UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 x
                  QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the Quarterly Period Ended December 31, 2008
  OR
   ̈
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the Transition Period From
      __________      
To     ________________
  Commission
File Number: 000-51055
  RED
MILE ENTERTAINMENT, INC.
 (Exact
name of registrant as specified in its charter)
 
 Delaware
                20-4441647(State
      or other jurisdiction of
                  incorporation
      or organization)
                (I.R.S.
      Employer
                  Identification
      No.)223
      San Anselmo Way #3
                94960San
      Anselmo, CA 94960
                (Zip
      Code)
  415-339-4240
 (Registrant’s
telephone number, including area code)
 
  Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past
90 days.    Yes  x    No   ̈
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated
      filer               
      o
                  Accelerated
      filer                          
      oNon-accelerated
      filer                 
       ̈
                    (Do not check if a smaller
      reporting company)
                  Smaller
      reporting company        x
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes   ̈    No  x
  Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
  Class
              Shares
      outstanding on February 10, 2009Common
      Stock, $0.01 par value per share
              15,977,941
      shares
 
 
 
 
 Table
of Contents
   PagePART
      I
                          FINANCIAL
      INFORMATION
                          1ITEM
      1.
                          FINANCIAL
      STATEMENTS
                          1ITEM 2.
                          MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
      OPERATIONS
                          18ITEM 3.
                          QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                          27ITEM
      4T.
                          CONTROLS
      AND PROCEDURES
                          27PART II
                          OTHER
      INFORMATION
                          28ITEM
      1.
                          LEGAL
      PROCEEDINGS
                          28ITEM
      1A.
                          RISK
      FACTORS
                          28ITEM
      2.
                          UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                          35ITEM
      3.
                          DEFAULTS
      UPON SENIOR SECURITIES
                          35ITEM
      4.
                          SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                          35ITEM 5.
                          OTHER
      INFORMATION
                          35ITEM
      6.
                          EXHIBITS
                          35SIGNATURE
      PAGE
                          36
    
 
  
 Part I.
FINANCIAL INFORMATION
  ITEM
1. Financial Statements
   RED MILE ENTERTAINMENT, INC.
AND SUBSIDIARIES
 Condensed
      Consolidated Balance SheetsDecember
      31,
                                  2008
                              
                              
                              March
      31, 2008Assets
                              
                              (Unaudited)Current
      assets:Cash
      and cash equivalents
                              
                              $
                              666,601
                              
                              
                              $
                              335,147Accounts
      receivable, net of reserves of $199,076 and $583,090
                              
                              
                              143,998
                              
                              
                              
                              340,182Inventory,
      net
                              
                              
                              21,928
                              
                              
                              
                              31,406Prepaid
      expenses and other assets
                              
                              
                              10,670
                              
                              
                              
                              34,027Software
      development costs and advanced royalties
                              
                              
                              8,494,972
                              
                              
                              
                              5,942,921Total
      current assets
                              
                              
                              9,338,169
                              
                              
                              
                              6,683,683Property
      and equipment,
      net
                              
                              
                              46,547
                              
                              
                              
                              128,234Other
      assets
                              
                              
                              9,775
                              
                              
                              
                              9,755Total
      assets
                              
                              $
                              9,394,491
                              
                              
                              $
                              6,821,672Liabilities,
      and stockholders’ deficitCurrent
      liabilities:Accounts
      payable
                              
                              $
                              921,889
                              
                              
                              $
                              1,551,785Secured
      credit loan
                              
                              
                              572,810
                              
                              
                              
                              -Revolving
      line of credit
                              
                              
                              500,000
                              
                              
                              
                              500,000Accrued
      liabilities
                              
                              
                              1,277,669
                              
                              
                              
                              1,211,934Deferred
      revenue
                              
                              
                              4,750,000
                              
                              
                              
                              40,892Other
      current liabilities
                              
                              
                              154
                              
                              
                              
                              48,000Total
      current liabilities
                              
                              
                              8,022,522
                              
                              
                              
                              3,352,611Stockholders’
      Equity:Common
      stock, $0.01 par value, authorized 100,000,000 shares; 15,977,941
                                and 15,977,941 shares outstanding, respectively
                              
                              
                              159,779
                              
                              
                              
                              159,779Additional
      paid-in capital
                              
                              
                              36,395,980
                              
                              
                              
                              36,235,106Accumulated
      deficit
                              
                              
                              (35,186,097
                              )
                              
                              
                              (32,929,339
                              )Accumulated
      other comprehensive income
                              
                              
                              2,307
                              
                              
                              
                              3,515Total
      stockholders’ equity
                              
                              
                              1,371,969
                              
                              
                              
                              3,469,061Total
      liabilities and stockholders’ equity
                              
                              $
                              9,394,491
                              
                              
                              $
                              6,821,672
  The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
 
 -1-
 
 
 RED MILE ENTERTAINMENT, INC.
AND SUBSIDIARIES
 Condensed
Consolidated Statements of Operations
 (Unaudited)
  Three
      months ended December 31,2008
                                
                                
                                2007Revenues,
      net
                                
                                $
                                47,345
                                
                                
                                $
                                5,704,034Cost
      of
      sales
                                
                                
                                50,566
                                
                                
                                
                                6,314,875Gross
      margin
                                
                                
                                (3,221
                                )
                                
                                
                                (610,841
                                )Operating expensesResearch  and
      development costs
                                
                                
                                222,487
                                
                                
                                
                                442,333General
      and administrative costs
                                
                                
                                307,608
                                
                                
                                
                                1,156,000Sales,
      marketing and business development costs
                                
                                
                                44,813
                                
                                
                                
                                428,511Total
      operating expenses
                                
                                
                                574,908
                                
                                
                                
                                2,026,844Net
      loss before interest income (expense),other income (expense), and
      provision for income taxes
                                
                                
                                (578,129
                                )
                                
                                
                                (2,637,685
                                )Interest
      income (expense), net
                                
                                
                                (30,209
                                )
                                
                                
                                8,806Other
      income (expense), net
                                
                                
                                107,614
                                
                                
                                
                                (190,080
                                )Net
      loss before income tax expense
                                
                                
                                (500,724
                                )
                                
                                
                                (2,818,959
                                )Net
      loss
                                
                                $
                                (500,724
                                )
                                
                                $
                                (2,818,959
                                )Net
      loss per common share, basic and diluted
                                
                                $
                                (0.03
                                )
                                
                                $
                                (0.18
                                )Shares
      used in computing basic and diluted loss per share
                                
                                
                                15,977,941
                                
                                
                                
                                15,952,005
 
 The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
 
 -2-
 
   RED MILE ENTERTAINMENT, INC.
AND SUBSIDIARIES
 Condensed
Consolidated Statements of Operations
 (Unaudited)
  Nine
      months ended December 31,2008
                              
                              
                              2007Revenues,
      net
                              
                              $
                              162,435
                              
                              
                              $
                              9,137,350Cost
      of
      sales
                              
                              
                              147,382
                              
                              
                              
                              11,342,119Gross
      margin
                              
                              
                              15,053
                              
                              
                              
                              (2,204,769)Operating
      expensesResearch  and
      development costs
                              
                              
                              740,478
                              
                              
                              
                              1,038,426General
      and administrative costs
                              
                              
                              1,499,009
                              
                              
                              
                              2,749,295Sales,
      marketing and business development costs
                              
                              
                              108,214
                              
                              
                              
                              2,350,805Total
      operating expenses
                              
                              
                              2,347,701
                              
                              
                              
                              6,138,526Net
      loss before interest income (expense), other income (expense), and
      provision for income taxes
                              
                              
                              (2,332,648)
                              
                              
                              
                              (8,343,295)Debt
      conversion inducement costs
                              
                              
                              -
                              
                              
                              
                              4,318,286Beneficial
      debt conversion costs
                              
                              
                              -
                              
                              
                              
                              662,902Interest
      income (expense), net
                              
                              
                              (87,923)
                              
                              
                              
                              (80,255)Amortization
      of senior secured convertible debenture issuance costs
                              
                              
                              -
                              
                              
                              
                              78,399Other
      income (expense), net
                              
                              
                              164,612
                              
                              
                              
                              (190,080)Net
      loss before income tax expense
                              
                              
                              (2,255,959)
                              
                              
                              
                              (13,673,217)Income
      tax expense
                              
                              
                              800
                              
                              
                              
                              -Net
      loss
                              
                              $
                              (2,256,759)
                              
                              
                              $
                              (13,673,217)Net
      loss per common share, basic and diluted
                              
                              $
                              (0.14)
                              
                              
                              $
                              (1.02)Shares
      used in computing basic and diluted loss per share
                              
                              
                              15,977,941
                              
                              
                              
                              13,378,805
  The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
 
 
 -3-
  RED MILE ENTERTAINMENT INC.
AND SUBSIDIARIES
 Condensed
Consolidated Statements of Cash Flows
 (Unaudited)
  Nine
      months ended December 31,2008
                          
                          
                          2007Cash
      flows from operating activities:Net
      loss
                          
                          $
                          (2,256,759
                          )
                          
                          $
                          (13,673,217
                          )Adjustments
      to reconcile net loss to net cash used in operating
    activitiesDepreciation
                          
                          
                          93,965
                          
                          
                          
                          156,015Amortization
      of software development costs
                          
                          
                          58,790
                          
                          
                          
                          4,180,123Amortization
      of debt costs
                          
                          
                          4,056
                          
                          
                          
                          76,307Amortization
      of intangibles `
                          
                          
                          -
                          
                          
                          
                          32,282Loss
      on disposal of assets
                          
                          
                          -
                          
                          
                          
                          1,970Impairment
      of inventory
                          
                          
                          2,046
                          
                          
                          
                          410,044Impairment
      of software development and licensing costs
                          
                          
                          44,943
                          
                          
                          
                          1,776,252Stock
      based compensation
                          
                          
                          160,877
                          
                          
                          
                          355,832Liquidated
      damage charges
                          
                          
                          -
                          
                          
                          
                          190,080Revaluation
      of liquidated damage charges
                          
                          
                          (47,846
                          )
                          
                          
                          -Foreign
      currency transaction gain
                          
                          
                          (126,326
                          )
                          
                          
                          -Reserve
      for price protection and bad debt expense
                          
                          
                          254,390
                          
                          
                          
                          610,197Beneficial
      debt conversion costs
                          
                          
                          -
                          
                          
                          
                          662,902Debt
      conversion inducement costs
                          
                          
                          -
                          
                          
                          
                          4,318,286Changes
      in current assets and liabilitiesAccounts
      receivable
                          
                          
                          (567,832
                          )
                          
                          
                          (2,678,996
                          )Inventory
                          
                          
                          7,432
                          
                          
                          
                          (680,939
                          )Prepaid
      expenses and other current assets
                          
                          
                          19,282
                          
                          
                          
                          287,836Software
      development costs and advanced royalties
                          
                          
                          (2,655,784
                          )
                          
                          
                          (4,943,238
                          )Accounts
      payable
                          
                          
                          (126,139
                          )
                          
                          
                          397,995Accrued
      liabilities
                          
                          
                          65,735
                          
                          
                          
                          1,039,791Deferred revenue
                          
                          
                          4,709,108
                          
                          
                          
                          576,395Net
      cash used in operating activities
                          
                          
                          (360,062
                          )
                          
                          
                          (6,904,083
                          )Cash
      flows from investing activities:Acquisition
      of property and equipment
                          
                          
                          (12,279
                          )
                          
                          
                          (99,268
                          )Cash
      paid for other investment
                          
                          
                          -
                          
                          
                          
                          (114,755
                          )Net
      Cash flows used in investing activities
                          
                          
                          (12,279
                          )
                          
                          
                          (214,023
                          )Cash
      flows from financing activities:Proceeds
      from sales of stock, net of costs
                          
                          
                          -
                          
                          
                          
                          4,295,527Proceeds
      from issuance of debt
                          
                          
                          746,410
                          
                          
                          
                          2,277,000Repayment
      of debt
                          
                          
                          (41,407
                          )
                          
                          
                          -Net
      cash provided by financing activities
                          
                          
                          705,003
                          
                          
                          
                          6,572,527Effect
      of exchange rate changes on cash
                          
                          
                          (1,208
                          )
                          
                          
                          1,575Net
      increase (decrease) in cash
                          
                          
                          331,454
                          
                          
                          
                          (544,004
                          )Cash
      and cash equivalents, beginning of period
                          
                          
                          335,147
                          
                          
                          
                          1,912,992Cash
      and cash equivalents, ending of period
                          
                          $
                          666,601
                          
                          
                          $
                          1,368,988Supplemental
      Disclosure of Non-Cash Financing TransactionsConversion of senior secured convertible debentures
                          
                          $
                          -
                          
                          
                          $
                          8,244,000Accrued
      interest on revolving line of credit
                          
                          $
                          38,611
                          
                          
                          $
                          -Accrued
      interest on secured credit facility
                          
                          $
                          -
                          
                          
                          $
                          -Accrued
      interest on senior secured convertible debentures
                          
                          $
                          -
                          
                          
                          $
                          155,821Debt
      issuance costs related to the issuance of the senior secured convertible
      debentures
                          
                          $
                          -
                          
                          
                          $
                          528,240Conversion
      of convertible promissory notes
                          
                          $
                          -
                          
                          
                          $
                          2,400,000Debt
      issuance costs
                          
                          $
                          5,000
                          
                          
                          $
                          -Relative
      fair value of warrants issued for conversion of promissory
      notes
                          
                          $
                          -
                          
                          
                          $
                          662,902
 
 
 The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
 
 
 -4-
 
 RED
MILE ENTERTAINMENT, INC.
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
  
 NOTE
1 – BASIS OF PRESENTATION
 
 The
accompanying condensed consolidated financial statements are unaudited and have
been prepared in accordance with generally accepted accounting principles for
interim financial information. They should be read in conjunction with the
financial statements and related notes to the financial statements of Red Mile
Entertainment, Inc. (“Red Mile” or the “Company”) for the years ended March 31,
2008 and 2007 appearing in the Company’s Form 10-KSB. The December 31, 2008
unaudited interim consolidated financial statements on Form 10-Q have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). Certain information and note disclosures normally included
in the annual financial statements on Form 10-KSB have been condensed or omitted
pursuant to those rules and regulations, although the Company’s management
believes the disclosures made are adequate to make the information presented not
misleading. In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary for a fair statement of the result of operations
for the interim periods presented have been reflected herein. The results of
operations for interim periods are not necessarily indicative of  the
results to be expected for the entire year.
 
 NOTE
2 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Business — The Company was
incorporated in Delaware in August of 2004. The Company is a developer and
publisher of interactive entertainment software across multiple hardware
platforms, with a focus on creating or licensing intellectual
properties.  The Company sells its games directly to distributors,
retailers, and video rental companies in North America. In Europe and Australia,
the Company either sells its games directly to distributors or licenses its
games with major international game co-publishers in exchange for payment to the
Company of either development fees or guaranteed minimum payments. The
guaranteed minimum payments are recoupable by the distributor or co-publisher
against amounts owed under the various agreements. Once the distributor or
co-publisher recoups the guaranteed minimum payments, the Company is entitled to
additional payments as computed under the agreements. The Company operates in
one business segment, interactive software publishing.
 
 Going Concern — The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplates continuation of the Company as a going concern. However, the
Company has sustained substantial operating losses since inception of
$35,186,097 at December 31, 2008, and has predominantly incurred negative cash
flows from operations.
 
 On
February 11, 2009, IR Gurus Pty Ltd., the Company’s developer for its “Heroes
Over Europe” title, sent the Company a termination notice with respect to the
software development and licensing agreement for such title claiming that the
Company failed to make a payment under such agreement in the amount of
$281,000.
 
 On
February 11, 2009, Atari Interactive, Inc., the Company’s publishing partner for
its “Heroes Over Europe” title, sent the Company a termination notice with
respect to the publishing agreement for such title claiming that the Company
breached the publishing agreement. The Company disputes the grounds for
termination.  The publishing partner has ceased making milestone
payments to the Company which has had a material and adverse effect on the
Company’s ability to continue operations.
 
 The
Company is attempting to increase its revolving line of credit with Tiger Paw
Capital Corporation.  If the Company is unable to substantially
increase such line of credit within the next 30 days, the Company will likely
cease operations.
 
 If the
Company is successful in increasing the revolving line of credit with Tiger Paw
Capital Corporation, the Company plans to immediately implement a strategic plan
to contribute to meeting the Company’s cash flow requirements. Management
believes that this plan is capable of removing the threat to continuation of the
business during the 12 month period following the most recent balance sheet
presented, however there can be no guarantee or assurance that the Company will
be successful in implementing its plan. In particular, failure to raise external
capital within the next 30 days will likely cause the Company to cease
operations.  The Company’s strategic financing plan has the following
components:
  
 
 -5-
 
 
  (1)
              The
      Company is considering all remedies available under its publishing
      agreement with its partner for its “Heroes Over Europe” title which may
      include compensatory damages.(2)
              The
      Company plans to enter into a co-publishing agreement for its licensed Sin
      City video game which will provide the Companywith
      minimum guarantees on execution of the agreement as well as milestone
      payments coinciding with the timing of milestone obligations the Company
      has to its developers.
 
 (3)
              The
      Company plans to renegotiate both the amount and timing for payment of
      many of its current payables and accrued
  obligations.
 
 Notwithstanding
this strategic financing plan, however, we cannot guarantee that the Company
will be successful in  increasing its revolving line of credit,
sustaining a profitable level of operations or raising capital at favorable
rates, or at all. The accompanying condensed consolidated financial statements
do not include any adjustments that might result from failures to increase the
revolving line of credit, sustain profitability or raise capital.
 
 Principles of Consolidation —
The condensed consolidated financial statements of Red Mile include the accounts
of the Company, and its wholly-owned subsidiaries, 2WG Media, Inc., Roveractive
Ltd., and Red Mile Australia Pty Ltd. All inter-company accounts and
transactions have been eliminated in consolidation.
  Use of
Estimates – The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America (GAAP)
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Such estimates include sales
returns and allowances, price protection estimates, retail sell through
estimates, provisions for doubtful accounts, accrued liabilities, estimates
regarding the recoverability of advanced royalties, inventories, software
development costs, long-lived assets, estimates of when a game in development
has reached technological feasibility, and deferred tax assets. These estimates
generally involve complex issues and require us to make judgments, involve
analysis of historical and future trends, can require extended periods of time
to resolve, and are subject to change from period to period. Actual results
could differ materially from our estimates.
  Reclassifications-Certain prior period
amounts have been reclassified to conform to the current period presentation. In
the Consolidated Balance Sheet as of March 31, 2008 the Company reclassified
$271,269 in price protection reserves from accounts receivable to accounts
payable.
  Concentration of Credit Risk —
Financial instruments which potentially subject us to concentration of credit
risk consist of temporary cash investments and accounts receivable. During the
periods ended December 31, 2008 and March 31, 2008, we had deposits in excess of
the Federal Deposit Insurance Corporation (“FDIC”) limit at one U.S. based
financial institution.
  At December 31, 2008 and March 31,
2008, Red Mile had uninsured bank balances and certificates of deposit totaling
approximately $564,497 and $221,690, respectively.
 
 Receivable Allowances–
Receivables are stated net of allowances for returns, discounts, doubtful
accounts, and allowances for value-added services by retailers.
 
 We may
grant price protection to, and sometimes allow product returns from our
customers and customers of our distributors under certain
conditions.  Therefore, we record a reserve for potential price
protection and returns at each balance sheet date.  The provision
related to this allowance is reported in net revenues.  Price
protection means credits relating to retail price markdowns on our products
previously sold by us to customers or customers of our
distributors.  We base these allowances on expected trends and
estimates of future retail sell-through of our games.  Actual price
protection and product returns may materially differ from our estimates as our
products are subject to changes in consumer preferences, technological
obsolescence due to new platforms or competing products.  At December
31, 2008 and March 31, 2008, Red Mile had price protection and returns reserves
of $185,879 and $271,269, respectively. At December 31, 2008 and March 31, 2008,
the balance in price protection reserves was included in accounts payable.
Changes in these factors could change our judgments and estimates and result in
variances in the amount of reserve required.  If customers request
price protection in amounts exceeding the rate expected and if management agrees
to grant it, then we may incur additional charges against our net revenues, but
we are not required to grant price protection to retailers who purchase our
products from distributors and the decision to grant price protection is
discretionary. At December 31, 2008 and March 31, 2008, Red Mile had allowance
reserves for doubtful accounts of $199,076 and $574,090, respectively. We may
also incur cooperative marketing costs for our products owed to our customers,
or to customers of our distributors. These costs are deducted from accounts
receivable due to us from our customers. At December 31, 2008 and March 31,
2008, Red Mile had cooperative marketing deductions of $0 and $9,000,
respectively, recorded as deductions from accounts receivable. All receivables
are pledged as collateral for our secured loan from SilverBirch Inc. and our
revolving line of credit with Tiger Paw Capital Corporation.
   -6-
 
 Inventories — Inventories
consist of materials (including manufacturing royalties paid to console
manufacturers), labor charges from third parties, and freight-in. Inventories
are stated at the lower of cost or market, using the first-in, first-out
method.  The Company performs periodic assessments to determine the
existence of obsolete, slow moving and non-saleable inventories, and records
necessary provisions to reduce such inventories to net realizable
value.  All inventories are produced by third party manufacturers, and
substantially all inventories are located at third party warehouses on
consignment. All inventories are pledged as collateral for our secured loan from
SilverBirch Inc. and our revolving line of credit with Tiger Paw Capital
Corporation.
 
 Software Development Costs and
Advanced Royalties — Software development costs and advanced royalties to
developers include milestone payments or advances on milestone payments made to
software developers and other third parties and direct labor
costs.  Advanced royalties also include license payments made to
licensors of intellectual property we license.
  Software
development costs and advanced royalty payments made to developers are accounted
for in accordance with Statement of Financial Accounting Standards No. 86,
“Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed.”
  Software
development costs and advanced royalty payments to developers are capitalized
once technological feasibility of a product is established and such costs are
determined to be recoverable. For products where proven technology exists, this
may occur very early in the development cycle. Factors we consider in
determining when technological feasibility has been established include (i)
whether a proven technology exists; (ii) the quality and experience levels of
the development studio developing the game; (iii) whether the game is a sequel
to an already-completed game which has used the same or similar technology; and
(iv) whether the game is being developed with a proven underlying game engine.
Technological feasibility is evaluated on a product-by-product basis.
Capitalized costs for those products that are cancelled or abandoned are charged
immediately to cost of sales. The recoverability of capitalized software
development costs and advanced royalty payments to developers are evaluated
based on the expected performance of the specific products for which the costs
relate.
  Commencing
upon a product’s release, capitalized software development costs and advanced
royalty payments to developers are amortized to cost of sales using the greater
of (i) the ratio of actual cumulative revenues during the quarter to the total
of actual cumulative revenues during the quarter plus projected future revenues
for each game, or (ii) on a straight-line basis over the remaining estimated
life of the product.
  For
products that have been released in prior periods, we evaluate the future
recoverability of capitalized amounts on a quarterly basis or when events or
circumstances indicate the capitalized costs may not be recoverable. The primary
evaluation criterion is actual title performance.
 
 Significant
management judgments and estimates are utilized in the assessment of when
technological feasibility is established, as well as in the ongoing assessment
of the recoverability of capitalized development costs and advanced royalty
payments to developers.  In evaluating the recoverability of
capitalized software development costs and advanced royalty payments to
developers, the assessment of expected product performance utilizes forecasted
sales quantities and prices and estimates of additional costs to be incurred or
expensed.
  If
revised forecasted or actual product sales are less than and/or revised
forecasted or actual costs are greater than the original forecasted amounts
utilized in the initial recoverability analysis, the net realizable value may be
lower than originally estimated in any given quarter, which could result in a
larger charge to cost of sales in future quarters or an impairment charge to
cost of sales.
  Advanced
royalty payments made to licensors of intellectual property are capitalized and
evaluated for recoverability based on the expected performance of the underlying
games for which the intellectual property was licensed. Any royalty payments
made to licensors of intellectual property determined to be unrecoverable
through future sales of the underlying games are charged to cost of
sales.
 
 Property and Equipment —
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful life of the respective assets
ranging from one to three years. Salvage values of these assets are not
considered material. Repairs and maintenance costs that do not increase the
useful lives and/or enhance the value of the assets are charged to operations as
incurred. All property and equipment are pledged as collateral for our secured
loan from SilverBirch Inc. and our revolving line of credit agreement with Tiger
Paw Capital Corporation.
 
 Revenue Recognition
— Our revenue
recognition policies are in accordance with the American Institute of Certified
Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, Software Revenue Recognition
as amended by SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain
Transactions.  SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts,  Staff
Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial
Statements, as revised by SAB No. 104, RevenueRecognition,  Emerging
Issues Task Force (“EITF”) 01-09 Accounting
for  Consideration Given by a Vendor to a Customer, and FASB
Interpretation No. 39 Offsetting of Amounts Related to
Certain Contracts- an interpretation of APB Opinion No.
10 and Financial Accounting Standards Board (“FASB”) Statement No. 105,
and  EITF 06-03, How
Taxes Collected from Customers and Remitted to Governmental Authorities Should
Be Presented in the Income Statement.
 
 We
evaluate revenue recognition using the following basic criteria and recognize
revenue when all four criteria are met:
 
 (i)
Evidence of an arrangement: Evidence of an arrangement with the customer that
reflects the terms and conditions to deliver products must be present in order
to recognize revenue.
   -7-
 
 (ii)
Delivery: Delivery is considered to occur when the products are shipped and the
risk of loss and reward has been transferred to the customer. At times, for us,
this occurs when the product has shipped to the retailer from the distributor
that we sold to on consignment.
 
 (iii)
Fixed or determinable fee: If a portion of the arrangement fee is not fixed or
determinable, we recognize that amount as revenue when the amount becomes fixed
or determinable.
 
 (iv)
Collection is deemed probable: We conduct a credit review of each customer
involved in a significant transaction to determine the creditworthiness of the
customer. Collection is deemed probable if we expect the customer to be able to
pay amounts under the arrangement as those amounts become due. If we determine
that collection is not probable, we recognize revenue when collection becomes
probable (generally upon cash collection).
 
 Product
revenue, including sales to distributors, retailers, co-publishers, and video
rental companies is recognized when the above criteria are met. We reduce
product revenue for estimated future returns and price protection, which may
occur with our distributors, retailers, retailers of our distributors, and
co-publishers. In the future, we may decide to issue price protection credits
for either our PC or console products.
  When
evaluating the adequacy of sales returns and price protection reserve
allowances, we analyze our historical returns on similar products, current
sell-through of distributor and retailer inventory, current trends in the video
game market and the overall economy, changes in customer demand , acceptance of
our products, and other factors.
 
 In North
America, we primarily sell our games to distributors who in turn sell to
retailers that both our internal sales force, our outsourced independent sales
group, and distributors’ sales force generate orders from.  These
distributors will charge us a distribution fee based on a percentage of the
prevailing wholesale price of the product. We record revenues net of these
distribution fees. We will likely co-publish our current titles under
development and net sell directly to distributors.
 
 Red Mile
may receive minimum guaranteed amounts or other up-front cash amounts from a
co-publisher or distributor prior to delivery of the products. Pursuant to SOP
81-1, we use the completed contract method of accounting because these minimum
guaranteed amounts usually do not become non-refundable until the co-publisher
or distributor accepts the completed product. These receipts are credited to
deferred revenue when received. We recognize revenues as the product is shipped
and actual amounts are earned. In the case of distributors who hold our
inventory on consignment, revenues are recognized once the product leaves the
distributor warehouse.
 
 Periodically,
we review the deferred revenue balances and, when the product is no longer being
actively sold by the co-publisher or distributor, or when our forecasts show
that a portion of the revenue will not be earned out, this excess is taken into
revenue.
 
 Red Mile
may be required to levy European Value Added Tax (“VAT”) and Australian Goods
and Services Tax (“GST”) on shipments of products within the EU member
countries, and Australia, respectively. Pursuant to EITF 06-03, How Taxes Collected from Customers
and Remitted to Governmental Authorities Should Be Presented in the Income
Statement, Red Mile will include the taxes assessed by a governmental
authority that is directly imposed on a revenue-producing transaction on a gross
basis (included in revenues and cost of sales).
 
 Our
revenues are subject to material seasonal fluctuations. In particular, revenues
in our third fiscal quarter will ordinarily be significantly higher than other
fiscal quarters. Revenues recorded in our third fiscal quarter are not
necessarily indicative of what our reported revenues will be for an entire
fiscal year.
 
 Distribution Costs —
Distribution costs, including shipping and handling costs of video games sold to
customers, are included in cost of sales.
  Foreign Currency Translation and
Remeasurement— The functional currency of our foreign subsidiary is its
local currency. All assets and liabilities of our foreign subsidiary are
translated into U.S. dollars at the exchange rate in effect at the end of the
period, and revenue and expenses are translated at weighted average exchange
rates during the period. The resulting translation adjustments are reflected as
a component of accumulated other comprehensive income (loss) in shareholders’
equity. The functional currency of the Company’s assets and liabilities
denominated in foreign currencies is the US dollar. Assets and liabilities
denominated in foreign currencies are re-measured at each balance sheet date at
the prevailing exchange rates on the balance sheet date. The resulting
re-measurements are reflected in other income (expense), net in the Condensed
Consolidated Statements of Operations.
 
 Stock-Based Compensation Plans
— On April 1, 2006, we adopted the provisions of Statement of Financial
Accounting Standards (“SFAS”) 123 (revised 2004),Share-Based
Payment  ( “SFAS 123(R)”), requiring us to recognize expense
related to the fair value of
 our
stock-based compensation awards. Prior to April 1, 2006, the Company used the
minimum value method in estimating the value of employee option grants as
allowed by SFAS 123, amended by SFAS 148 Accounting for stock based
compensation - transition and disclosure. Accordingly, we have elected to
use the prospective transition method as permitted by SFAS 123(R) and therefore
have not restated our financial results for prior periods. Under this transition
method, stock-based compensation expense for the three and nine months ended
December 31, 2008 includes compensation expense for all stock option awards
granted subsequent to March 31, 2006 based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R). We recognize
compensation expense for stock option awards on a straight-line basis over the
requisite service period of the award.
   -8-
  In March
2005, the Securities and Exchange Commission (“SEC”) issued (“SAB”) No. 107,
which offers guidance on SFAS 123(R). SAB 107 was issued to assist preparers by
simplifying some of the implementation challenges of SFAS 123(R) while enhancing
the information that investors receive. SAB 107 creates a framework that is
premised on two overarching themes: (a) considerable judgment will be required
by preparers to successfully implement SFAS 123(R), specifically when valuing
employee stock options; and (b) reasonable individuals, acting in good
faith, may conclude differently on the fair value of employee stock options. Key
topics covered by SAB 107 include valuation models, expected volatility and
expected term. The Company is applying the principles of SAB 107 in conjunction
with its adoption of SFAS 123(R) for stock options granted up to December 31,
2007.
 
 In
December 2007, the SEC issued SAB No. 110, which expresses the views of the
staff regarding the use of a "simplified" method, as discussed in SAB No. 107 in
developing an estimate of expected term of stock options in accordance with SFAS
No. 123(R). Under SAB No. 110, the staff will continue to accept, under certain
circumstances, the use of the simplified method permitted under SAB No. 107
beyond December 31, 2007.
  Loss Per Share — We compute
basic and diluted loss per share amounts pursuant to the SFAS No. 128, “Earnings per Share.” Basic
loss per share is computed using the weighted average number of common shares
outstanding during the period.
  Diluted
loss per share is computed using the weighted average number of common and
potentially dilutive securities outstanding during the period. Potentially
dilutive securities consist of the incremental common shares that could be
issued upon exercise of stock options, warrants, convertible promissory notes,
convertible preferred stock, and senior secured convertible debentures (using
the treasury stock method). Potentially dilutive securities are excluded from
the computation if their effect is anti-dilutive.
  The
following table summarizes the weighted average shares outstanding for the three
months ending December 31, 2008 and 2007:
  Three
      Months Ended December 31,2008
                          
                          
                          2007Basic
      weighted average shares outstanding
                          
                          
                          15,977,941
                          
                          
                          
                          15,952,005Total
      stock options outstanding
                          
                          
                          1,012,734
                          
                          
                          
                          1,776,007Less:
      anti-dilutive stock options due to loss
                          
                          
                          (1,012,734
                          )
                          
                          
                          (1,776,007
                          )Total
      warrants outstanding
                          
                          
                          1,261,928
                          
                          
                          
                          3,374,327Less:
      anti-dilutive warrants due to loss
                          
                          
                          (1261,928
                          )
                          
                          
                          (3,374,327
                          )Diluted
      weighted average shares outstanding
                          
                          
                          15,977,941
                          
                          
                          
                          15,952,005
  
 The
following table summarizes the weighted average shares outstanding for the nine
months ending December 31, 2008 and 2007:
  Nine
      Months Ended December 31,2008
                          
                          
                          2007Basic
      weighted average shares outstanding
                          
                          
                          15,977,941
                          
                          
                          
                          13,378,805Total
      stock options outstanding
                          
                          
                          1,012,734
                          
                          
                          
                          1,776,007Less:
      anti-dilutive stock options due to loss
                          
                          
                          (1,012,734
                          )
                          
                          
                          (1,776,007
                          )Total
      warrants outstanding
                          
                          
                          1,261,928
                          
                          
                          
                          3,374,327Less:
      anti-dilutive warrants due to loss
                          
                          
                          (1,261,928
                          )
                          
                          
                          (3,374,327
                          )Diluted
      weighted average shares outstanding
                          
                          
                          15,977,941
                          
                          
                          
                          13,378,805
 
 
 NOTE 3 — ACCRUED LIABILITIES
 
 December
      31,
                      2008
                    
                    March
      31,
                      2008Accrued
      royalties payable
                    
                    $
                    388,233
                    
                    
                    $
                    679,469Accrued
      bonuses
                    
                    
                    —
                    
                    
                    
                    67,900Accrued milestone payments to developers or other development
      costs
                    
                    
                    600,000
                    
                    
                    
                    186,389Accrued
      paid time off
                    
                    
                    33,106
                    
                    
                    
                    24,500Accrued
      professional fees
                    
                    
                    181,250
                    
                    
                    
                    148,369Accrued
      commissions
                    
                    
                    72,108
                    
                    
                    
                    96,865Other
                    
                    
                    2,972
                    
                    
                    
                    8,442Total
                    
                    $
                    1,277,669
                    
                    
                    $
                    1,211,934
 
  -9-
 
 NOTE
4 — DEFERRED REVENUE
 
 December
      31, 2008
                                  
                                  
                                  March
      31, 2008Heroes
      Over Europe
                                  
                                  
                                  4,750,000
                                  
                                  
                                  
                                  —Lucinda
      Green’s Equestrian Challenge
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  40,892Total
                                  
                                  $
                                  4,750,000
                                  
                                  
                                  $
                                  40,892
  NOTE
5 — OTHER CURRENT LIABILITIES
 
 December
      31, 2008
                              
                              
                              March
      31, 2008Contingent
      Registration Payment Liability
                              
                              
                              154
                              
                              
                              
                              48,000Total
                              
                              $
                              154
                              
                              
                              $
                              48,000
 
 On July
18, 2007, holders of the Company’s convertible promissory notes converted their
notes into shares of common stock of the Company. In connection with the
conversion, holders of the notes received 0.2 warrants with a strike price of $0
per share for every common share they received. These warrants contained a
provision for automatic cancellation of the warrants if the Company would be
able to realize a liquidity event in Canada on or before March 18, 2008. The
Company was unable to realize a liquidity event by the aforementioned date.
Accordingly, in accordance with FASB Staff Position EITF 00-19-2, “Accounting For Registration Payments
Arrangements”, the Company recorded a contingent liability representing
the value of 192,000 shares of common stock of the Company that the Company
would be required to deliver after March 18, 2008 upon exercise of the
warrants.
 
 NOTE
6 — COMMITMENTS
 
 Developer and
intellectual property contracts - In the normal course of business, we
enter into contractual arrangements with third-parties for the development of
products, as well as for the license rights to intellectual property and/or
underlying game engines. Under these agreements, we commit to provide specified
payments to a developer, or intellectual property holder, based upon contractual
arrangements.  For our development agreements, we will often
renegotiate development fees if the costs-to-complete the product has differed
from what was contractually agreed to. In these cases, we may increase the
amounts of payments made to developers before a new contractual agreement is
reached. Typically, the payments to third-party developers are conditioned upon
the achievement by the developers of contractually specified development
milestones. These payments to third-party developers and intellectual property
holders may be deemed to be advances and are recoupable against future royalties
earned by the developer or intellectual property holder based on the sale of the
related game. Assuming all contractual provisions are met, the total future
minimum commitments for development contracts, intellectual property holders,
and licensors of underlying game engines in place as of December 31, 2008 are
approximately $1,794,500 which is scheduled to be paid as follows in our
upcoming fiscal years:
  Year ended March
      31,2009
                                  
                                  $
                                  452,0002010
                                  
                                  $
                                  940,0002011
                                  
                                  $
                                  402,500Total
                                  
                                  $
                                  1,794,500
 
 Lease
Commitments
 
 In March
2008, we moved our corporate offices from Sausalito to San Anselmo, California.
Our corporate offices are in leased space in San Anselmo, California of
approximately 1,300 square feet at $2.03 per square foot per month. We believe
that if we lost this lease, we could promptly relocate within ten miles on
similar terms. Rent expense for the nine months ended December 31, 2008 and 2007
was $21,134 and $56,860, respectively.
   -10-
  Approximate
future minimum lease payments under non-cancelable office and equipment lease
agreements are as follows:
  Year
      ended March 312009
                              
                              $
                              7,2952010
                              
                              
                              32,6312011
                              
                              
                              33,588Total
                              
                              $
                              73,514
 
 NOTE
7 — STOCK OPTIONS AND STOCK COMPENSATION
 
 The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
  Period
      Ended
                          December
      31, 2008Expected
      life (in years)
                        4.2
      – 6.5Risk
      free rate of return
                        4.0%
      - 5.13%Volatility
                        50%
      - 80%Dividend
      yield
                        -Forfeiture
      rate
                        9%
      - 15%
 
 The
following table sets forth the total stock-based compensation expense for the
three months ended December 31, 2008 and 2007.  All research and
development costs, and sales, marketing, and business development costs in this
table are related to employees. General and administrative costs are broken out
between those related to consultants and those related to
employees.
 
 Three
      Months Ended December 31, 2008
                          
                          
                          Three
      Months Ended December 31, 2007Research
      and development costs
                          
                          $
                          —
                          
                          
                          $
                          5,658Sales,
      marketing, and business development costs
                          
                          
                          —
                          
                          
                          
                          4,568General
      and administrative costs—consultants
                          
                          
                          3,395
                          
                          
                          
                          3,395General
      and administrative costs—employees
                          
                          
                          50,426
                          
                          
                          
                          103,336Stock-based
      compensation before income taxes
                          
                          
                          53,821
                          
                          
                          
                          116,957Income
      tax benefit
                          
                          
                          -
                          
                          
                          
                          -Total
      stock-based employee compensation expense after income
    taxes
                          
                          $
                          53,821
                          
                          
                          $
                          116,957
  During
the three months ended December 31, 2008, no stock options were
granted.
  The
following table sets forth the total stock-based compensation expense for the
nine months ended December 31, 2008 and 2007.  All research and
development costs, and sales, marketing, and business development costs in this
table are related to employees. General and administrative costs are broken out
between those related to consultants and those related to
employees.
  Nine
      Months Ended December, 2008
                                
                                
                                Nine
      Months Ended December 31, 2007Research
      and development costs
                                
                                $
                                —
                                
                                
                                $
                                16,914Sales,
      marketing, and business development costs
                                
                                
                                —
                                
                                
                                
                                19,137General
      and administrative costs—consultants
                                
                                
                                10,147
                                
                                
                                
                                4,834General
      and administrative costs—employees
                                
                                
                                150,729
                                
                                
                                
                                314,947Stock-based
      compensation before income taxes
                                
                                
                                160,877
                                
                                
                                
                                355,832Income
      tax benefit
                                
                                
                                -
                                
                                
                                
                                -Total
      stock-based employee compensation expense after income
    taxes
                                
                                $
                                160,877
                                
                                
                                $
                                355,832
   -11-
   On April
8, 2005, our board of directors approved the Red Mile Entertainment 2005 Stock
Option Plan (the “Plan”) which permits the board of directors to grant to
officers, directors, employees and third parties incentive stock options,
non-qualified stock options, restricted stock and stock appreciation rights. On
March 15, 2007, the board of directors and stockholders holding a majority of
voting power voted to authorize the board of directors, at its discretion, to
amend the 2005 Stock Option Plan (the “Amended Plan”).
 
 Under the
Amended Plan, options for 2,500,000 shares of common stock are reserved for
issuance.  At December 31, 2008, we had 1,487,266 options available
for grant.  Options have been issued with exercise prices of between
$0.66 and $4.00 per share as follows:
 
 Option
activity under the Amended Plan is as follows:
 
 Options
                          
                          Shares
                          
                          
                          Weighted
      Average Exercise Price
                          
                          
                          Weighted
      Average Remaining Contractual Term
                          
                          Aggregate
      Intrinsic ValueOutstanding
      at March 31, 2006
                          
                          
                          940,966
                          
                          
                          $
                          0.75
                          
                          
                          
                          
                          $
                          -Granted
                          
                          
                          1,124,167
                          
                          
                          
                          3.75Exercised
                          
                          
                          -
                          
                          
                          
                          -Forfeited or expired
                          
                          
                          (76,388
                          )
                          
                          
                          2.73
                          
                          
                          
                          -
                          
                          
                          -Outstanding at March 31, 2007
                          
                          
                          1,988,745
                          
                          
                          $
                          2.28
                          
                          
                          
                          9.71
                          
                          $
                          3,420,166Exercisable at March 31, 2007
                          
                          
                          607,000
                          
                          
                          $
                          0.83
                          
                          
                          
                          8.65
                          
                          $
                          1,926,537Granted
                          
                          
                          45,000
                          
                          
                          
                          2.35Exercised
                          
                          
                          (143,068
                          )
                          
                          
                          0.71Forfeited
      or expired
                          
                          
                          (114,670
                          )
                          
                          $
                          0.88
                          
                          
                          
                          -
                          
                          
                          -Outstanding
      at March 31, 2008
                          
                          
                          1,776,007
                          
                          
                          $
                          2.59
                          
                          
                          
                          8.44
                          
                          $
                          -Exercisable
      at March 31, 2008
                          
                          
                          676,007
                          
                          
                          $
                          1.35
                          
                          
                          
                          7.86
                          
                          $
                          -Granted
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Exercised
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Forfeited
      or expired
                          
                          
                          (763,272)
                          
                          
                          $
                          3.24
                          
                          
                          
                          -Outstanding
      at December 31, 2008
                          
                          
                          1,012,734
                          
                          
                          $
                          2.10
                          
                          
                          
                          7.56
                          
                          
                          -Exercisable
      at December 31, 2008
                          
                          
                          586,622
                          
                          
                          $
                          0.79
                          
                          
                          
                          7.04
                          
                          
                          -
 
 
 Options
      Outstanding
                      
                      Options
      ExercisableNumber
                      
                      Weighted
      Avg.
                      
                      Weighted
      Avg.
                      
                      Number
                      
                      Weighted
      Avg.Range
      of Exercise Prices
                      
                      Outstanding
                      
                      Remaining
      Life
                      
                      Exercise
      Price
                      
                      Exercisable
                      
                      Exercise
      Price$0.66
      - $1.49
                      
                      564,400
                      
                      7.00
                      
                      $
      0.71
                      
                      564,400
                      
                      $
      0.71$1.50
      - $2.37
                      
                      30,000
                      
                      8.65
                      
                      $
      2.35
                      
                      10,000
                      
                      $
      2.35$2.38
      - $4.00
                      
                      418,334
                      
                      8.25
                      
                      $
      3.97
                      
                      12,222
                      
                      $
      3.301,012,734
                      
                      
                      
                      
                      
                      586,622
 
 In the
case where shares have been granted to third parties, the fair value of such
shares is recognized as an expense in the period issued using the Black-Scholes
option pricing model.
 
 In the
case of shares granted to employees, the fair value of such shares is recognized
as an expense over the service period.  As of December 31, 2008, the
fair value of options issued by the Company was $2,626,385 of which $1,389,891
in expense has been forfeited. Expense recognized for the nine months ending
December 31, 2008 was $160,877.  The unamortized cost remaining at
December 31, 2008 was $496,297 with a weighted average expected term for
recognition of 3.15 years. At the time of grant, the estimated fair values per
option were from $0.33 to $2.94.
   -12-
  NOTE 8 — COMMON STOCK
 
 In March
and May 2006, the Company issued 845,333 investment units outside the U.S. to
thirty-two non U.S. investors for $3,170,000. A unit consisted of one share of
Series B Convertible Preferred stock and a warrant to purchase an additional
share of Series B Convertible Preferred stock before May 1, 2008 for $4.50 per
share. These shares of Series B Convertible Preferred stock converted to the
same number of shares of the Company’s common stock in December
2006.
  In
addition, from March through May 2006, nine US investors purchased 100,000
investment units for a total of $375,000. A unit consisted of one share of
Series C Convertible Preferred stock and a warrant to purchase an additional
share of Series C Convertible Preferred stock before May 1, 2008 for $4.50 per
share. These shares of Series C Convertible Preferred stock converted to the
same number of shares of the Company’s common stock in December
2006.
 
 In
October and November 2006, the Company issued an aggregate of $8,224,000 in
senior secured convertible debentures to 81 debenture holders.
 
 In
January 2007, the Company acquired all of the assets of Roveractive, Ltd., a
worldwide distributor and publisher of downloadable PC and PDA-based casual
games, in exchange for 33,333 shares of the Company’s common stock.
 
 From June
25 through June 27, 2007, the Company issued an aggregate of $2,050,000 of
Convertible Promissory Notes to a total of 19 note holders. In addition, on June
25, 2007, the Company issued a $350,000 Convertible Promissory Note to one note
holder. These notes automatically converted into 960,000 units of the Company in
July 2007, with one unit consisting of one share of the Company’s common stock,
and 0.2 of one warrant with an exercise price of $2.75 per share.
 
 On July
18, 2007, holders of more than 66 2/3% of the $8,244,000 principal amount of
senior secured convertible debentures and $155,281 in accrued interest on the
debentures, after a proposal brought forth by the Company, voted by way of
extraordinary resolution to cancel such debentures and convert the principal and
accrued interest amounts of their debentures into shares of the Company’s common
stock at $2.50 per share, thereby resulting in the conversion of the full
principal and interest amounts associated with such debentures into 3,359,713
shares of the Company’s common stock.  With the conversion, the
Company recorded a non-cash debt inducement conversion charge of
$4,318,286.
 
 On July
18, 2007, the Company issued 1,872,600 units at $2.50 per unit with each unit
consisting of one share of common stock and 0.2 of one warrant to a total
of 69 investors for net proceeds of $4,295,527 (gross proceeds of
$4,681,501).
  NOTE
9 — WARRANTS
 
 The
following table lists the total number of warrants outstanding as of December
31, 2008.
 Expiring
                                            
                                            Strike
                                              Price
                                            
                                            Number
      of
                                              Common
      sharesJanuary
      18, 2009 (a)
                                            
                                            (a)
                                            
                                            566,520July
      17, 2009
                                            
                                            2.75
                                            
                                            480,000July
      18, 2009
                                            
                                            3.00
                                            
                                            215,408Total
                                            
                                            
                                            
                                            1,261,928
  (a) These
warrants expire on the earlier of (i) a liquidity transaction or (ii) January
18, 2009. The warrants entitle the holder to acquire common stock for no
consideration. In January 2009, 255,080 of these warrants were exercised and
311,440 expired.
 
 NOTE
10 — CONCENTRATIONS
  Customer
base
 
 Our
customer base includes distributors, co-publishers, and retailers of video games
in the United States, Europe, and Australia. We review the creditworthiness of
our customers on an ongoing basis, and believe that we need an allowance for
potential credit losses at December 31, 2008 of $199,076 compared to $574,090 at
March 31, 2008. The receivables recorded from our customers are net of their
reserves for uncollectible accounts. Account balances are charged off against
the allowance when the Company believes it is probable that accounts receivable
will not be recovered.
   -13-
  As of
December 31, 2008, one customer accounted for 64.3% of our accounts receivable.
During the nine months ended December 31, 2008, two customers accounted for
63.3% and 25.17%, respectively, of our consolidated net revenues. During the
nine months ended December 31, 2007, two customers accounted for 51.8% and
31.0%, respectively, of our consolidated net revenues.
  Operations
by Geographic Area
  Our
products are sold in North America, Europe, Australia, and Asia through
third-party licensing arrangements, through distributors, and through
retailers.
 
 The
following tables display consolidated net revenue by location during the three
and nine months ended December 31, 2008:
 
 Location
                      
                      Three
      Months Ended December 31, 2008North
      America
                      
                      $
                      43,737Europe
                      
                      
                      3,608$
                      47,345
 
 
 Location
                    
                    Nine
      Months Ended December 31, 2008North
      America
                    
                    $
                    108,850Europe
                    
                    
                    53,585$
                    162,435
 
 Location
of assets
  Our
tangible assets, excluding inventory, are located at our corporate offices in
San Anselmo, California and on loan to a third party developer in Melbourne,
Australia. Inventory is located at a select few third party warehouse
facilities.
 
 NOTE
11 – REVOLVING LINE OF CREDIT
  On
February 11, 2008, we entered into an uncommitted revolving line of credit
agreement with Tiger Paw Capital Corporation, a corporation owned and operated
by Mr. Kenny Cheung, a member of the Company’s board of directors in the amount
of $1,000,000 (the “Line"). The Line is available for working capital
requirements. Any amounts drawn on the Line are payable on demand. The Line is
an uncommitted obligation where Tiger Paw Capital Corporation may decline to
make advances under the Line, or terminate the Line, at any time and for any
reason without prior notice to the Company.  The Line bears interest
at the rate of 10% per annum and is payable to Tiger Paw Capital Corporation on
demand. Advances under the Line may be pre-paid without penalty. The Line has a
subordinated security interest to all present and future assets of the
Company and carries no financial or operating covenants. As of December 31,
2008, we have drawn $500,000 on the Line.
 
 On May 7,
2008, we entered into a Temporary Forbearance Agreement with Tiger Paw Capital
Corporation whereby Tiger Paw Capital Corporation agreed not to exercise any
demand or enforcement rights under the Line until November 7, 2008.
 
 On
November 5, 2008, we entered into an Amendment to Temporary Forbearance
Agreement with Tiger Paw Capital Corporation whereby Tiger Paw Capital
Corporation agreed not to exercise any demand or enforcement rights under the
Line until the earlier of: (i) the closing date of our merger with and into the
subsidiary of SilverBirch, Inc.; (ii) fifteen days after the termination of the
merger agreement with SilverBirch, Inc.; (iii) the date of any change of control
of Red Mile other than the merger with SilverBirch, Inc.; and (iv) the
occurrence of an event of default.
 
 On
December 3, 2008, we terminated the Merger Agreement with SilverBirch based on a
material breach by Silverbirch of the Merger Agreement. Accordingly, December
18, 2008 was the end of the period during which TigerPaw Capital Corporation
agreed to forbear on its demand and enforcement rights under the Temporary
Forbearance Agreement, as amended.  However, the Line remains
subordinate to the senior debt to SilverBirch Inc. discussed
below.  Tiger Paw has not demanded repayment of the Line.
 
 We are
currently negotiating with Tiger Paw Capital Corporation to increase the amount
of the Line.
   -14-
 
 NOTE
12 – SECURED CREDIT LOAN
 
 On May 7,
2008, we entered into a secured credit agreement with SilverBirch Inc, a
Canadian publicly traded corporation in the amount of $750,000 Canadian Dollars
($746,410 USD equivalent) (the “Facility”). The Facility is available for
development and production of our “Heroes Over Europe” video game and general
and administrative purposes. On May 7, 2008, we borrowed CAD $302,000 ($302,000
USD equivalent) against the Facility in respect of a development payment due to
the developer of the “Heroes Over Europe” video game.  On May 12,
2008, we borrowed CAD $448,000 ($444,410 USD equivalent) against the facility.
The Facility bears interest at the rate of 10% per annum and is payable to
SilverBirch, Inc. quarterly in arrears. Advances under the Facility may be
pre-paid without penalty. The Facility carries a first priority security
interest in all our present and future assets in addition to the securities in
the capital of our three wholly owned subsidiaries. The Facility contains
customary terms and conditions for credit facilities of this type, including
restrictions on the Company’s ability to incur or guaranty additional
indebtedness, create liens, make loans or investments, sell assets, pay
dividends or make distributions on, or repurchase, its stock.
 
 In
October 2008, we amended the secured credit agreement whereby SilverBirch, Inc.
agreed not to exercise any demand or enforcement rights under such agreement
until the closing of our merger into their subsidiary.
 
 On
December 3, 2008, we terminated the Merger Agreement with SilverBirch based on a
material breach by SilverBirch of the Merger Agreement. The terms of the
Facility call for repayment of all amounts advanced under the Facility within
fifteen days after termination of the Merger Agreement. We received a demand
from SilverBirch Inc. on December 3, 2008 for repayment of the advances under
the Facility, with interest, by December 18, 2008.
 
 On
December 30, 2008, we entered into a Standstill Agreement (the “Standstill
Agreement”) with SilverBirch whereby both parties agreed to forbear and stand
still from exercising their respective rights and remedies against each other
during the Standstill Period. The Standstill Period commenced on December 30,
2008 and ends on the “Standstill Termination Date”, the date which is the
earlier of: (i) the date of the payment of the Final Settlement Payment (as such
term is defined below); (ii) July 31, 2009; or (iii) the date that SilverBirch
gives written notice to us of SilverBirch’s election to terminate the Standstill
Period in the event we breach or fail to comply with any of the terms of the
Standstill Agreement “Early Termination”.
 
 Under the
Standstill Agreement, we agreed to pay SilverBirch the following amounts in
Canadian Dollars in connection with the secured credit loan on the following
dates:
 
 (1)
                $50,000
      upon execution of the Standstill Agreement;(2)
                $225,000
      on the earlier of: (i) our  achieving certain development
      milestones in connection with development of our “Heroes Over Europe” game
      and receiving the next co-publishing installment payment from our
      co-publishing partner; and (ii) February 6,
  2009;
 
 (3)
                $250,000
      on the earlier of: (i) our achieving the next succeeding milestone
      following the aforementioned milestone and receiving applicable
      co-publishing installment payment from our co-publishing partner; and (ii)
      March 20, 2009; and(4)
                $75,000
      on the earlier of: (i) our signing a publishing agreement in connection
      with our licensed Sin City Video game; and (ii) July 31,
    2009.
 
 In our
third fiscal quarter of 2009, we recognized an unrealized foreign exchange gain
of $108,483 related to the devaluation of the Canadian dollar denominated
loan.
 
 Each of
the above-referenced payments are referred to as “Settlement Payment
Installments” and collectively, the four Settlement Payment Installments are
referred to as the “Final Settlement Payment.”
 
 Subject
to timely payment of the Final Settlement Payment by us, each party has agreed
to fully release the other party and its officers, directors, shareholders,
agents, employees, representatives, successors and assigns from all claims,
liabilities and causes of action including those arising out of the documents
related to the secured loan and the merger agreement.
 
 NOTE
13 — SUBSEQUENT EVENTS
 
 On
February 11, 2009, IR Gurus Pty Ltd., the Company’s developer for its “Heroes
Over Europe” title, sent the Company a termination notice with respect to the
software development and licensing agreement for such title claiming that the
Company failed to make a payment under such agreement in the amount of
$281,000.
 
 On
February 11, 2009, Atari Interactive, Inc., the Company’s publishing partner for
its “Heroes Over Europe” title, sent the Company a termination notice with
respect to the publishing agreement for such title claiming that the Company
breached the publishing agreement. The Company disputes the grounds for
termination.  The publishing partner has ceased making milestone
payments to the Company which has had a material and adverse effect on the
Company’s ability to continue operations.
   -15-
 
 NOTE
14 — NEW ACCOUNTING PRONOUNCEMENT
  SFAS 157
  In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements (SFAS 157), which defines fair value, establishes a
framework for measuring fair value and expands the level of disclosures
regarding fair value. SFAS 157 also emphasizes that fair value is a market-based
measurement rather than an entity-specific measurement. The Company adopted the
provisions of SFAS 157 relating to financial assets and liabilities and other
assets and liabilities carried at fair value on a recurring basis effective on
April 1, 2008, as required.  As allowed by FASB Staff Position FAS157-2, Effective Date of FASB Statement
No. 157, the Company has elected to defer the adoption of SFAS 157
with respect to non-financial assets and liabilities until April 1,
2009.  There was no material impact on the Company’s financial
statements at the time of adoption; however, the Company does expect that this
new standard will impact certain aspects of its accounting for business
combinations on a prospective basis, including the determination of fair values
assigned to certain purchased assets and liabilities.
  SFAS
159
  On
February 15, 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159). Under this standard, we
may elect to report financial instruments and certain other items at fair value
on a contract-by-contract basis with changes in value reported in earnings. This
election is irrevocable. SFAS No. 159 provides an opportunity to mitigate
volatility in reported earnings that is caused by measuring hedged assets and
liabilities that were previously required to use a different accounting method
than the related hedging contracts when the complex provisions of SFAS No. 133
hedge accounting are not met. SFAS No. 159 is effective for years beginning
after November 15, 2007 and it has not had a material impact on our consolidated
financial statements.
  FIN
48
  Effective
April 1, 2007, we adopted the provisions of FASB Interpretation
No. 48,Accounting for
Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109  or FIN 48.
FIN 48 provides detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain income tax positions recognized in the
financial statements in accordance with SFAS No. 109. Income tax positions
must meet a “more-likely-than-not” recognition threshold at the effective date
to be recognized upon the adoption of FIN 48 and in subsequent
periods.
  Upon
review and analysis by the Company, we have concluded that no FIN 48 effects are
present as of March 31, 2008 and our tax position has not materially changed
since March 31, 2008.  For the year ended March 31, 2008, we did not
identify and record any liabilities related to unrecognized income tax
benefits.  The adoption of FIN 48 did not have a material impact our
financial statements.
  We
recognize interest and penalties related to uncertain income tax positions in
income tax expense. No interest and penalties related to uncertain income tax
positions have been accrued.  Income tax returns for the fiscal tax
year ended March 31, 2005 to the present are subject to examination by major tax
jurisdictions.
  EITF
07-03
 
 In June
2007, the EITF reached a consensus on EITF No. 07-03, Accounting for Nonrefundable Advance Payments
for Goods or Services to Be Used in Future Research and Development
Activities, or EITF 07-03. EITF 07-03 specifies the timing of expense
recognition for non-refundable advance payments for goods or services that will
be used or rendered for research and development activities. EITF 07-03 was
effective for fiscal years beginning after December 15, 2007, and early adoption
is not permitted. Adoption of EITF 07 has not  had a material impact
on either our financial position or results of operations.
 
 EITF
07-01
 
 In
December 2007, the EITF reached a consensus on EITF No. 07-01, Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual
Property, or EITF 07-01. EITF 07-01 discusses the appropriate income
statement presentation and classification for the activities and payments
between the participants in arrangements related to the development and
commercialization of intellectual property. The sufficiency of disclosure
related to these arrangements is also specified. EITF 07-01 is effective for
fiscal years beginning after December 15, 2008. As a result, EITF 07-01 is
effective for us in the first quarter of fiscal 2010. We do not expect the
adoption of EITF 07-01 to have a material impact on either our financial
position or results of operations.
  SFAS
141(R) and SFAS 160
  In
December 2007, the Financial Accounting Standards Board  (“FASB”)
issued Statement No. 141(Revised 2007),Business
Combinations  (SFAS 141(R)) and Statement No. 160,Accounting and Reporting
of Non-controlling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51 (SFAS 160). These statements will significantly
change the financial accounting and reporting of business combination
transactions and non-controlling (or minority) interests in consolidated
financial statements. SFAS 141(R) requires companies to: (i) recognize, with
certain exceptions, 100% of the fair values of assets acquired, liabilities
assumed, and non-controlling interests in acquisitions of less than a 100%
controlling interest when the acquisition constitutes a change in control of the
acquired entity; (ii) measure acquirer shares issued in consideration for a
business combination at fair value on the acquisition date; (iii) recognize
contingent consideration arrangements at their acquisition-date fair values,
with subsequent changes in fair value generally reflected in
earnings; (iv) with certain exceptions, recognize pre-acquisition loss
and gain contingencies at their acquisition-date fair values; (v) capitalize
in-process research and development (IPR&D) assets acquired;
(vi) expense, as incurred, acquisition-related transaction costs;
(vii) capitalize acquisition-related restructuring costs only if the
criteria in SFAS 146,Accounting for Costs
Associated with Exit or Disposal Activities, are met as of the
acquisition date; and (viii) recognize changes that result from a business
combination transaction in an acquirer’s existing income tax valuation
allowances and tax uncertainty accruals as adjustments to income tax expense.
SFAS 141(R) is required to be adopted concurrently with SFAS 160 and is
effective for business combination transactions for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008 (our fiscal 2010). Early adoption of these
statements is prohibited. We believe the adoption of these statements will have
a material impact on significant acquisitions completed after March 31,
2009.
   -16-
  SFAS
161
  In March
2008, the FASB issued SFAS No. 161,Disclosures about Derivative
Instruments and Hedging Activities -an amendment of SFAS 133 or SFAS 161.
SFAS 161 seeks to improve financial reporting for derivative instruments and
hedging activities by requiring enhanced disclosures regarding the impact on
financial position, financial performance, and cash flows. To achieve this
increased transparency, SFAS 161 requires: (1) the disclosure of the fair value
of derivative instruments and gains and losses in a tabular format; (2) the
disclosure of derivative features that are credit risk-related; and (3)
cross-referencing within the footnotes. This standard shall be effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 and early application is encouraged. We are in the process of
evaluating the new disclosure requirements under SFAS 161 and do not expect the
adoption to have a material impact on our consolidated financial
statements.
  SFAS
162
  In May
2008, the FASB issued SFAS No. 162, “TheHierarchy of Generally Accepted
AccountingPrinciples”. This standard is
intended to improve financial reporting by identifying a consistent framework,
or hierarchy, for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with US GAAP for
non-governmental entities. SFAS No. 162 is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, the meaning of “PresentFairly in Conformity withGAAP”. The
Company is in the process of evaluating the impact, if any, of SFAS No. 162 on
its consolidated financial statements.
 
 FSP
APB 14-1
 
 In May
2008, the FASB released FSP APB 14-1 Accounting For Convertible
Debt  Instruments That May Be Settled in Cash Upon Conversion
(Including Partial Cash Settlement) (FSP APB 14-1) that alters the accounting
treatment for convertible debt instruments that allow for either mandatory or
optional cash settlements. FSP APB 14-1 specifies that issuers of such
instruments should separately account for the liability and equity components in
a manner that will reflect the entity's nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. Furthermore, it would require
recognizing interest expense in prior periods pursuant to retrospective
accounting treatment. This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008. We are currently evaluating the
effect the adoption of FSP APB 14-1 will have on our consolidated results of
operations and financial condition.
 
 EITF
07-5
 
 In
June 2008, the EITF reached a consensus in Issue No. 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”).
This Issue addresses the determination of whether an instrument (or an embedded
feature) is indexed to an entity’s own stock, which is the first part of the
scope exception in paragraph 11(a) of SFAS 133. EITF 07-5 is effective for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early application is not permitted. We do not expect the
adoption of this accounting guidance to impact our results of operations or
financial position.
 
 -17-
 
 RED
MILE ENTERTAINMENT, INC.
  ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS
 
 FORWARD-LOOKING
STATEMENTS
  Most of
the matters discussed within this Form 10-Q include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. In some cases you can identify
forward-looking statements by terminology such as "may," "should," "potential,"
"continue," "expects," "anticipates," "intends," "plans," "believes,"
"estimates," and similar expressions. These statements are based on our current
beliefs, expectations, and assumptions and are subject to a number of risks and
uncertainties, many of which are set forth in this Form 10-Q. Actual results and
events may vary significantly from those discussed in the forward-looking
statements.
  These
forward-looking statements may include, among other things, statements relating
to the following matters:
 
 O
              the
      likelihood that our management team will increase our profile in the
      industry and create new video games for us.O
              our
      ability to compete against companies with much greater resources than
      us.O
              our
      ability to obtain various intellectual property licenses as well as
      development and publishing licenses and approvals from the third party
      hardware manufacturers.
  These
statements are not guarantees of future performance and involve certain risks
and uncertainties that are difficult to predict. Actual results could vary
materially from the description contained herein due to many factors included
and discussed in “Risk Factors” and elsewhere in the Company’s annual report on
Form 10-KSB filed on June 19, 2008 with the Securities and Exchange
Commission.
 
 The
information contained in this Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2008 is not a complete description of the Company’s
business or the risks associated with an investment in the Company’s common
stock. Each reader should carefully review and consider the various disclosures
made by the Company in this Quarterly Report on Form 10-Q and in the Company’s
other filings with the Securities and Exchange Commission.
 
 These
forward-looking statements are made as of the date of this Form 10-Q, and we
assume no obligation to explain the reason why actual results may differ. In
light of these assumptions, risks, and uncertainties, the forward-looking events
discussed in this Form 10-Q might not occur.
 
 Overview
 
 We were
incorporated in Delaware in August of 2004. We are a developer and publisher of
interactive entertainment software across multiple hardware platforms, with a
focus on creating or licensing intellectual properties.  We sell our
games directly to distributors, retailers, and video rental companies in North
America. In Europe and Australia, we either sells our games directly to
distributors or license our games with major international game co-publishers in
exchange for payment of either development fees or guaranteed minimum payments.
The guaranteed minimum payments are recoupable by the distributor or
co-publisher against amounts owed under the various agreements. Once the
distributor or co-publisher recoups the guaranteed minimum payments, we are
entitled to additional payments as computed under the agreements.
 
 Going
Concern
 
 The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States, which
contemplates continuation of the Company as a going concern. However, the
Company has sustained substantial operating losses since inception of
$35,186,097 at December 31, 2008, and has predominantly incurred negative cash
flows from operations.
 
 The
Company is attempting to increase its revolving line of credit with Tiger Paw
Capital Corporation.  If the Company is unable to substantially
increase such line of credit within the next 30 days, the Company will likely
cease operations.
 
 If the
Company is successful in increasing the revolving line of credit with Tiger Paw
Capital Corporation, the Company plans to immediately implement a strategic plan
to contribute to meeting the Company’s cash flow requirements. Management
believes that this plan is capable of removing the threat to continuation of the
business during the 12 month period following the most recent balance sheet
presented.  However, there can be no guarantee or assurance that the
Company will be successful in implementing its plan. In particular, failure to
raise external capital within the next 30 days will likely cause the Company to
cease operations.  The Company’s strategic financing plan has the
following components:
   -18-
   (1)
              The
      Company is considering all remedies available under its publishing
      agreement with its partner for its “Heroes Over Europe” title which may
      include compensatory damages.(2)
              The
      Company plans to enter into a co-publishing agreement for its licensed Sin
      City video game which will provide the Companywith
      minimum guarantees on execution of the agreement as well as milestone
      payments coinciding with the timing of milestone obligations the Company
      has to its developers.(3)
              The
      Company plans to renegotiate both the amount and timing for payment of
      many of its current payables and accrued
  obligations.
 
 Notwithstanding
this strategic financing plan, however, we cannot guarantee that the Company
will be successful in increasing its revolving line of credit, sustaining a
profitable level of operations or raising capital at favorable rates, or at all.
The accompanying condensed consolidated financial statements do not include any
adjustments that might result from failures to increase the revolving line of
credit, sustain profitability or raise capital.
 
 Liquidity
and Capital resources
 
 During
our second fiscal quarter of 2008, we signed a publishing agreement with Atari
for our “Heroes Over Europe” titles under development. Our agreement with Atari
provides us with minimum guaranteed payments from Atari in addition to back-end
royalty payments.
 
 On
February 11, 2009, IR Gurus Pty Ltd., the Company’s developer for its “Heroes
Over Europe” title, sent the Company a termination notice with respect to the
software development and licensing agreement for such title claiming that the
Company failed to make a payment under such agreement in the amount of
$281,000.
 
 On
February 11, 2009, Atari Interactive, Inc., the Company’s publishing partner for
its “Heroes Over Europe” title, sent the Company a termination notice with
respect to the publishing agreement for such title. The Company disputes the
grounds for termination. The publishing partner has ceased making milestone
payments to the Company which has had a material and adverse effect on the
Company’s ability to continue operations.
 On
February 11, 2008, we entered into an uncommitted revolving line of credit
agreement with Tiger Paw Capital Corporation, a corporation owned and operated
by Mr. Kenny Cheung, a member of the Company’s board of directors in the amount
of $1,000,000 (the “Line”). The Line is available for working capital
requirements. Any amounts drawn on the Line are payable on demand. The Line is
an uncommitted obligation where Tiger Paw Capital Corporation may decline to
make advances under the Line, or terminate the Line, at any time and for any
reason without prior notice to the Company.  The Line bears interest
at the rate of 10% per annum and is payable to Tiger Paw Capital Corporation on
demand. Advances under the Line may be pre-paid without penalty. The Line has a
subordinated security interest to all present and future assets of the
Company and carries no financial or operating covenants. As of December 31,
2008, we have drawn $500,000 on the Line.  We are attempting to
increase the Line in order to sustain operations.
 
 On May 7,
2008, we entered into a Temporary Forbearance Agreement with Tiger Paw Capital
Corporation whereby Tiger Paw Capital Corporation agreed not to exercise any
demand or enforcement rights under the Line until November 7, 2008.
 
 On
October 7, 2008, we entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with SilverBirch Inc., RME Merger Sub Corp., a Delaware corporation
and wholly owned subsidiary of SilverBirch Inc. (“Merger Sub”), and Kenny
Cheung, as stockholder representative.
 
 On
November 5, 2008, we entered into an Amendment to Temporary Forbearance
Agreement with Tiger Paw Capital Corporation whereby Tiger Paw Capital
Corporation agreed not to exercise any demand or enforcement rights under the
Line until the earlier of: (i) the closing date of our merger with and into the
subsidiary of SilverBirch Inc.; (ii) fifteen days after the termination of the
Merger Agreement with SilverBirch Inc.; (iii) the date of any change of control
of Red Mile other than the merger with SilverBirch, Inc.; and (iv) the
occurrence of an event of default.
 
 On
December 3, 2008, we terminated the Merger Agreement with SilverBirch based on a
material breach by SilverBirch of the Merger Agreement. As of December 18, 2008,
Tiger Paw Capital Corporation became entitled to exercise its demand and
enforcement rights against us under the Line although they have not yet
exercised any of its rights.
 
 On May 7,
2008, we entered into a secured credit agreement with SilverBirch Inc., a
Canadian publicly traded corporation in the amount of $750,000 Canadian Dollars
(the “Facility”). The Facility was made available for development and production
of our “Heroes Over Europe” video game and general and administrative purposes.
Amounts drawn on the Facility are payable upon the closing or termination of the
merger agreement.  The Facility bears interest at the rate of 10% per annum
and is payable to Lender quarterly in arrears. Advances under the Facility may
be pre-paid without penalty.
 
  -19-
  The
Facility carries a first priority security interest in all of our present and
future assets in addition to the securities in the capital of our three wholly
owned subsidiaries. The Facility contains customary terms and conditions for
credit facilities of this type, including restrictions on the Company’s ability
to incur or guaranty additional indebtedness, create liens, make loans or
investments, sell assets, pay dividends or make distributions on, or repurchase,
its stock.
 
 In
October 2008, we amended the secured credit agreement whereby SilverBirch, Inc.
agreed not to exercise any demand or enforcement rights under such agreement
until the closing of our merger into their subsidiary.
 
 As
previously mentioned, on December 3, 2008, we terminated the Merger Agreement
with SilverBirch based on a material breach by SilverBirch Inc. of the Merger
Agreement.
 
 On
December 30, 2008, we entered into a Standstill Agreement (the “Standstill
Agreement”) with SilverBirch whereby both parties agreed to forbear and
standstill from exercising their respective rights and remedies against each
other during the “Standstill Period”. Such period commences on December 30, 2008
and ends on the “Standstill Termination Date”, the date which is the earlier of:
(i) the date of the payment of the Final Settlement Payment (as such term is
defined below); (ii) July 31, 2009; or (iii) the date that SilverBirch gives
written notice to us of SilverBirch’s election to terminate the Standstill
Period in the event we breach or fail to comply with any of the terms of the
Standstill Agreement “Early Termination”.
 
 Under the
Standstill Agreement, we agreed to pay SilverBirch the following amounts in
Canadian Dollars in connection with the secured credit loan on the following
dates:
 
 (1)
                $50,000
      upon execution of the Standstill Agreement;(2)
                $225,000
      on the earlier of: (i) our  achieving certain development
      milestones in connection with development of our Heroes Over Europe game
      and receiving the next co-publishing installment payment from our
      co-publishing partner; and (ii) February 6,
  2009;
 
 (3)
                $250,000
      on the earlier of: (i) Our achieving the next succeeding milestone
      following the aforementioned milestone and receiving applicable
      co-publishing installment payment from our co-publishing partner; and (ii)
      March 20, 2009; and(4)
                $75,000
      on the earlier of: (i) our signing a publishing agreement in connection
      with our licensed Sin City Video game; and (ii) July 31,
    2009.
 
 Each of
the above-referenced payments are referred to as “Settlement Payment
Installments” and collectively, the four Settlement Payment Installments are
referred to as the “Final Settlement Payment.”
 
 We
currently need to raise additional capital in order to continue operating our
business. We believe our current cash on hand on as of February 10, 2009 of
approximately $341,000 will allow us to continue our business operations until
the March 31, 2009.  If we are unable to increase our credit line or
raise new capital, we will likely be unable to continue operations past March
31, 2009.
 
 We
anticipate needing an additional $10,000,000 to finance our planned operations
over the next 24 to 36 months. We will be unable to complete development of
“Heroes Over Europe” and “Sin City: The Game” (working title), or publish any
other additional games if we are unable to receive co-publishing advances on
both the foregoing titles or raise additional capital through either sale of
securities or issuance of debt.
 
 -20-
 
  RED
MILE ENTERTAINMENT, INC.
  Results
of Operations
  The
unaudited results of operations for the three months ending December 31, 2008
and  2007 are as follows:
   Summary of Unaudited Statements
of Operations
 Three
Months Ended December 31, 2008 and 2007
  Summary
of Statements of Operations
 
 2008
                  
                  
                  2007
                  
                  %
      changeRevenue
                  
                  $
                  47,345
                  
                  
                  $
                  5,704,034
                  
                  (99)%Cost
      of sales
                  
                  
                  50,566
                  
                  
                  
                  6,314,875
                  
                  (99)%Gross
      margin
                  
                  
                  (3,221)
                  
                  
                  
                  (610,841)Operating
      expenses
                  
                  
                  574,908
                  
                  
                  
                  2,026,844
                  
                  (72)%Net
      loss before interest income (expense), other income (expense) and
      provision for income taxes
                  
                  
                  (578,129)
                  
                  
                  
                  (2,637,685)Interest
      income (expense), net
                  
                  
                  (30,209)
                  
                  
                  
                  8,806
                  
                  (443)%Other
      income (expense), net
                  
                  
                  107,614
                  
                  
                  
                  (190,080)
                  
                  221%Net
      loss
                  
                  $
                  (500,724)
                  
                  
                  $
                  (2,818,959)
                  
                  (87)%Net
      loss per common share - Basic and diluted
                  
                  $
                  (0.03)
                  
                  
                  $
                  (.18)Shares
      used in computing basic and diluted net loss per share (in
      000’s)
                  
                  
                  15,978
                  
                  
                  
                  15,952
 
 
 Summary
of Unaudited Statements of Operations
 Nine
Months Ended December 31, 2008 and 2007
 
 Summary
of Statements of Operations
  2008
                        
                        
                        2007
                        
                        
                        %
      changeRevenue
                        
                        $
                        162,435
                        
                        
                        $
                        9,137,350
                        
                        
                        
                        (98
                        )%Cost
      of sales
                        
                        
                        147,382
                        
                        
                        
                        11,342,119
                        
                        
                        
                        (99
                        )%Gross
      margin
                        
                        
                        15,053
                        
                        
                        
                        (2,204,769
                        )Operating
      expenses
                        
                        
                        2,347,701
                        
                        
                        
                        6,138,526
                        
                        
                        
                        (62
                        )%Net
      loss before interest income (expense), other income (expense) and
      provision for income taxes
                        
                        
                        (2,332,648
                        )
                        
                        
                        (8,343,295
                        )Debt
      conversion inducement costs
                        
                        
                        -
                        
                        
                        
                        (4,318,286
                        )Beneficial
      debt conversion costs
                        
                        
                        -
                        
                        
                        
                        (662,902
                        )Interest
      income (expense), net
                        
                        
                        (87,923
                        )
                        
                        
                        (80,255
                        )
                        
                        
                        (10
                        )%Amortization
      of senior secured convertible debenture issuance costs
                        
                        
                        -
                        
                        
                        
                        78,399Other
      income (expense), net
                        
                        
                        164,612
                        
                        
                        
                        (190,080
                        )
                        
                        
                        251
                        %Income
      tax expense
                        
                        
                        800
                        
                        
                        
                        -Net
      loss
                        
                        $
                        (2,256,759
                        )3
                        
                        $
                        (13,673,217
                        )
                        
                        
                        (84
                        )%Net
      loss per common share - Basic and diluted
                        
                        $
                        (0.14
                        )
                        
                        $
                        (1.02
                        )Shares
      used in computing basic and diluted net loss per share (in
      000’s)
                        
                        
                        15,978
                        
                        
                        
                        13,379






-21-






Revenues
  Revenues
were $47,345 and $5,704,034 during the three months ended December 31, 2008 and
2007, respectively. Revenues were $162,435 and $9,137,350 during the nine months
ended December 31, 2008 and 2007, respectively. The decrease is primarily due to
sales of “Jackass: The Game” which first shipped in our second quarter of fiscal
2008. Our license agreement for Jackass was terminated in March 2008 and
accordingly, there were no sales of Jackass in fiscal 2009.  Revenue
for the three months ended December 31, 2008 primarily related to adjustments of
the Company’s price protection reserve balances at the end of the quarter from
additional sell-through of products in the retail channel to end
consumers.
 
 Our
revenues are subject to material seasonal fluctuations. In particular, revenues
in our third fiscal quarter will ordinarily be significantly higher than other
fiscal quarters. Revenues recorded in our third fiscal quarter are not
necessarily indicative of what our reported revenues will be for an entire
fiscal year.  We had no new products that were released in our third
fiscal quarter of 2008 and accordingly our revenue were not higher in our third
fiscal quarter of 2009 compared to the other fiscal quarters in
2009.
 
 We
currently have two games under development which we anticipate will be ready for
shipment in fiscal years 2010 through 2012. We are developing “Sin City: The
Game” (working title) and plan to ship this game in fiscal 2012.  We
are developing “Heroes Over Europe”, a sequel to “Heroes of the Pacific” that is
set in the European Theatre of World War II (for the next generation consoles
and PC) that we expect to ship in fiscal 2010.  We have been experiencing
milestone payment delays from our co-publishing partner on Heroes Over Europe
and have accordingly been delayed in making payments to our developer. Failure
to make timely payments will likely cause us to miss our expected ship date. We
are also developing Sin City: The Game (working title) and currently in the
process of negotiating revisions to the license agreement. If we can raise
sufficient funds to continue operations, we expect to ship this game in fiscal
2012.
  We record
revenues net of distribution fees.
 
 We may be
required to levy European Value Added Tax (“VAT”) and Australian Goods and
Services Tax (“GST”) on shipments of  products within the European
Union member countries, and Australia, respectively. Pursuant to EITF 06-03,
How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the
IncomeStatement, we include the
taxes assessed by a governmental authority that is directly imposed on a
revenue-producing transaction on a gross basis (included in revenues and costs).
For the three and nine months ended December 31, 2008, no taxes assessed by a
governmental authority were included in revenue and cost of sales. For the three
and nine months ended December 31, 2007, $167,300 in taxes assessed by a
governmental authority were included revenue and cost of sales.
 
 Cost of
sales
 
 Cost of
sales were $50,566 and $6,314,875 during the three months ended December 31,
2008 and 2007, respectively. Cost of sales were $147,382 and $11,342,119 during
the nine months ended December 31, 2008 and 2007, respectively. The decrease is
primarily due to the decrease in sales of “Jackass: The Game” since there were
no sales of the game in fiscal 2009.
 
 Cost of
sales for the three months ended December 31, 2008 and 2007 consisted
of:
 
 December
      31, 2008
                
                
                December
      31, 2007Amortization
      of capitalized software development costs, cost of inventory
      sold,  manufacturing and distribution costs
                
                $
                14,287
                
                
                $
                4,763,313Royalties
      to third party game developers
                
                
                2,713
                
                
                
                822,031Write
      down of inventory costs to net realizable value
                  Write down of software development costs and advanced  royalties
      to net realizable value
                  Taxes collected from
      customers and remitted to governmental authorities
                
                
                -
                  33,566
                  -
                
                
                
                384,672
      177,559
      167,300Total
                
                $
                50,566
                
                
                $
                6,314,875
 
 Cost of
sales for the nine months ended December 31, 2008 and 2007 consisted
of:
  December
      31, 2008
                  
                  
                  December
      31, 2007Amortization
      of capitalized software development costs, cost of inventory
      sold,  manufacturing and distribution costs
                  
                  $
                  85,718
                  
                  
                  $
                  8,117,402Royalties
      to third party game developers
                  
                  
                  14,675
                  
                  
                  
                  883,117Write
      down of inventory costs to net realizable value
                    Write
      down of software development costs and advanced  royalties to
      net realizable value
                    Taxes
      collected from customers and remitted to governmental
      authorities
                  
                  
                  2,046
                    44,943
                    -
                  
                  
                  
                  410,044
      1,764,256
      167,300Total
                  
                  $
                  147,382
                  
                  
                  $
                  11,342,119
 
  -22-
 
 Operating
Expenses
  Operating
expenses for three months ended December 31, 2008 and 2007, respectively, were
as follows:
  Three
      Months Ended
                                    December
      31, 2008
                                  
                                  
                                  Percent
                                    of
      Total
                                  
                                  
                                  Three
      Months Ended
                                    December
      31, 2007
                                  
                                  
                                  Percent
                                    of
      Total
                                  
                                  
                                  Percent
                                    DecreaseResearch
      and development costs
                                  
                                  $
                                  222,487
                                  
                                  
                                  
                                  38.7
                                  %
                                  
                                  $
                                  442,333
                                  
                                  
                                  
                                  21.8
                                  %
                                  
                                  
                                  (50
                                  %)General
      and administrative costs
                                  
                                  
                                  307,608
                                  
                                  
                                  
                                  53.5
                                  %
                                  
                                  
                                  1,156,000
                                  
                                  
                                  
                                  57.0
                                  %
                                  
                                  
                                  (73
                                  %)Marketing,
      sales and business development costs
                                  
                                  
                                  44,813
                                  
                                  
                                  
                                  7.8
                                  %
                                  
                                  
                                  428,511
                                  
                                  
                                  
                                  21.2
                                  %
                                  
                                  
                                  (90
                                  %)Total
      operating expenses
                                  
                                  $
                                  574,908
                                  
                                  
                                  
                                  100.0
                                  %
                                  
                                  $
                                  2,026,844
                                  
                                  
                                  
                                  100.0
                                  %
                                  
                                  
                                  (72
                                  %)
 
 Operating
expenses for nine months ended December 31, 2008 and 2007, respectively, were as
follows:
 
 Nine
      Months Ended
                        December
      31, 2008
                      
                      
                      Percent
                        of
      total
                      
                      
                      Nine
      Months Ended
                        December
      31, 2007
                      
                      
                      Percent
                        of
      total
                      
                      
                      Percent
                        DecreaseResearch
      and development costs
                      
                      $
                      740,478
                      
                      
                      
                      31.5
                      %
                      
                      $
                      1,038,426
                      
                      
                      
                      16.9
                      %
                      
                      
                      (29
                      %)General
      and administrative costs
                      
                      
                      1,499,009
                      
                      
                      
                      63.9
                      %
                      
                      
                      2,749,295
                      
                      
                      
                      44.8
                      %
                      
                      
                      (45
                      %)Marketing,
      sales and business development costs
                      
                      
                      108,214
                      
                      
                      
                      4.6
                      %
                      
                      
                      2,350,805
                      
                      
                      
                      38.3
                      %
                      
                      
                      (95
                      %)Total
      operating expenses
                      
                      $
                      2,347,701
                      
                      
                      
                      100.0
                      %
                      
                      $
                      6,138,526
                      
                      
                      
                      100.0
                      %
                      
                      
                      (62
                      %)
 
 Research and Development
Costs
 
 Our
research and development (“R&D”) expenses consist of the following: (i)
costs incurred at our third party developers for which the game has not yet
reached technological feasibility as described in SFAS 86; and (ii) costs
incurred in our internal development group which are not capitalized into our
games under development. All direct game development during the year was
performed by third party developers under development and royalty contracts.
These external development costs are capitalized upon the Company determining
that the game has passed the technological feasibility standard of FAS 86 and
commencing upon product release, capitalized software development costs are
amortized to cost of sales using the greater of the ratio of actual cumulative
revenues during the quarter to the total of actual cumulative revenues during
the quarter plus projected future revenues for each game or straight-line over
the estimated remaining life of the product.
 
 Certain
internal costs are capitalized as part of the development costs of a game.
During the three and nine months ended December 31, 2008, $25,729 and $99,504 of
internal costs were capitalized. During the three and nine months ended December
31, 2008, $174,063 and $578,938 of external costs were expensed as incurred as
costs prior to the related game reaching technological feasibility.
 
 Virtually
all of the costs for R&D during the three and nine months ended December 31,
2008, related to costs incurred in the development of “Sin City: the Game”.
R&D costs have decreased from the prior year as the Company has decreased
its development activity of “Sin City: the Game”.
 
 In
general, a product goes through multiple levels of design, production, approvals
and authorizations before it may be shipped.
 
 These
approvals and authorizations include concept approvals from the platform
licensors of the game concept and product content, approvals from the licensor
of the intellectual property of the game design and game play, and approvals
from the platform licensors that the game is free of all material bugs and
defects. In addition, all games sold in North America are required to be rated
by the Entertainment Software Rating Board (ESRB) and equivalent regulatory
bodies in Europe for their content.
 
  -23-
   Once
these approvals have been satisfied, the game can be placed into manufacturing
with a manufacturer that must also be approved by the platform licensor. Once a
product is manufactured and inspected, it is ready to be shipped.
  One
multi-platform product, “Lucinda Green’s Equestrian Challenge,” shipped in late
November 2006 for the PS2 in North America, and shipped in early January 2007
for the PC. This product shipped in July 2007 in Europe and shipped in September
2007 in Australia.
 
 “Jackass:
The Game” for the PSP and PS2 platforms shipped in North America in late
September 2007, and in Europe and Australia in November 2007. The Nintendo DS
version of the game shipped in January 2008.
 
 In August
of 2006, we also began development of a sequel of “Heroes of the Pacific” set in
the European theatre on next generation consoles and PC (“Heroes Over
Europe”).  If we can resolve our disputes with our developer and
publishing partner, and raise sufficient funds to continue operations, we expect
to ship the game in our fiscal 2010 year.
 
 On May
18, 2007, we entered into a multi-year world-wide license agreement with Frank
Miller, Inc., a New York Corporation (“FMI”). This license grants us the
exclusive rights for the development, manufacturing, and publishing of games on
multiple platforms based on all current and future Sin City comic books and
collections, Sin City graphic novels, and other Sin City books owned or
controlled by FMI, including all Sin City storylines of those comic books and
graphic novels.  We are currently in the process of renegotiating
certain terms of the license agreement.
  The funds
required to develop a new game depend on several factors, including: the target
release platform, the scope and genre of the game design, the cost of any
underlying intellectual property licenses, the length of the development
schedule, the size of the development team, the complexity of the game, the
skill and experience of the development team, the location of the development
studio, whether an underlying game engine is being licensed, and any specialized
software or hardware necessary to develop a game.
 
 We expect
research and development costs to increase during the remainder of fiscal 2009
reflecting increased development activity for Sin City.
 
 General and Administrative
Costs
 
 General
and administrative costs were $307,608 and $1,156,000 in the three months ended
December 31, 2008 and 2007, respectively, a decrease of 73%. General and
administrative costs were $1,499,009 and $2,749,295 in the nine months ended
December 31, 2008 and 2007, respectively, a decrease of 45%. General and
administrative (G&A) costs are comprised primarily of the costs of stock
options issued to employees and consultants, employee salaries and benefits,
professional fees (legal, accounting, investor relations, and consulting),
facilities expenses, amortization and depreciation expenses, insurance costs,
and travel. General and administrative costs primarily decreased due to a
recovery in bad debt charges previously expensed that were recovered in the
current quarter and a reduction in the number of employees following the
Company’s restructuring in March 2008.
 
 Sales, Marketing and
Business Development Costs
 
 Sales,
marketing and business development costs were $44,813 and $428,511 during the
three months ended December 31, 2008 and 2007, respectively, a decrease of 90%.
Sales, marketing and business development costs were approximately $108,214 and
$2,350,805 during the nine months ended December 31, 2008 and 2007,
respectively, a decrease of 95%. Sales, marketing, and business development
costs consist primarily of employee salaries, stock option expenses, employee
benefits, consulting costs, public relations costs, promotional costs, marketing
research, sales commissions, and sales support materials
costs.  Sales, marketing, and business development costs decreased
year over year primarily due to the Company no longer incurring marketing or
promotional costs for Jackass: The Game and reduced headcount costs related to
the Company’s restructuring in March 2008.
 
 Interest Income (Expense),
net
 
 Interest
income (expense), net were ($30,209) and $8,806 for the three months ended
December 31, 2008 and 2007, respectively. The decrease primarily reflects lower
cash balances in fiscal 2009 and interest incurred on the Company’s Line with
Tiger Paw Capital Corporation and the secured credit loan from SilverBirch Inc.
Interest income (expense), net were ($87,923) and ($80,255) for the nine months
ended December 31, 2008 and 2007, respectively.  In 2008, we incurred
interest charges on our senior secured convertible debentures that were no
longer outstanding in fiscal 2009. In 2009, we incurred interest on the Line
with Tiger Paw Capital Corporation and the secured credit loan from SilverBirch
Inc.
 
 Other
Expense
 
 Other
income (expense) for the three months ended December 31, 2008 relates primarily
to the principal foreign currency revaluation of the Canadian dollar secured
credit loan from SilverBirch Inc.
 
 During
the three months ended December 31, 2007, we took a charge related to contingent
liability charges on the value of 192,000 warrants issued on July 18, 2007, that
management believed would not be cancelled as we were not able to realize a
liquidity event in Canada before March 18, 2008.
 
  -24-
  Critical
Accounting Policies
  Red
Mile's financial statements and related public financial information are based
on the application of accounting principles generally accepted in the United
States ("GAAP"). GAAP requires the use of estimates; assumptions, judgments and
subjective interpretations of accounting principles that have an impact on the
assets, liabilities, revenues, expenses, and equity amounts
reported.
 
 These
estimates can also affect supplemental information contained in our external
disclosures including information regarding contingencies, risk and financial
condition.
 
 We
believe our use of estimates and underlying accounting assumptions adhere to
GAAP and are consistently applied. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. Actual results may differ materially from these
estimates under different assumptions or conditions. We continue to monitor
significant estimates made during the preparation of our financial
statements.
  Our
significant accounting policies are summarized in Note 1 of our consolidated
financial statements. While all these significant accounting policies impact our
financial condition and results of operations, we view certain of these policies
as critical. Policies determined to be critical are those policies that have the
most significant impact on our consolidated financial statements and require
management to use a greater degree of judgment and estimates. Actual results may
differ from those estimates. Our management believes that given current facts
and circumstances, it is unlikely that applying any other reasonable judgments
or estimate methodologies would cause a material effect on our consolidated
results of operations, financial position or liquidity for the periods presented
in this Quarterly Report on Form 10-Q.
 
 We
believe that certain critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements: revenue recognition and software development cost and advanced
royalties.  These accounting policies are discussed in “ITEM 6 —
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION” contained in our
Annual Report on Form 10-KSB for the fiscal year ended March 31, 2008, as well
as in the notes to the March 31, 2008 consolidated financial
statements.  There have not been any significant changes to these
accounting policies since they were previously reported at March 31,
2008.
 
 Revenue
recognition
  Our  revenue
recognition policies are in accordance with the American Institute Of Certified
Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2 Software Revenue Recognition
as amended by SOP 98-9 Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions and SOP 81-1
Accounting for Performance of
Construction Type and Certain Production-TypeContracts.
  In most
cases, we ship finished products to third party game distributors who will ship
these products to retailers and charge us a distribution fee. Our internal sales
force, together with the distributors’ sales force and an  outsourced
independent sales group we use,  generate orders from the retailers.
In North America, shipments made to an exclusive distributor (Navarre
Corporation) are shipped under consignment, and accordingly we do not record any
revenue on these shipments until the distributor ships the games to the
retailers.  Revenue is recorded net of the distribution fees levied by
the distributor.  We also ship directly to a select few specialty
retailers and to video rental companies.
 
 Red Mile
may receive minimum guaranteed amounts or development advances from its
distributors or co-publishers prior to and upon final delivery and acceptance of
a completed game.
 
 Under
these agreements, such payments do not become non-refundable until such time as
the game is completed and accepted by the co-publisher(s). Pursuant to SOP 81-1,
the completed contract method of accounting is used and these cash receipts are
credited to deferred revenue when received.
  In cases
where the contract with the co-publisher(s) is a development contract, revenue
is recognized once the product is completed and accepted by the co-publisher(s).
This acceptance by the co-publisher(s) is typically concurrent with approval
from the third party hardware manufacturer for those products where approval is
required from the third-party hardware manufacturer.
  In cases
where the agreement with the distributors or co-publishers calls for these
payments to be recouped from revenue share or royalties earned by us from sales
of the games, we do not recognize revenue from these payments until the game
begins selling. Accordingly, we recognize revenue as the games are sold by the
distributors or co-publishers using the stated revenue share or royalty rates
and definitions in the respective contract(s). Periodically, we review our
deferred revenue balances and if the product is no longer being sold or when our
current forecasts show that a portion of the revenue will not be earned out
through forecasted sales of the games, the excess balance in deferred revenue is
recognized as revenue.
   -25-
  Determining
when revenue is recognized and the amount of revenue to be recognized often
involves assumptions and judgments that can have a significant impact on the
timing and amount of revenue we report. For example, in recognizing revenue, we
must make assumptions as to the potential returns and potential price protection
of the product which could result in credits to distributors or retailers
for their unsold inventory. Changes in any of these assumptions or judgments
could cause a material increase or decrease in the amount of net revenue we
report in a particular period.
 
 Our
revenues are subject to material seasonal fluctuations. In particular,
revenues in our third fiscal quarter will ordinarily be significantly higher
than other fiscal quarters. Revenues recorded in our third fiscal quarter are
not necessarily indicative of what our reported revenues will be for an entire
fiscal year.
 
 We may be
required to levy European Value Added Tax (“VAT”) and Australian Goods and
Services Tax (“GST”) on shipments of  products within the EU member
countries, and Australia, respectively. Pursuant to EITF 06-03, How Taxes Collected from Customers
and Remitted to Governmental Authorities Should Be Presented in the IncomeStatement, we
will include the taxes assessed by a governmental authority that is directly
imposed on a revenue-producing transaction on a gross basis (included in
revenues and costs).
  Software
Development Costs and Advanced Royalties
  Software
development costs and advanced royalties to developers include milestone
payments or advances on milestone payments made to software developers and other
third parties and direct labor costs.  Advanced royalties also include
license payments made to licensors of intellectual property we
license.
  Software
development costs and advanced royalty payments made to developers are accounted
for in accordance with Statement of Financial Standards No. 86, “Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed”.
  Software
development costs and advanced royalty payments to developers are capitalized
once technological feasibility of a product is established and such costs are
determined to be recoverable. For products where proven technology exists, this
may occur very early in the development cycle. Factors we consider in
determining when technological feasibility has been established include (i)
whether a proven technology exists; (ii) the quality and experience levels of
the development studio developing the game; (iii) whether the game is a sequel
to an already completed game which has used the same or similar technology; and
(iv) whether the game is being developed with a proven underlying game engine.
Technological feasibility is evaluated on a product-by-product basis.
Capitalized costs for those products that are cancelled or abandoned are charged
immediately to cost of sales. The recoverability of capitalized software
development costs and advanced royalty payments to developers are evaluated
based on the expected performance of the specific products for which the costs
relate.
  Commencing
upon a product’s release, capitalized software development costs and advanced
royalty payments to developers are amortized to cost of sales using the greater
of the ratio of actual cumulative revenues during the quarter to the total of
actual cumulative revenues during the quarter plus projected future revenues for
each game or straight-line over the remaining estimated life of the
product.  For products that have been released in prior periods, we
evaluate the future recoverability of capitalized amounts on a quarterly basis
or when events or circumstances indicate the capitalized costs may not be
recoverable. The primary evaluation criterion is actual title
performance.
  Significant
management judgments and estimates are utilized in the assessment of when
technological feasibility is established, as well as in the ongoing assessment
of the recoverability of capitalized development costs and advanced royalty
payments to developers.  In evaluating the recoverability of
capitalized software development costs and advanced royalty payments to
developers, the assessment of expected product performance utilizes forecasted
sales quantities and prices and estimates of additional costs to be incurred or
expensed.
  If
revised forecasted or actual product sales are less than the original forecasted
amounts utilized in the initial recoverability analysis, the net realizable
value may be lower than originally estimated in any given quarter, which could
result in a larger charge to cost of sales in future quarters or an impairment
charge to cost of sales.
  Advanced
royalty payments made to licensors of intellectual property are capitalized and
evaluated for recoverability based on the expected performance of the underlying
games for which the intellectual property was licensed. Any royalty payments
made to licensors of intellectual property determined to be unrecoverable
through future sales of the underlying games are charged to cost of
sales.
 
 Off-Balance Sheet
Arrangements
 
 At
December 31, 2008, we did not have any transactions, obligations or
relationships that could be considered off-balance sheet
arrangements.
 
 
 -26-
  
 ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 We do not hold any derivative instruments and do not engage in
any hedging activities.
 
 ITEM
4T. CONTROLS AND PROCEDURES
  (a)
Evaluation of disclosure controls and procedures.
 
 We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized,
and reported within the required time periods and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer (our Principal Accounting Officer), as
appropriate, to allow for timely decisions regarding required
disclosure.  In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can only provide reasonable assurance of
achieving the desired control objective, and management is required to exercise
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
 
 Management,
under the supervision and with the participation of our Chief Executive Officer,
who is our principal executive officer and principal financial officer, has
evaluated the effectiveness of our disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended as of the end of the period covered by this Quarterly
Report  (the “Evaluation Date”).  Management assessed the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008, and this assessment identified material weakness in the
Company’s internal control over financial reporting.
 
 In making
its assessment of internal control over financial reporting management used the
criteria issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in  Internal Control—Integrated
Framework.  Because of the material weakness described in the
preceding paragraph, management believes that, as of December 31, 2008, the
Company’s internal control over financial reporting was not effective based on
those criteria.
 
 We do not
expect that our disclosure controls or internal controls over financial
reporting will prevent all errors or all instances of fraud.  A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system's objectives will be met.
 Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs.  Management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within our company have been detected.  These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
 Because of the inherent limitation of a cost-effective control system,
misstatements due to error or fraud may occur and not be
detected.  Additionally, controls can be circumvented by the
individual acts of  some  persons,  by collusion
of two or more people or by management override of a control. A design of a
control system is also based upon certain assumptions about potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and may not be
detected.
 
 The
Company does not have independent board members and, therefore, we have no
independent audit committee. In addition, the lack of multiple employees results
in the Company’s inability to have a sufficient segregation of duties within its
accounting and financial activities. These absences constitute material
weaknesses in the Company’s internal controls over financial reporting and
corporate governance structure.
 
 Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. The Company’s internal control system was designed to
provide reasonable assurance to the Company’s management and board of directors
regarding the preparation and fair presentation of published financial
statements. The internal control system over financial reporting includes those
policies and procedures that:
 
 •
              
              pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;•
              
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the Company
      are being made only in accordance with authorization of management and our
      board of directors; and•
              
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.
 
 All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
  Changes
in Internal Control Over Financial Reporting
 
 There have
been no changes in the Company’s internal controls over financial reporting
identified in connection with the evaluation of disclosure controls and
procedures discussed above that occurred during the quarter ended December 31,
2008 or subsequent to that date that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
  -27-
  PART
II. OTHER INFORMATION
  ITEM
1. LEGAL PROCEEDINGS
 
 None.
  ITEM
1A. RISK FACTORS
 
 Our
business involves a high degree of risk. Therefore, in evaluating us and our
business you should carefully consider the risks set forth below as well as
those set forth in our annual report on Form 10-KSB filed on June 19, 2008 with
the SEC.
 
 If
we are unable to raise additional financing or receive advances from
co-publishing or distribution partners, we will be unable to fund our product
development and continue our business operations and investors may not receive
any portion of their investment back.
  On
February 11, 2009, our publishing partner for our “Heroes Over Europe” title
served us a termination notice of the publishing agreement for claims that we
breached the publishing agreement.  We dispute the grounds for
termination. The publishing partner has ceased making milestone payments to us
which has had a material and adverse effect on our ability to continue
operations.
 
 We have
never achieved positive cash flow from operations and there can be no assurance
that we will do so in the future. We need additional financing to fund our
product development costs and our operating costs that we anticipate incurring
over the next several quarters. Our current cash on hand will enable us to
continue operating until the end of our 2009 fiscal year. We anticipate needing
an additional $10,000,000 to bring our existing products under development to
market and finance our day to day operations.  If we are unable to
make additional draws on our revolving line of credit, receive timely advances
from co-publishing partners, or raise additional capital, we will be unable to
continue our business operations and investors may not receive any portion of
their investment back. If we are unable to make timely payments under our
Standstill Agreement with SilverBirch Inc., we may be unable to continue our
business operations and investors may not receive any portion of their
investment back.
  Because
we have significant accumulated deficit and negative cash flows from operations,
our independent registered accounting firm has qualified its opinion regarding
our ability to continue as a going concern.
  We have a
significant accumulated deficit and have sustained negative cash flows from
operations since our inception. The opinion of our independent registered
accounting firm for the years ended March 31, 2008 and 2007 is qualified subject
to uncertainty regarding our ability to continue as a going concern. In fact,
the opinion states that these factors raise substantial doubt as to our ability
to continue as a going concern. In order for us to operate and not go out of
business, we must generate and/or raise capital to stay operational and ensure
our co-publishing partners are making timely milestone payments to us. The
continuity as a going concern is dependent upon our co-publishing partners
making timely milestone payments to us, the continued financial support of our
current shareholders, current line of credit lenders, and new investors. There
can be no assurance that we will be successful with any of these
initiatives.
 
 Because
we have not internally developed any of the games that we have sold, our
business is dependent upon external sources over which we have very little
control.
  We have
not yet internally developed any games that we sell and our business has been
derived from the sale of games developed by external development studios. If the
external developers of our current games under development were to discontinue
their relationship with us, we may not be able to find a replacement. If our
external developers were to increase the fees above amounts contractually agreed
to, we may be unable to pay the increased fees which could delay or even halt
development of our games.
  As a
result of our co-publishing partner on our “Heroes Over Europe” title delaying
payment to us, we have been unable to make timely payments to our developer of
the title. Our failure to make timely payments to our developer could cause our
developer to become insolvent and unable to complete development of the
game.
 
 There can
be no assurance that we would be able to find alternative developers, or even if
such developers are available, that they will be available on terms acceptable
to us.
  Any
delays in development of our games could cause our financial projections to be
materially different from what was anticipated.
 
 Because
we have only recently commenced business operations, it is difficult to evaluate
our prospects and we face a high risk of business failure.
  We were
incorporated in August 2004 and shipped our first two games in our second fiscal
quarter of 2006 and an additional six games in fiscal 2007. During the year
ended March 31, 2008, we shipped Jackass: The Game for the Sony PS2, Sony PSP,
and Nintendo DS  platforms and an additional three PC games from our
Roveractive, Ltd. casual games subsidiary.  We therefore face the
risks and problems associated with businesses in their early stages in a
competitive environment and have a limited operating history on which an
evaluation of our prospects can be made. Until we develop our business further
by publishing and developing more games, it will be difficult for an investor to
evaluate our chances for success. Our prospects should be considered in light of
the risks, expenses and difficulties frequently encountered in the establishment
of any business in a competitive environment and in the video game and
publishing spaces.
   -28-
  The
Company has not yet generated any net income and may never become
profitable.
  During
the years ended March 31, 2008 and 2007, we incurred net losses of $15,711,149
and $8,038,894, respectively. Our ability to generate revenues and to become
profitable depends on many factors, including without limitation, the market
acceptance of our products and services, our ability to control costs and our
ability to implement our business strategy. There can be no assurance that we
will become or remain profitable.
 
 The
Company has rarely generated positive gross margins.
  Our
ability to generate positive gross margins depends on many factors, including
the market acceptance of our products, the selling prices of our products, our
ability to control the costs of developing and manufacturing our products and
the costs of royalties paid to licenses of any intellectual properties we have
licensed. There can be no assurance that we will be able to sustain positive
gross margins.
 
 If
our business plan fails, our Company will dissolve and investors may not receive
any portion of their investment back.
  If we are
unable to increase our line of credit with Tiger Pay Capital Corporation,receive
co-publishing or distribution advances on our games under development or raise
sufficient capital, we will be unable to implement our business strategy.
Co-publishing our titles will make it more difficult to achieve profitability
and positive cash flow.  In such circumstances, it is likely that we
will dissolve and we would likely not be able to return any funds back to
investors.
 
 If
we are unable to hire and retain key personnel, then we may not be able to
implement our business plan.
  The
success and growth of our business will depend on the contributions of our
Chairman and Chief Executive Officer, Chester Aldridge as well as our ability to
attract, motivate and retain other highly qualified personnel. Competition for
such personnel in the publishing and development industry is intense. We do not
have an employment agreement with Mr. Aldridge or any of our other employees.
The loss of the services of any of our key personnel, or our inability to hire
or retain qualified personnel, could have a material adverse effect on our
business.
 
 The
Company faces intense competition.
 
 Our
products compete with motion pictures, television, music and other forms of
entertainment for the leisure time and money of consumers.
 
 Our
competitors vary in size from very small companies with limited resources to
very large, diversified corporations with greater financial and marketing
resources than ours. Our business requires the continuous introduction of
popular games, which require ever-increasing budgets for development and
marketing. As a result, the availability of significant financial resources has
become a major competitive factor in developing and marketing of software
games.
 
 We
currently compete with Sony, Microsoft, and Nintendo, each of which develop and
publish software for their respective console platforms. We also compete with
numerous companies which are, like us, licensed by the console manufacturers to
develop and publish software games that operate on their consoles. These
competitors include Activision Blizzard, Atari, Capcom, Eidos, Electronic Arts,
Koei, Konami, LucasArts, Midway, Namco, Sega, Take-Two Interactive, THQ, and
Ubisoft, among others. Diversified media companies such as Time Warner, Viacom
and Disney have also indicated their intent to significantly expand their
software game publishing efforts in the future.
 
 We
believe that the software games segment is best viewed as a segment of the
overall entertainment market. We believe that large software companies and media
companies are increasing their focus on the software games segment of the
entertainment market and as a result, may become more direct competitors.
Several large software companies and media companies (e.g., Microsoft and Sony)
have been publishing products that compete with ours for a long time, and other
diversified media/entertainment companies (e.g., Time Warner, Disney and MTV)
have announced their intent to significantly expand their software game
publishing efforts in the future.
 
 In
addition to competing for product sales, we face heavy competition from other
software game companies to obtain license agreements granting us the right to
use intellectual property included in our products. Some of these content
licenses are controlled by the diversified media companies, which intend to
expand their software game publishing divisions.
 
 Finally,
the market for our products is characterized by significant price competition
and we regularly face pricing pressures from our competitors and customers.
These pressures may, from time to time, require us to reduce our prices on
certain products. Our experience has been that software game prices tend to
decline once a generation of consoles has been in the market for a significant
period of time due to the increasing number of software titles competing for
acceptance by consumers and the anticipation of the next-generation of
consoles.
 
 If we
fail to compete successfully, we could lose customers and our results of
operations could be affected and our business will suffer.
  -29-
   Our
business depends on the availability and installed base of current and
next  generation video game platforms and will suffer if an
insufficient quantity of these platforms is sold.
  Most of
our anticipated revenues will be generated from the development and publishing
of games for play on video game platforms produced by third
parties.
  Our
business will suffer if such third-parties do not manufacture and sell an
adequate number of platforms to meet consumer demand or if the installed base of
the platforms is insufficient.
  Our
financial performance will suffer if we do not meet our game development
schedules.
  We expect
that many of our future games will be developed and published in connection with
the releases of related movie titles and other significant marketing events, or
more generally in connection with higher sales periods, including our third
quarter ending December 31. As such, we will establish game development
schedules tied to these periods. If we miss these schedules, we will incur the
costs of procuring licenses without obtaining the revenue from sales of the
related games.
  We
are currently dependent on a small number of customers, the loss of any of which
could cause a significant decrease in our revenue.
  We are
currently dependent on one customer, Atari, for the majority of our future
revenue which relates to co-publishing revenue of our “Heroes Over Europe” title
currently under development. On February 11, 2009, Atari sent us a notice of
termination with respect to our publishing agreement with Atari.  If
we are unable to resolve our dispute with Atari and find a new publishing
partner for this game, we may not be able to continue operations.  If
major customers were to decrease their purchase volume or discontinue their
relationship with us, our revenue would decrease significantly unless we were
able to find new customers or co-publishing partners to replace the lost volume.
There can be no assurance that such new customers or co-publishing partners
could be found, or if found, that they would purchase the same quantity as the
current customers.
  If
we do not continually develop and publish popular games, our business will
fail.
  The
lifespan of any of our games is relatively short, in many cases less than one
year. It is therefore important for us to be able to continually develop games
that are popular with the consumers.
  During
the last two fiscal years, we have sold five Console or Handheld games and six
PC only games. We are currently involved in the development of two games. If we
are unable to continually identify, develop and publish games that are popular
with the consumers on a regular basis, our business will suffer and we will
ultimately cease our operations. Our business will also suffer if we do not
receive additional financing to be used for research and development of new
games.
  We have
shipped the following Console or Handheld games: (i) Heroes of the Pacific for
the PS2, Xbox and PC platforms which first began shipping in September, 2005;
(ii) GripShift for the PSP platform which first began shipping in September
2005; (iii) Crusty Demons for the PS2 and Xbox platforms which first began
shipping in July 2006; (iv) Lucinda Green’s Equestrian Challenge for the PS2 and
PC which first began shipping in November 2006; and (v) Jackass for the PS2 and
PSP which first began shipping in September 2007 and for the DS platform which
first began shipping in January 2008.  On the PC, we have shipped: (i)
Disney’s Aladdin Chess Adventures which first began shipping in February 2006;
(ii) El Matador, which first began shipping in October 2006; (iii) Dual Sudoku,
which first began shipping in September 2006; (iv) Timothy and Titus, which
first began shipping in November 2006; (v) Aircraft Power Pack, which first
began shipping in December 2006;  (vi)  Lucinda Green’s
Equestrian Challenge, which we first began shipping in November 2006; and (vii)
Ouba, Pantheon and 10 Talismans which first began shipping in May 2007. We are
currently involved in the development of two games: (i) a sequel to Heroes of
the Pacific, “Heroes Over Europe” for the Xbox 360, PS3, and PC; and (ii) Sin
City: The Game (working title) for the PS3 and Xbox 360.
  In
addition, the Entertainment Software Rating Board (ESRB), a non-profit
self-regulatory body, assigns various ratings for our games as do the European
equivalent rating agencies. If any of our games receive a rating that is
different from the rating we anticipated, sales of our games could be adversely
effected which could ultimately cause our business to fail.
  The
cyclical nature of video game platforms and the video game market may cause our
operating results to suffer, and make them more difficult to predict. We may not
be able to adapt our games to the next generation platforms.
  Video
game platforms generally have a life cycle of approximately six to ten years,
which has caused the market for video games to also be cyclical. Sony’s
PlayStation 2 was introduced in 2000 and Microsoft’s Xbox and the Nintendo
GameCube were introduced in 2001. Microsoft introduced the Xbox 360 in 2005,
Sony the PlayStation 3 and Nintendo the Wii in 2006. These introductions have
created a new cycle for the video game industry which will require us to make
significant financial and time investments in order to adapt our current games
and develop and publish new games for these new consoles. We cannot assure you
that we will be able to accomplish this or that we will have the funds or
personnel to do this. Furthermore, we expect development costs for each game on
the new consoles to be significantly greater than in the past. If the increased
costs we incur due to next generation consoles are not offset by greater sales,
we will continue to incur losses.
   -30-
    We
depend on our platform licensors for the license to publish games for their
platforms and to establish the royalty rates for the license.
  We are
dependent on our platform licensors for the license to the specifications needed
to develop software for their platforms. These platform licensors set the
royalty rates that we must pay in order to publish games for their platforms.
These royalty rates will vary based on the expected wholesale price point of the
game. Certain of our platform licensors have retained the ability to change
their royalty rates. It is possible that a platform licensor may terminate or
not renew our license.  Our gross margins and operating margins will
suffer if our platform licensors increase the royalty rates that we must pay,
terminate their licenses with us, do not renew their licenses with us, or do not
grant us a license to publish on the next generation consoles.
  In
addition, if we are required to issue price protection credits to our customers
on slow moving inventory, we are not entitled to receive corresponding credits
on the royalty rates to the platform manufacturers for publishing the
games.
  We are
also dependent on the platform licensors for multiple approvals on each game in
order to publish each game. There can be no assurance that such platform
licensors will approve any of our games. Accordingly, we may never be able to
ship our games that have completed development if they are not approved by the
platform manufacturers.
  We have
the following platform licenses:
  Platform
                  
                  TermMicrosoft
      Xbox
                  
                  Initial
      term expired on November 15, 2007. Then automatic renewal unless noticed
      60 days prior to expiration of non-renewal. Royalty may change on July
      1st
      of any year.Sony
      PS2 and PSP
                  
                  Initial
      term expired on March 31, 2007. Then automatic renewal unless noticed 60
      days prior to expiration of non-renewal. Royalty rates are subject to
      change with 60 days notice.Sony
      PS3
                  
                  Initial
      term expires on March 31, 2012. Automatic renewal for one-year terms,
      unless noticed on or before January 31 of the year in which the term would
      renew. Royalty rates are subject to change with 60 days
      notice.Nintendo
      Wii and DS
                  
                  Expires
      June 12, 2010.PC
                  
                  There
      are no platform licenses required for the PCs.
  In
addition, each platform licensor has its own criteria for approving games for
its hardware platform. Each platform licensor also has different criteria
depending on the geographical territory of the game release. These criteria are
highly subjective. Without such approval, we would not be able to publish our
games nor have the games manufactured. Failure to obtain these approvals on the
games we are currently developing and any games that we develop in the future
will preclude any sales of such products and, as such, negatively affect our
margins and profits, and could ultimately cause our business to
fail.
  It
may become more difficult or expensive for us to license intellectual property,
thereby causing us to publish fewer games.
  Our
ability to compete and operate successfully depends in part on our acquiring and
controlling proprietary intellectual property. Our games embody trademarks,
trade names, logos, or copyrights licensed from third parties. If we cannot
maintain the licenses that we currently have, or obtain additional licenses for
the games that we plan to publish or co-publish, we will produce fewer games and
our business will suffer.
  Furthermore,
some of our competitors have significantly greater resources than we do, and are
therefore better positioned to secure intellectual property licenses. We cannot
assure you that our licenses will be extended on reasonable terms or at all, or
that we will be successful in acquiring or renewing licenses to property rights
with significant commercial value.
  Infringement
claims regarding our intellectual property may harm our business.
  Our
business may be harmed by the costs involved in defending product infringement
claims. We can give no assurances that infringement or invalidity claims (or
claims for indemnification resulting from infringement claims) will not be
asserted or prosecuted against us or that any such assertions or prosecutions
will not materially adversely affect our business. The images and other content
in our games may unintentionally infringe upon the intellectual property rights
of others despite our best efforts to ensure that this does not occur. It is
therefore possible that others will bring lawsuits against us claiming that we
have infringed on their rights. Regardless of whether any such claims are valid
or can be successfully asserted, defending against such lawsuits could be
expensive and cause us to stop publishing certain games or require us to license
the proprietary rights of third parties. Such licenses may not be available upon
reasonable terms, or at all.
   -31-
    The
content of our games may become subject to increasing regulation and such
regulation may limit the markets for our games.
  Legislation
is periodically introduced at the local, state and federal levels in the United
States and in foreign countries that is intended to restrict the content and
distribution of games similar to the ones that we develop and produce, and could
prohibit certain games similar to ours from being sold to minors. Additionally,
many foreign countries have laws that permit governmental entities to censor the
content and advertising of interactive entertainment software.
  We
believe that similar legislation will be proposed in many countries that are
significant markets for our games, including the United States. If any of this
proposed legislation is passed, it could have the effect of limiting the market
for our games and/or require us to modify our games at an additional cost to
us.
  If
we or others are not successful in combating the piracy of our games, our
business could suffer.
  The games
that we develop and publish are often the subject of unauthorized copying and
distribution, which is referred to as pirating. The measures taken by the
manufacturers of the platforms on which our games are played to limit the
ability of others to pirate our games may not prove successful. Increased
pirating of our games throughout the world negatively impacts the sales of our
games.
  If
any of our games are found to contain hidden, objectionable content, our
business may be subject to fines or otherwise be harmed.
  Some game
developers and publishers include hidden content in their games that are
intended to improve the experience of customers that play their games.
Additionally, some games contain hidden content introduced into the game without
authorization by an employee or a non-employee developer. Some of this hidden
content has in the past included graphic violence or sexually explicit material.
In such instances, fines have been imposed on the publisher of the game and the
games have been pulled off the shelves by retailers. The measures we have taken
to reduce the possibility of hidden content in the games that we publish may not
be effective, and if not effective our future income will be negatively impacted
by increased costs associated with fines or decreased revenue resulting from
decreased sales volume because of ownership of games that cannot be
sold.
  Our
business is subject to economic, political, and other risks associated with
international operations.
  Because
we have distribution agreements with entities located in foreign countries, our
business is subject to risks associated with doing business
internationally.
  Accordingly,
our future results could be harmed by a variety of factors, including less
effective protection of intellectual property, changes in foreign currency
exchange rates, changes in political or economic conditions, trade-protection
measures and import or export licensing requirements. Effective protection of
intellectual property rights is unavailable or limited in certain foreign
countries. There can be no assurance that the protection afforded our
proprietary rights in the United States will be adequate in foreign countries.
Furthermore, there can be no assurance that our business will not suffer from
any of these other risks associated with doing business in a foreign
country.
  Our
business may suffer from deteriorating macroeconomic conditions in the United
States.
 
 We are
not able to predict whether macroeconomic conditions will get worse or improve,
or predict the timing of such developments.  If macroeconomic
conditions get worse, we are not able to predict the impact such worsening
conditions will have on the online marketing industry and on our results of
operations.  Further, if and when macroeconomic conditions do improve,
there can be no assurances that we will be able to regain the levels of revenue
and profitability that we achieved prior to the macroeconomic
downturn.
 
 We
incur increased costs as a result of being a public company, which could
adversely affect our operating results.
 
 As a
public company, we incur significant legal, accounting and other expenses that
we did not incur as a private company. In addition, the Sarbanes-Oxley Act of
2002 and the new rules subsequently implemented by the Securities and Exchange
Commissions, the National Association of Securities Dealers, Inc., and the
Public Company Accounting Oversight Board have imposed various new requirements
on public companies, including requiring changes in corporate governance
practices. We expect these rules and regulations to increase our legal and
financial compliance costs and to make some activities more time-consuming and
costly. We also expect these new rules will require us to incur substantial
costs to obtain the same or similar insurance coverage. These additional costs
will have a negative impact on our income and make it more difficult for us to
achieve profitability.
  -32-
   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.
 
 Our
common stock is considered to be a “penny stock” since it meets one or more of
the definitions in Rule 3a51-1 under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). These include but are not limited to the
following: (i) the stock trades at a price less than $5.00 per share; (ii) it is
not traded on a “recognized” national exchange; (iii) it is not quoted on the
NASDAQ Stock Market, or even if so, has a price less than $5.00 per share; or
(iv) is issued by a company with net tangible assets less than $2.0 million, if
in business more than a continuous three years, or with average revenues of less
than $6.0 million for the past three years. The principal result or effect of
being designated a “penny stock” is that securities broker-dealers cannot
recommend the stock but must trade in it on an unsolicited
basis.  Section 15(g) of the Exchange Act and Rule 15g-2 promulgated
thereunder by the SEC require broker-dealers dealing in penny stocks to provide
potential investors with a document disclosing the risks of penny stocks and to
obtain a manually signed and dated written receipt of the document before
effecting any transaction in a penny stock for the investor’s
account.
 
 Potential
investors in our common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be “penny stock.”
Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the
account of any investor for transactions in such stocks before selling any penny
stock to that investor. This procedure requires the broker-dealer to (i) obtain
from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investor’s financial situation, investment experience
and investment objectives.  Compliance with these requirements may
make it more difficult for holders of our common stock to resell their shares to
third parties or to otherwise dispose of them in the market or
otherwise.
 
 Delaware
law contains anti-takeover provisions that could deter takeover attempts that
could be beneficial to our stockholders.
 
 Provisions
of Delaware law may make it more difficult for a third-party to acquire the
Company, even if doing so would be beneficial to the stockholders of the
Company. Section 203 of the Delaware General Corporation Law may makes an
acquisition of the Company and the removal of incumbent officers and directors
more difficult by prohibiting stockholders holding 15% or more of the Company’s
outstanding voting stock from acquiring us, without our board of directors’
consent, for at least three years from the date they first hold 15% or more of
the voting stock.
  We may become
subject to litigation which could be expensive or
disruptive.
 
 Similar
to our competitors in the video game software industry, we have been and will
likely become subject to litigation. Such litigation may be costly and time
consuming and may divert management’s attention from our day-to-day operations.
In addition, we cannot assure you that such litigation will be ultimately
resolved in our favor or that an adverse outcome will not have a material
adverse effect on our business, results of operations and financial
condition.
 
 Effect
of Recent Accounting Pronouncements
 
 EITF
06-03
  In June
2006, the EITF reached a consensus on Issue No. 06-03 (“EITF 06-03”), How Taxes Collected from Customers
and Remitted to Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation). EITF 06-03 provides
that the presentation of taxes assessed by a governmental authority that is
directly imposed on a revenue-producing transaction between a seller and a
customer on either a gross basis (included in revenues and costs) or on a net
basis (excluded from revenues) is an accounting policy decision that should be
disclosed. The provisions of EITF 06-03 became effective as of December 31,
2006. We believe EITF 06-03 will have a material impact on our financial
statements in the future.
  SFAS 157
  In
September 2006, the FASB issued SFAS No. 157,Fair Value Measurements
(SFAS 157), which provides guidance on how to measure assets and liabilities
that use fair value.
 
 SFAS 157
will apply whenever another US GAAP standard requires (or permits) assets or
liabilities to be measured at fair value but does not expand the use of fair
value to any new circumstances.  This standard also will require
additional disclosures in both annual and quarterly reports.  SFAS 157
will be effective for fiscal 2009. We are currently evaluating the potential
impact this standard may have on its financial position and results of
operations.
  In
December 2007, the FASB issued proposed FASB Staff Position ("FSP") 157-b, Effective Date of FASB Statement No.
157, that would permit a one-year deferral in applying the measurement
provisions of Statement No. 157 to non-financial assets and non-financial
liabilities (non-financial items) that are not recognized or disclosed at fair
value in an entity's financial statements on a recurring basis (at least
annually). Therefore, if the change in fair value of a non-financial item is not
required to be recognized or disclosed in the financial statements on an annual
basis or more frequently, the effective date of application of Statement 157 to
that item is deferred until fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years. This deferral does not apply,
however, to an entity that applies Statement 157 in interim or annual financial
statements before proposed FSP 157-b is finalized. We believe the adoption of
FSP 157-b may have a material impact on operating income or net
earnings.
  SFAS
159
  On
February 15, 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159). Under this standard, we
may elect to report financial instruments and certain other items at fair value
on a contract-by-contract basis with changes in value reported in earnings. This
election is irrevocable. SFAS No. 159 provides an opportunity to mitigate
volatility in reported earnings that is caused by measuring hedged assets and
liabilities that were previously required to use a different accounting method
than the related hedging contracts when the complex provisions of SFAS No. 133
hedge accounting are not met. SFAS No. 159 is effective for years beginning
after November 15, 2007 and it is not expected to have a material impact on our
consolidated financial statements.
   -33-
  FIN
48
  Effective
April 1, 2007, we adopted the provisions of FASB Interpretation
No. 48,Accounting for
Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109 , or FIN 48. FIN 48 provides detailed guidance for
the financial statement recognition, measurement and disclosure of uncertain
income tax positions recognized in the financial statements in accordance with
SFAS No. 109. Income tax positions must meet a “more-likely-than-not”
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods.
  Upon
review and analysis by the Company, we have concluded that no FIN 48 effects are
present as of March 31, 2008 and our tax position has not materially changed
since March 31, 2008.  For the year ended March 31, 2008, we did not
identify and record any liabilities related to unrecognized income tax
benefits.  We do not expect the adoption of FIN 48 to have a material
impact our financial statements.
  We
recognize interest and penalties related to uncertain income tax positions in
income tax expense. No interest and penalties related to uncertain income tax
positions have been accrued.  Income tax returns for the fiscal tax
year ended March 31, 2005 to the present are subject to examination by major tax
jurisdictions.
  EITF
07-03
 
 In June
2007, the EITF reached a consensus on EITF No. 07-03, Accounting for Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities, or EITF 07-03. EITF 07-03 specifies the timing of expense
recognition for non-refundable advance payments for goods or services that will
be used or rendered for research and development activities. EITF 07-03 was
effective for fiscal years beginning after December 15, 2007, and early adoption
is not permitted. Adoption of EITF 07-03 has not had a material impact on
either our financial position or results of operations.
 
 EITF
07-01
 
 In
December 2007, the EITF reached a consensus on EITF No. 07-01, Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual
Property, or EITF 07-01. EITF 07-01 discusses the appropriate income
statement presentation and classification for the activities and payments
between the participants in arrangements related to the development and
commercialization of intellectual property. The sufficiency of disclosure
related to these arrangements is also specified. EITF 07-01 is effective for
fiscal years beginning after December 15, 2008. As a result, EITF 07-01 is
effective for us in the first quarter of fiscal 2010. We do not expect the
adoption of EITF 07-01 to have a material impact on either our financial
position or results of operations.
  SFAS
141(R) and SFAS 160
  In
December 2007, the Financial Accounting Standards Board  (“FASB”)
issued Statement No. 141(Revised 2007),Business
Combinations  (SFAS 141(R)) and Statement No. 160,Accounting and Reporting
of Non-controlling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51 (SFAS 160). These statements will significantly
change the financial accounting and reporting of business combination
transactions and non-controlling (or minority) interests in consolidated
financial statements. SFAS 141(R) requires companies to: (i) recognize, with
certain exceptions, 100% of the fair values of assets acquired, liabilities
assumed, and non-controlling interests in acquisitions of less than a 100%
controlling interest when the acquisition constitutes a change in control of the
acquired entity; (ii) measure acquirer shares issued in consideration for a
business combination at fair value on the acquisition date; (iii) recognize
contingent consideration arrangements at their acquisition-date fair values,
with subsequent changes in fair value generally reflected in
earnings; (iv) with certain exceptions, recognize pre-acquisition loss
and gain contingencies at their acquisition-date fair values; (v) capitalize
in-process research and development (IPR&D) assets acquired;
(vi) expense, as incurred, acquisition-related transaction costs;
(vii) capitalize acquisition-related restructuring costs only if the
criteria in SFAS 146,Accounting for Costs
Associated with Exit or Disposal Activities, are met as of the
acquisition date; and (viii) recognize changes that result from a business
combination transaction in an acquirer’s existing income tax valuation
allowances and tax uncertainty accruals as adjustments to income tax expense.
SFAS 141(R) is required to be adopted concurrently with SFAS 160 and is
effective for business combination transactions for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008 (our fiscal 2010). Early adoption of these
statements is prohibited. We believe the adoption of these statements will have
a material impact on significant acquisitions completed after March 31,
2009.
  SFAS
161
  In March
2008, the FASB issued SFAS No. 161,Disclosures about Derivative
Instruments and Hedging Activities -an amendment of SFAS 133 or SFAS 161.
SFAS 161 seeks to improve financial reporting for derivative instruments and
hedging activities by requiring enhanced disclosures regarding the impact on
financial position, financial performance, and cash flows. To achieve this
increased transparency, SFAS 161 requires: (1) the disclosure of the fair value
of derivative instruments and gains and losses in a tabular format; (2) the
disclosure of derivative features that are credit risk-related; and (3)
cross-referencing within the footnotes. This standard shall be effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 and early application is encouraged. We are in the process of
evaluating the new disclosure requirements under SFAS 161 and do not expect the
adoption to have a material impact on our consolidated financial
statements.
   -34-
  SFAS
162
  In
May 2008, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 162, The Hierarchy of Generally Accepted
AccountingPrinciples. This standard is
intended to improve financial reporting by identifying a consistent framework,
or hierarchy, for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with US GAAP for
non-governmental entities. SFAS No. 162 is effective 60 days following the SEC's
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, the meaning of Present Fairly in Conformity withGAAP. We are in
the process of evaluating the impact, if any, of SFAS 162 on its consolidated
financial statements.
 
 FSP
APB 14-1
 
 In May
2008, the FASB released FSP APB 14-1 Accounting For Convertible
Debt  Instruments That May Be Settled in Cash Upon Conversion
(Including Partial Cash Settlement)(FSP APB 14-1) that alters the
accounting treatment for convertible debt instruments that allow for either
mandatory or optional cash settlements. FSP APB 14-1 specifies that issuers of
such instruments should separately account for the liability and equity
components in a manner that will reflect the entity's nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods.
Furthermore, it would require recognizing interest expense in prior periods
pursuant to retrospective accounting treatment. This FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2008.
We are currently evaluating the effect the adoption of FSP APB 14-1 will have on
our consolidated results of operations and financial condition.
 
 EITF
07-5
 
 In
June 2008, the EITF reached a consensus in Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-5”).
This Issue addresses the determination of whether an instrument (or an embedded
feature) is indexed to an entity’s own stock, which is the first part of the
scope exception in paragraph 11(a) of SFAS 133. EITF 07-5 is effective for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early application is not permitted. We do not expect the
adoption of this accounting guidance to impact our results of operations or
financial position.
 
 
 Item
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
 None.
 
 Item
3.   DEFAULTS UPON SENIOR SECURITIES
 
 None.
 
 Item
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 
 None.
 
 Item.
5. OTHER INFORMATION
 
 None
 
 ITEM
6. EXHIBITS
  (a)
  Exhibits:
 
 10.1(1)
              Standstill
      Agreement among Red Mile Entertainment, Inc. and SilverBirch, Inc dated
      December 30, 2008.10.2(2)
              Agreement
      and Plan of Merger among SilverBirch Inc., RME Merger Sub Corp., Red Mile
      Entertainment, Inc., and Kenny Cheung as representative, dated October 7,
      2008.31.1
              Certification
      of Chief Executive Officer and Principal Financial Officer Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200232.1
              Certification
      of Chief Executive Officer and Principal Financial Officer Pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002
 
 (1)
              Previously
      filed as an exhibit to the registrant’s current report on Form 8-K, filed
      on January 6, 2009  (Commission File No. 000-51055), and
      incorporated herein by reference.
 (2)
              Previously
      filed as an exhibit to the registrant’s current report on Form 8-K, filed
      on October 14, 2008 (Commission File No. 000-51055), and incorporated
      herein by reference.
 
 Exhibits
to the Agreement and Plan of Merger have been omitted pursuant to Item 601(b)(2)
of Regulation S-K.  Red Mile agrees to furnish a supplemental copy of
any omitted exhibit to the SEC upon request.
 
 
 
 
 -35-
 
   SIGNATURES
  Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
 
  RED
      MILE ENTERTAINMENT, INC.(Registrant)Date:        February
      13, 2009
                  
                  By:
      /s/ Chester AldridgeChester
      AldridgeChief
      Executive Officer(Principal
      Executive Officer
                    and
      Principal Accounting Officer)
   -36-