl(TM) and other sub-modules of V-Girl(TM), including our V-boy(TM), V-disco(TM) and Virtual Penguins(TM) products that we released in 2005.We intend to further adapt and improve our technology through in-house R&D efforts in the coming months and years. To date we have not generated any major revenues from these efforts and there can be no guarantee that we will be able to generate substantial revenues from sales of these new products.
COMPETITION
The market for most of our products and services is still emerging and constantly evolving. Competition may intensify as the markets mature and more established software companies may become increasingly involved. Barriers to market entry may be considered as relatively insubstantial. However, we believe that the principal competitive factors for companies seeking to become involved in the software robot and intelligent agent mobile applications business are our core technology, delivery methods and platforms, a leading edge technology, a global brand recognition for our flagship games, and the ease of use and integration in existing environments and legacy systems.
We use our core technology, the ALife-SmartEngine(TM) and SEMP, in a wide variety of business areas but mostly in the 3G network business. Although we have not yet identified any direct competitors in exactly the same areas in which we are active, companies that have overlapping activities and therefore could potentially be regarded as our competition. Such firms include, among others, Active Buddy, Inc; Anthropics; Ask Jeeves; Autonomy, Inc.; Brightware, Inc.; Cybird; Digital Marketing Concepts, Inc.; eGain, Inc.; eAssist Global Solutions, Inc; Electronic Arts, Inc.; General Magic, Inc.; GK Intelligent Systems, Inc.; Green Tomato; Haptek, Inc.; Headpedal, Inc.; Intellix A/S; Kinetoscope, Inc.; Kiwi Logic AG; Microsoft Corporation; Netsage Corp.; Nintendo, Nuance, Inc.; Novomind AG; Pulse; Sega; Sony; SRA International, Inc. THQ, Inc. and Virtual Personalities, Inc. In addition, there is also certain free-ware available such as ALICE provided and supported by universities or non-profit organizations.
In the mobile area the following companies may be considered potential competitors even though none of them has - to our knowledge - yet produced any direct competing product to us: Bandai Networks Co., Ltd.; BANPRESTO Co., Ltd.; Capcom Co., Ltd; Com2uS Corp.; CYBIRD Co., Ltd.; Digital Chocolate, Inc.; Digital-Red Mobile Software Co., Ltd.; Eidos Interactive Ltd. (under SCi Entertainment Group); Electronic Arts, Inc.; Entaz Co., Ltd.; Gameloft GAMEVIL, Inc.; Glu Mobile; G-mode Co., Ltd.; iFone Ltd.; InfoSpace, Inc.; IN-FUSIO; I-Play (under Digital Bridges Limited); Jaleco Ltd.; JAMDAT Mobile Inc.; Konami Digital Entertainment, Inc.; KongZhong Corp.; Kuju Mobile; M DREAM Co., Ltd.;
MFORMA Group, Inc.; Mr. Goodliving Ltd. by RealNetworks, Inc.;Namco Networks America Inc.; Pearl-in-Palm Information Technology Ltd.; Player One Ltd.: Reakosys, Inc.; Sammy Corp.; SEGA Mobile, division of SEGA Corporation; Square Enix Co., Ltd.; Square Enix, Inc.; Superscape Group plc; Taito Corp.; THQ Wireless Inc.; Tianjin Mammoth Technology Co., Ltd.
These lists may not be complete and may change and substantially increase over time. Some of our existing and potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than us. Such competitors are able to commit operating resources to product development and enhancement, engage in more thorough marketing campaigns for their products and services, be more aggressive from a pricing standpoint and make more attractive offers to potential employees and partners.
To the extent one or more of our competitors introduce products that more fully address customer requirements, our business could be materially adversely affected. There can be no assurance that we will be successful in customizing contracted enhancements to our existing products incorporating new technology on a timely basis, or that our products will adequately address the changing needs of the marketplace. If we are unable to customize existing products in a timely manner in response to changing market conditions or customer requirements, our business, prospects, financial condition and results of operations will be materially adversely affected.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We rely upon trade secrets, know-how, copyrights and certain continuing technological innovations to develop and maintain our competitive position. We seek to protect such information, in part, by entering into confidentiality agreements with our corporate partners, collaborators, employees and consultants. These agreements provide that all confidential information developed or made known during the course of the individual's or entity's relationship with us is to be kept confidential and not be disclosed to third parties except in specific circumstances. We have endeavored to cause our employees to execute forms of Confidentiality and Inventions Agreements which provide that, to the extent permitted by applicable law, all inventions conceived by an individual during the individual's employment will remain our exclusive property. There can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors. Further, there can be no assurance that we will be able to protect our copy-rights, trade secrets or that others will not independently develop substantially equivalent proprietary information and techniques.
In 2001 we filed for three patent applications pertaining primarily to our core ALife-SmartEngine. However, in the second half of 2002 we decided to no longer maintain two of our patent applications out of cost considerations and because we believe that our current technology has been improved, modified and enhanced strongly since we first applied for the original patent applications. The continuous change of the technology markets and especially the fast moving mobile technology markets forces technology providers to continuously enhance and improve their technology on a timely and close to market basis.
EMPLOYEES
We adjusted our employment strategy and policy during the global market downturn in 2001 and 2002 to reduce cost and overhead expenses. In 2003 we slowly and carefully re-expanded and hired new employees and consultants. We also have maintained access to former employees to assist us on a contractual basis as we may require from time to time. As of December 31, 2004 we had 11 full time employees and contractually engaged 16 full time consultants. As of December 31, 2005 full time employees and contractual consultants were 30 and 7 respectively. We expect to substantially increase the number of employees in 2006.
Our employees and consultants are not represented by any labor unions. We consider our relations with our employees and consultants to be good.
