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Amendment to Registration of Securities of a Small-Business Issuer · Form 10-SB
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10SB12G/A · Amendment to Registration of Securities of a Small-Business Issuer
This is an EDGAR HTML document rendered as filed. [ Alternative Formats ]
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 3
TO
FORM
10-SB
GENERAL
FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS
ISSUERS
UNDER
SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF
1934
SPIRALFROG,
INC.
(Name
of
Small Business Issuer in its charter)
|
|
14-1928717
|
|
(State or other jurisdiction of incorporation or
organization)
|
(I.R.S. Employer Identification
No.)
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95
Morton
Street
(Address
of principal executive offices)
Issuer's
telephone number : 718-839-9431
Copies
to:
Jeffrey
Fessler, Esq.
Andrea
Cataneo, Esq.
Sichenzia
Ross Friedman Ference LLP
61
Broadway, 32nd Floor
Securities
to be registered under Section 12(b) of the Exchange Act: None
Securities
to be registered under Section 12(g) of the Act:
|
Title
of each class
|
Name
of Exchange on which to be so
registered
each class is to be registered
|
|
Common
Stock, $.001 par value
|
N/A
|
ITEM
1. DESCRIPTION OF BUSINESS
Overview
We
are a
development stage company focused on providing free downloaded music
legally. We provide ad-supported music to registered users through
the advertising we sell on our website. We license the music from
record labels, by paying an up-front licensing fee and paying the record labels
a percentage of the ad-generated revenue. The license agreements with the music
industry allows our users to synchronize their libraries and playlists on their
personal computer and up to two portable devices, and the users will not be
subject to lawsuits for copyright infringement from the record industry,
assuming compliance with the terms and conditions of our site. Users
are required to enter minimal data about themselves upon initial
registration. This will be used to validate the user and to
facilitate targeted advertising with age and gender appropriate
messages. Over time we will learn more about our users’
tastes and we will be better positioned to provide even more
targeted
advertising.
Industry
Background
Evolution
of Music Formats and Effect on Piracy
With
each
new format introduced by the music industry, new piracy issues have arisen.
This
was the case with the cassette tape when it was introduced in the late 70’s, as
it allowed easy duplication, but with a diminished quality. The
introduction of the compact disc, or CD, or music on a digital format from
Sony
and Philips in the mid-80’s, created an era of huge profits for the industry as
users replaced their aging catalogs for the higher quality CD’s.
With
the
success of the CD format, the music industry gradually phased out tapes and
vinyl as alternative formats. The storage capacity of the CD encouraged the
industry to also phase out singles, once the dominant format, which virtually
disappeared by 2001.
The
digitalization of music created by the CD became the industry’s worst enemy,
however, with the development of the Internet and increased connection speeds
in
the late 1990’s. With the Internet allowing the fast transfer of digital files,
it became the home to illegal music sites that now trade billions of music
files
on a monthly basis.
According
to the Recording Institute Association of America, U.S. CD sales peaked in
2000
at 942.5 million units. CD sales have declined every year since to the
2006 low of 614.9 million units equaling a total decline in sales of
34.8%. Year end 2006, sales were down 12.8% versus the prior year and in
the first quarter of 2007, U.S. CD sales were down 20.5%.
The
music
industry is now scrambling to re-invent itself. Harmed by its dependence on
the
CD distribution format, it is exploring various digital distribution channels
including the sale of music through Internet based music–sites and through
portable handsets such as cell-phones. It is still exploiting the CD format,
which accounted for 85% of sales at the end of 2006.
The
music
industry has struggled to make its music available to legal music sites as
the
majors, artists, and digital distributors have had to re-negotiate distribution
terms and digital rights management policies. It was not until 2004 with the
advent of iTunes that the industry made its deep catalog available.
Advertising
revenue has historically never been a significant source of revenue for the
music industry. While it has had long and deep associations with advertisers
through radio and MTV, the main role of these advertising supported businesses
has been to help promote music sales; they have never contributed meaningful
revenues directly to the music industry. And while concert tours have
been supported by large sponsorship deals for over two decades, the music
companies typically do not share in the revenues of their artists’ touring
revenues. Neither has it known historically how to monetize the high recognition
and brand value of its star artists.
Online
Music Services
Internet
online music service businesses fall into two categories, legitimate and
illegitimate. Within the legitimate digital music market, the
services available either sell music on an a la carte or subscription basis.
A
la carte legitimate music services generally sell songs at a price yielding
very
small margins to the retailer. Online music services that provide a
combination of streaming and downloading capabilities on a subscription basis
allow customers to listen to as many songs as they want in a month for a flat
fee. Even ringtone downloading services are facing concerns of
hacking, altering of ringtones, and piracy, with prices rising for users at
the
same time. Illegitimate music services generally make money from the
sale of advertising, the sale of information received from bundles
spyware, or the sales of “software upgrades that make piracy more
convenient.
Legitimate
Online Music Services
Legal
music service businesses may be standalone enterprises that encompass a
proprietary technology platform and/or include some type of license or file
sharing. Online music services include iTunes, eMusic, Yahoo! Music,
AOL Music, and Wal-Mart to name a few.
Subscription
services charges generally range from $10 to $20 per month. The
industry had high expectations for the subscription services and the response
to
these services has disappointed. Recently there have been
attempts to create legitimate Peer-to-Peer services such as Mashboxx and iMesh
using fee and/or subscription revenue models. There have not been
many public releases as to success of such
services. Further, the consistency of the content of these sites is
not favorable, since it’s wholly dependent on the users supplying it, not the
site owner.
The
licensed digital music services also continue to grow due to consumer demand,
but the sustainability at the reseller level is questionable as the current
business of generating revenue on a pure pay-per-track business model is
sustainable as a standalone business>. The mechanical royalties to the
recording industry, performance royalties to the publishers and the cost of
e-commerce leaves little margin at the general dollar per track model that
is in
use today. This leaves services that use this model to make their
content available as loss leaders for the marketing of hardware or general
merchandise.
Pirate
Online Music Services
With
even
the foremost of pirate online enterprises, almost all online music is accessed
and downloaded using unlicensed file sharing. Most of these services
are now designed as Peer-to-Peer services so that songs are swapped from user
to
user, unlike the old Napster service that stored songs on a central
server. The distributed design of Peer-to-Peer makes the pirate
services much more difficult to shut down with legal enforcement. In
some countries where copyright enforcement is lax, the central server model
is
still used, such as the MP3.ru pirate service in Russia.
With
10.5
million average simultaneous users on Peer-to-Peer services around the world,
DCIA, the trade association that represents the Peer-to-Peer services, reported
that there are 320 million Peer-to-Peer users globally and roughly more than
52
million people illegally downloading music in the U.S. IFPI estimates that
20
billion songs were illegally swapped or downloaded on the internet in
2005.
Several
trends and circumstances precipitated the rise in both licensed and unlicensed
online music services. The first was the proliferation of the
Internet, in particular broadband and high speed capability. Music
files are relatively small and easy to download. The second was the decline
of
the singles format, either in Vinyl or CD. It was a deliberate move by music
companies that forced users to purchase a full CD even if they only wanted
the
highlighted, single track. The last was the willingness by a large
part of the consumer audience to engage in an endeavor or practice that, though
illegal, they did not consider immoral. According to the results of a
survey on Peer-to-Peer music file-sharing released by Harris Interactive, the
vast majority of Americans believe that downloading music for personal use
should not be prohibited and that the high price of CD’s had driven
downloading.
Harris
Interactive’s 2005 teen survey listed various reasons for teens sharing music on
the Internet:
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Only
like 1 or 2 songs on an album
(59%);
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Want
to get music quickly (48%);
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Music
is too expensive to buy (46%);
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Music
should be free (44%);
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·
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Wanting
exclusive songs that are not for sale (40%);
and
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·
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Think
music should be shared (38%).
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Most
Peer-to-Peer downloading occurs between 10 p.m. and 12 p.m. regardless of
age. This makes sense as the most people are on Peer-to-Peer networks
during these hours and the available selection is therefore the greatest at
this
time.
According
to the Harris Interactive survey, three out of four (75%) U.S. adults agree
that
"downloading and then selling the music is piracy and should be prohibited,
but
downloading for personal use is an innocent act and should not be
prohibited."
Internet
Advertising
A
2006
McKinsey study showed a steep decline in television viewership for males, 18-34.
This decline was largely attributed to the proliferation of alternative leisure
activities, particularly Internet usage. A number of studies by
Nielsen Media and Research, Jupiter Research, Ipsos-Insight, comScore, Veronis
Suhler Stevenson, TNS Media Intelligence/CMR, McKinsey &Co. and
PricewaterhouseCoopers amongst others analyzed the shift in TV viewership in
the
18-34 male segment and reported the shift as resulting from:
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·
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A
continued shift from television to other entertainment outlets
(particularly video games and the
Internet)
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A
gravitation towards adult content, music, auctions, sports and consumer
electronics retail
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Top
web-sites such as MSN, Google and Yahoo are becoming ubiquitous each with over
480 million unique visitors in March 2006.
As
Internet usage and broadband penetration rises and continues to increase, there
has been a significant increase in online sales and the use of rich media
advertisements. Currently there are 124 million broadband users in 54
million U.S. homes as of year end 2006 per eMarketer. China had 123 million
online users as of the end of 2006 per CIA’s World Factbook, up from 56.6
million users in March 2002 and 22.5 million users in January 2001 per
ClickZ. The CIA’s World Factbook reports online users in Germany at
50.6 million, India at 60.0 million, Japan at 86.3 million and the U.K. at
37.6
million users. AdAge using Forrester Research U.S. Commerce 2005-2010 actuals
and projections, has total online retail sales in the U.S. in 2005 at $172.4
billion, with a year on year 2005-2006 projected percentage change of 17% and
a
projected 2010 retail online U.S. sales number of $328.6 billion.
The
growth in broadband penetration and online retail have been two of the primary
drivers in the increase in online advertising. While television still commands
by far the biggest portion of ad spending, the increase in spending on Internet
advertising has far outpaced the increase in television advertising spending.
Online advertising in the U.S. is expected to increase from $16.4 billion in
2006 to an expected $19.5 billion in 2007 to over $30 billion by
2010.
The
ANA
and Forrester research companies undertook a study presented in March of 2006
which polled 133 advertisers that control $20 billion in ad spending. The
companies included Charles Schwab, Colgate, Dunkin' Donuts, Johnson &
Johnson, Mattel, Pfizer and Verizon. 80% of the respondents said that
they were going to increase online advertising. Most were going to
move from television to online. Forrester predicted that 2007 would
be the first full year of TV budget declines. Perhaps the most
pointed example of this is Procter & Gamble, which has an annual ad budget
of $2.5 billion. P&G announced in 2005 that it would cut back television ad
spending. In the first 6 months of 2005, P&G’s ad spending dropped by 20% to
$321 million, compared to the same period the previous year. During that same
period, P&G’s spending on Internet advertising increased by
55%.
Our
Solution
We
plan
to provide a rich user experience that enables users to download music at no
monetary cost. Our goal is to attract and maintain a very large 13-34 year-old
audience that consumes advertising, music and entertainment in an integrated
manner. In addition, our proprietary solution is planned to ensure
user privacy while utilizing the information collected at registration for
highly efficient ad placement. We believe the solution differs from
other music and entertainment download sites in numerous ways. The
main features of our solution include:
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·
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Broad
catalog of music from all music majors and independents. We
intend to deliver deep catalogs and new releases from the major record
labels and the independents. This is essential in order to compete
with
online piracy.
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Target
audience. We are targeting the 13-34 year-old
demographic that represents 75% of music downloaders, many who today
believe content should be free. The age traditional 12-17,
18-24 and 18-34 demographic groups are viewed as extremely attractive
segments of the advertising marketplace, given high current (or future)
disposable incomes and strong brand loyalties and openness to new
brands.
This brand loyalty is even more pronounced in the age 12-17 segment
that
is being courted in the social media space, such as
MySpace. This is an important segment for major brands that are
undertaking initiatives to build brand awareness, brand loyalty and
increase sales.
|
The
18-34
year-old audience has a fundamental belief that online content should be free,
especially music. This group has disposable income but they just choose to
spend
it on things other than online entertainment content. Some members of this
audience are looking for reliable legal alternatives to illegal Peer-to-Peer
services – this is especially true of the younger end of our target
demographic. The 13-24 year-old segment is unlikely to use music
sites that charge a fee for music downloads, as long as there are alternatives
available. Our plan capitalizes on the desire for ad-supported content and
monetizes this demographic’s interest in music. The industry has been facing the
possibility of losing nearly two generations of users, and we believe our
business model is designed to bring them back and retain them.
The
target audience has become more difficult to reach due to the proliferation
of
leisure activities, the decrease in time spent on traditional media (TV and
print), and the increase in time spent online. This audience is
highly receptive to targeted and contextually relevant commercial messages
which
acknowledge who they are and their desires. Our site is designed to
integrate the advertising and content into a more holistic entertainment
experience and in so doing will attract and keep our audience engaged for more
than just a download transaction.
Demographically,
this group falls in the 13-34 age range, allowing us to reach the most
attractive target audience for advertisers. The most prolific downloaders within
this group are aged 16-24. We have done extensive research on the
13-34 year-old demographic’s lifestyle, entertainment habits and, in particular,
online music behavior. Our site is being designed and built for a
user experience that appeals to this group, which we hope will allow us to
deliver this much-coveted audience to advertisers very
efficiently. Our internal research showed that all segments of our
target audience were open to relevant brands and advertising, and viewed the
ad-supported business model favorably. We believe this will allow
advertisers to have confidence that the ads they are placing are reaching the
right audience and ultimately allow us to achieve premium ad rates for
delivering this demographic.
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·
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Ad-supported
legal music. We will enable users to download music legally
on an ad-supported basis. We plan to provide ad-supported music
to registered users through the advertising we sell on our site – hence
the phrase “ad-supported” music downloads. Music companies are
endorsing the business model whereby they are compensated for the
lack of
fees charged for the music downloads by contractually agreeing to
a
material percentage of the ad-revenues and an allocation of unsold
ad
inventory for promotional purposes. Ad units on the site are
intended to include high impact video ads, rich media units,
banners and buttons.
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Ad-Supported
Music. Music is licensed by us from the record companies
for
ad-supported downloads. While many in the target audience believe
that
content should be free, they have different opinions on what free
means. Our focus group research indicates that time spent
downloading music is considered a valuable use of time. Time
and money are currencies and the users are more than willing to watch
commercial advertising as ”payment” for their content where ads are an
integral and contextually relevant part of the experience. Our
ad-supported business model was viewed favorably by all ages in the
target
demographic. There is no requirement to provide any financial
or other information beyond the initial limited registration
information.
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Legal.
The license agreements with the music industry will allow users to
synchronize their libraries and playlists on their personal computer
and
up to two portable devices. Provided users use the music in the
manner they have agreed to with the site, they will not be subject
to
lawsuits from the music industry for infringing
copyrights.
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Privacy.
Upon a user’s initial visit to our site, he or she must
register before downloading any music – this process is simple and
requires minimal effort. Very limited information is requested at
time of
sign-up – email address, age, gender and zip code or
state. Each user selects a unique ID by which they are
identified each time they return to the site. All data will be handled
with a high level of sensitivity. We intend to be a community
that people will not only visit, but come to stay and they and their
privacy will be treated accordingly. The service will be
designed initially so that if any data is shared with advertisers,
marketers or vendors, it will be provided at an aggregate level and
will
not include information that can identify an individual, unless they
have
given their express consent.
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Targeted
advertising. The minimal data users provide at registration
will be used to validate the user and to facilitate targeted advertising
with age and gender appropriate messages. Our
proprietary solution enables the behavior of each individual to be
tracked
by their unique ID assigned at registration. This process ensures
that ads
shown to the users are contextually relevant to their appropriate
user
characteristics and privacy is maintained. For example, a 26
year-old man may see an ad for beer while a 16 year-old boy would
not. We
intend to enhance our advertising delivery system to direct ads based
not
only on user characteristics, but also on individual behavior on
our
site. Over time we will learn more about our users’ tastes
(music genre downloaded, concerts attended, fan clubs participated
in,
etc.) and we will be better positioned to provide even more targeted
advertising.
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Non-intrusive
advertising. Our research has indicated that our users are
not opposed to advertising; however they are opposed to intrusive
advertising. The business model is driven by advertising and
the rich user experience has been designed to make this advertising
part
of the experience. The site has been designed with contextual advertising
primarily through rich media and broadband video commercials in addition
to the more traditional banners and buttons. It is our
intention to not have intrusive advertising such as pop-up ads. While
users are searching the site or downloading, they are free to peruse
the
ads, visit other areas of the site and/or activate rich media
ads.
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·
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Site
Design. Our site is being designed and
developed around the user’s experience and not just for downloading
transactions. Our design and development team is creating an
integrated entertainment experience by incorporating into the design
extensive target demographic research and insights on how this audience
lives and consumes its music and other entertainment. The
process for discovering new content is one that the user is passionate
about, and one that requires multiple sources and destinations for
information. Over time, we intend to incorporate important
sources for discovery such as reviews, lyrics, communications and
community (email and playlists), artist information (bios, event
calendars
such as concert and tour information) and metadata thus creating
a unique
central destination for the discovery of new music together with
the
ability to download the music, as well as other entertainment
content.
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·
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Control
over content. Virus-free downloads, clean and complete
downloads, reliable and consistent download process, lyrics,
categorization by genre, and metadata are key content differentiators
our
site will provide. Unlike Peer-to-Peer services, we will have
control over the content that appears on the site. This is very important
and attractive to advertisers as they will not have to worry about
their
products being associated with objectionable content. Control
is especially important with respect to the teen segment of our audience,
especially for the younger 13-15 year-old subset and their parents
who
monitor their online usage. By only including licensed content
that is controlled at the outset, we have a cost effective model
that will
not require dedicated overhead for people to monitor site content.
This
compares favorably to Myspace.com which currently dedicates more
than 1 in
3 employees to content filtering.
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Content
and major music label participation. Our business model
plans to monetize the heretofore non-revenue producing illegal
Peer-to-Peer downloads currently estimated to be 20 billion illegal
downloads a year. Record labels will be motivated to see us
succeed once they see significant positive revenues and the possible
reduction in piracy and the associated costs. A truly
successful music site must include the artists from major labels
and
independent labels, including what young people perceive as the latest
acts. This cannot happen without the support of the record labels
and
music publishers, which must license rights to their music. Agreements
have been reached with amongst others Universal Music Group and
Independent labels - Toddler Records, Tommy Boy Records, MC Records
and
Koch Records - to have their music libraries included in our online
catalog. These agreements allow us to deliver new releases on
the day they are released to the public. We are in the midst of
negotiating digital rights licensing agreements with the other labels
for
similar agreements. Publishers are also getting on board with deals
signed
or imminent with major holders of publishing rights. Agreements
have been reached with amongst others EMI Music Publishing, Cherry
Lane
Music Publishing, Carlin America, Anna Teresa Music/Helene and Blue
Music.
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Scalable
business model. Our business model is
intended to be highly scalable because ad-supported, legal and virus-free
content has universal appeal to our target audience in nearly every
market, and global advertisers all seek out this highly desirable
audience. Our model is intended to provide a highly targeted environment
for advertisers, with virtually no barriers for participation by
the
target group because the normal rules of e-commerce (i.e., credit
card
required) do not apply. Because the value proposition appeals to
our
target demographic, we believe the potential reach and growth rate
is
attractive.
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Strong,
leveragable financial model, with success-based costs. We
are not a capital intensive business. Our business model of sharing
advertising revenues with the music industry allows our costs to
be
controlled, our gross profit margins to be predictable and our
profitability to be a function of how well we manage our operating
expenses. At the same time, we intend to maintain a focus on
the appropriate advertising and promotional activities which will
build an
audience and then retain this user base. From a cash flow standpoint,
the
major expenditures we anticipate are royalties to the record labels,
publishers and ongoing operating expenses including
marketing. We can also expand the business to include
additional sources of revenue, such as selling “permanent” music or
selling concert tickets.
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·
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Quality
product. In an attempt to diminish the entertainment
experience, content owners have used a number of technologies to
lower the
quality of music and film files downloaded from pirate online music
services. This has been done with various degrees of success.
We will deliver virus-free digital files received directly from the
record
labels. This is a key component in convincing potential users
to migrate from pirate online music services due to the variable
quality
experienced. Music downloaded from us will be encoded at
128Kbps, the same quality that users get from popular paid sites
such as
iTunes.
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Evolving
landscape for music industry. Our business model
provides a solution for the problems facing the music industry, as
described below, by providing a viable legal alternative to the illegal
Peer-to-Peer music sites, an audience for advertisers and an attractive
music source for young adults. The problems
include:
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Piracy.
Illegal downloading of music remains the most important issue as
music
industry sales have continued to fall. Over the last five
years, CD units shipped have fallen 25.1% on a cumulative basis and
the
resultant revenue decrease is 20.3% over the same
period.
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Lack
of CD sales. Sales of digital tracks are up 75% for the
period January-July 2006 compared with the same period in
2005. In 2005, record company revenues from digital sales were
an estimated $1.1 billion globally. This is nowhere close to
making up for the loss of physical product sales which are down over
$9
billion annually and continuing to
fall.
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Advertisers
and Internet advertising. With larger overall ad
budgets, more companies have shifted advertising from other media
to the
Internet. U.S. online ad spending reached $12.9 billion in 2005
and is predicted to reach $15.6 billion in 2006 and $22.3 billion
in
2009. The ability to reach the 13-34 demographic through
traditional means has decreased. Advertisers now have new
connection points as Internet advertising has increased significantly,
especially with exploding broadband adoption, the advent of video
streaming and the ability to run TV-style ads on the
Internet.
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Broadband. The
availability, adoption and speed of in-home broadband connections
have
drawn millions of users to the Internet from other
media. Similarly, it has opened a new distribution pipeline for
entertainment content, both legal and
illegal.
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Download
site with value-added related content. We are
not a transaction-based store like iTunes or Napster, but a global
ad-supported personalized music service where registered users can
stay
for a more holistic music related visit. In addition to
ad-supported music downloads, over time we plan to add concert
information, reviews, lyrics, news, charts, the ability to purchase
albums, digital tracks or relevant merchandise through strategic
partnerships with the music industry and e-tailers. In addition to
the
ability to email album recommendations, save the album for later
or
include it on a favorites list, future releases could include other
programming content as well as social networking applications with
the
appropriate controls such as blogs, podcasts, artist chat, and chat
rooms
to name just a few. We also plan to offer sponsor contests and
work with our partners in the advertising and music industry to reach
and
connect with the target audience in new and exciting
ways.
|
Our
Technology
We
own
and develop our own technology, both for the front-end PCs and the back-end
server systems. Our technology consists of tens of thousands of lines
of proprietary code. The front-end technology is designed in New York,
NY and the backend technology in Seattle, WA by permanent employees of our
company. We believe that our in-house technology know-how is a key asset
for us at launch and moving forward. This is in stark contrast
with several potential competitors who have outsourced either the front-end
or back-end technology of their solution - or in some cases both.
Our
website, www.spiralfrog.com, is accessed via a standard browser
and consists of a server-based web service that includes a relational
database, a file store and a digital rights management (DRM) service.
We will support users who run Windows XP or Windows Vista, running either
the Microsoft Internet Explorer or Firefox browsers.
Unlike
most digital music stores today, we allow users to search and browse for
their favorite songs and videos without first registering for the service,
or
requiring to download client software. Only after the user has confirmed
their favorite track or video exists (including via an audio clip or a
video stream) does the site request the user to register and install the
download manager that permits files to be transferred to the user's hard disk
via the browser interface. We believe this type of unique design will help
us get many more users to try out our site by lowering the upfront
requirements of the typical music sites today. This will also
encourage users to check back often as we build our music and video catalogs
over time - and many users will find other things to do on the site,
helping us build our unique user numbers as all visitors will be consuming
our
sponsors' advertisements.
We
rely
on the Microsoft DRM platform to ensure copyright protection of the files,
as
required by content owners. We have developed a sophisticated system to be
able to report actual playcount data for each song and video which forms the
basis of royalty reports to the record labels and publishers. This permits
our revenue and royalty model to be independent of the number of downloads,
allowing for a site design that makes downloading easy and
convenient.
By
marrying the demand for music, entertainment, the marketers’ appetite for
reaching the 13-34 year-old demographic and the music industry’s desire to
reduce piracy and generate revenues, we believe we will offer a unique
win-win-win scenario for all involved in the content supply chain:
|
·
|
The
marketers and the advertising industry win with direct
access to this fundamentally important and elusive 13-34 year-old
target
market;
|
|
·
|
Users
win with access to a site with an unprecedented combination
of music catalogs, information for new music discovery and
legal music downloads;
|
|
·
|
The
music industry wins by possibly reducing and possibly
reversing economic losses suffered as a consequence of music piracy
by:
|
|
-
|
generating
new revenues; and
|
|
-
|
Potentially
stemming the tide of music piracy, which is estimated to total 20
billion
tracks a year by the RIAA.
|
In
April
2007, we previewed our site in Canada on an “invitation-only basis”. The
purpose of this first phase is to test the operational and functionality aspects
of the site, and to receive initial feedback on the user experience. We
currently have over 2,000 members taking part in these previews and have
received very constructive feedback about the site’s viability. In the
first month, the average member has downloaded 16 songs and viewed 15 pages
per
visit. In May 2007, we went “live” on our website in Canada.
The
website currently has over 700,000
songs available for download and 1,500 music videos that can be currently
watched on the website or downloaded. As we enter into additional
licensing agreements and as more content becomes available under our current
licenses, we will be adding them to our database. In connection with
registration, users need to submit their email address, age, gender, and
Zip/Postal code information, and to create a user name and password. Users
then
download and install our Download Manager, which allows users to download songs
from our site. Users can search for specific songs or artists or browse by
genre. Upon downloading a song, the user is required to type in a
randomly generated visual verification code in order to activate the downloaded
song, which process must be completed within 60 seconds after downloading is
completed. While a song is downloading, users can queue up additional
songs for downloading and move them up or down the queue list in the order
of
priority the user selects. Once the prior song finishes downloading,
users can click to have the next song begin downloading.
In
order to be able to keep downloading
songs and playing songs previously downloaded, users are required to renew
their
membership at least every 30 days. In order to renew, users must
enter their user name, email address, randomly generated code and answer a
few
questions about the user and his or her habits. Once the membership
is renewed, the digital rights management, or DRM, program updates the
license. Any songs on the user’s computer will automatically be
updated, and the user must sync their portable music devices to their computer
to update their song licenses.
License
Agreements
On
November 15, 2006, we entered into a Digital Music and Video License Agreement
with The Orchard Enterprises, Inc. (“Orchard”). Pursuant to that
Agreement, we were granted the non-exclusive worldwide rights to a minimum
of
450,000 sound recordings and additional video content from Orchard’s
catalog. The license expires on the earlier of December 31, 2008 or
the end of a pre-defined advance recoupment period.
On
May
16, 2007, we entered into a Digital Music and Video License Agreement
with Universal Music Publishing Group (“UMPG”) under which we were
granted the non-exclusive right to music downloads, music streams,
video downloads, and video streams from the UMPG catalog for the purposes
of
reproducing compositions a digital files on secured servers; reproducing
and
distributing compositions embodied in digital riles as limited music downloads,
music streams, limited video downloads, and video streams. This
license expires December 31, 2008.
On
August
6, 2007, we entered into a Digital Music and Video License Agreement
with BMG Music Publishing (“BMG”) under which were
granted non exclusive rights to digital music service,
including music downloads and music streams, limited video downloads and
video
streams from the BMG catalog for the purposes of reproducing compositions
a
digital files on secured servers; reproducing and distributing compositions
embodied in digital riles as limited music downloads, music streams, limited
video downloads, and video streams. This license expires
December 31, 2008.
On
August 16, 2007, we entered into a Digital Music and Video Distribution
Agreement between the Company and Independent Online Distribution Alliance,
Inc.
("IODA") under which were granted the non-exclusive right to limited music
and
video downloads, limited non-music videos, lyric displays, music streams,
music
video streams and non-music video streams.
This
license expires on the earlier of October 31, 2008 or one year from the official
USA launch of SprialFrog.
Future
Opportunities
After
the
initial services have been launched, we plan to leverage our installed base
and
knowledge of user musical preferences to key affiliates and partners who sell
other entertainment products and services. We plan to have a second
source of revenue produced from these third-party deals, which will encompass
related music products, including ad-free music for permanent ownership, digital
videos, ringtones, lyrics, concert tickets and potentially non-music related
products and music related hardware. We also plan to enter into alliances for
online ticket sales with appropriate companies in each market.
The
success of this model depends upon; 1) getting licenses from the music industry
to distribute songs using this new price model and; 2) negotiating reasonable
revenue splits that are based upon revenue percentages (and not fixed dollar
amounts per download or per play), such as the deal we have been successful
in
negotiating with Universal Music Group. This is necessary since we
expect our revenues to vary by song.
Competition
We
face
direct competition from illicit pirate music sites. These Peer-to-Peer sites
distribute free music, in most cases:
|
·
|
Without
the consent of the music owners, artists or
publishers;
|
|
·
|
Without
paying for their content;
|
|
·
|
Without
any advertising or marketing costs and a very limited or zero cost
of
goods sold ;
|
|
·
|
From
a company that is often incorporated in countries where intellectual
property laws are barely enforced, or not enforced at
all;
|
|
·
|
Downloads
do not include any DRM and no restrictions are imposed on sharing
or CD
burning;
|
|
·
|
These
services do not impose time-out restrictions on
downloads;
|
|
·
|
Where
spyware, varied file quality and viruses are the
norm;
|
|
·
|
Incorrect
metadata such as labels, descriptions and categorizations result
in poor
search capabilities;
|
|
·
|
Slow
and inaccurate downloads; and
|
|
·
|
Limited
or no information for music
discovery.
|
We
will
compete with these sites by offering a service that addresses all of the
above-mentioned limitations of the Peer-to-Peer services, namely higher quality
music that is virus-free; accurate metadata (name of the song, artist, composer,
etc.); spyware and virus-free downloads that will not slow down a user’s
computer and; sophisticated discovery tools and search
capabilities. Our service is being built to be more accurate,
reliable and faster than anything the Peer-to-Peer services can
offer.
Over
70%
of downloaders are under the age of 35 and many believe that content should
be
free. As such, the Peer-to-Peer services will be our main
competition. However, we do expect to have older segments of our
audience who will look to paid and subscription services as our
competition.
Employees
As
of
August 28, 2007, we have 20 full time employees and two
consultants. We consider our relations with our employees to be
good. We believe our future will depend in large part on our ability
to attract and retain highly skilled employees.
Legal
Proceedings
From
time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. We are currently not aware
of any such legal proceedings or claims that we believe will have, individually
or in the aggregate, a material adverse affect on our business, financial
condition or operating results.
Risk
Factors
Anyone
considering an investment in our company should consider the following risk
factors.
We
Have a History Of Losses Which May Continue, Which May Negatively Impact Our
Ability to Achieve Our Business Objectives.
We
incurred net losses of $6,743,302 and $1,079,925 for the years ended December
31, 2006 and 2005, respectively. For the six months ended June 30, 2007, we
incurred a net loss of $4,140,671. We cannot assure you that we can achieve
or
sustain profitability on a quarterly or annual basis in the future. Our
operations are subject to the risks and competition inherent in the
establishment of a business enterprise. There can be no assurance that future
operations will be profitable. Revenues and profits, if any, will depend upon
various factors, including whether we will be able to continue expansion of
our
revenue. We may not achieve our business objectives and the failure to achieve
such goals would have an adverse impact on us.
If
We Are Unable to Obtain Additional Funding, Our Business Operations Will be
Harmed and If We Do Obtain Additional Financing, Our Then Existing Shareholders
May Suffer Substantial Dilution.
We
will
require additional funds to complete additional licensing agreements, research
and development and website maintenance. We anticipate that we will
require up to approximately $18,000,000 to fund our continued operations for
the
next twelve months, depending on revenues from operations. Additional
capital will be required to effectively support the operations and to otherwise
implement our overall business strategy. There can be no assurance
that financing will be available in amounts or on terms acceptable to us, if
at
all. The inability to obtain additional capital will restrict our ability to
grow and may reduce our ability to continue to conduct business operations.
If
we are unable to obtain additional financing, we will likely be required to
curtail our marketing and development plans and possibly cease our operations.
Any additional equity financing may involve substantial dilution to our then
existing shareholders.
Our
Independent Registered Public Accountants Have Expressed Substantial Doubt
About
Our Ability to Continue As a Going Concern, Which May Hinder Our Ability to
Obtain Future Financing.
In
their
report dated June 15, 2007, our independent registered public accountants stated
that our financial statements for the year ended December 31, 2006 were prepared
assuming that we would continue as a going concern. Our ability to continue
as a
going concern is an issue raised as a result of recurring losses from operations
and a significant working capital deficiency. We continue to experience net
operating losses. Our ability to continue as a going concern is subject to
our
ability to generate a profit and/or obtain necessary funding from outside
sources, including obtaining additional funding from the sale of our securities,
increasing sales or obtaining loans and grants from various financial
institutions where possible. Our continued net operating losses increase the
difficulty in meeting such goals and there can be no assurances that such
methods will prove successful.
If
we fail to get nearly all the record labels to agree to work with us, our
business model could fail.
There
are
four major record labels, which represent a large majority of the business.
We
have entered into an agreement with Universal Music Group, which is the largest
record label, to distribute the music to our users on an ad-supported basis,
in
return for a percentage of the revenue from the commercials. We believe that
our
approach to licensing music is radically different than anything which has
ever
been done before. It involves a level of risk to the labels, since
our unique business model could take away from their other revenue streams.
While the level of interest of the other major and independent record labels
is
encouraging, there is no guarantee that they will all license us their music
on
business terms that we require. In the event that we are unable to
enter into agreements with most of the other major and independent record
labels, it is unlikely that we will be able to attract and keep users to our
site. If we are unable to offer a significant portion of all
available music, our business model is likely to fail and we will need to cease
operations or develop a new business model.
If
we fail to get Peer-to-Peer users to switch to our site, we will be unable
to
generate the revenues necessary to continue our
operations.
Even
if
we offer the downloads for free, there is a chance that the people who use
popular file sharing applications such as Limewire, KaZaA and Morpheus will
continue to use those sites and not switch to us in large numbers. In
the event that users do not switch from file sharing applications to our
services, we may not generate enough revenues and may be unable to convince
record labels to continue making their catalogues available, which would cause
us to cease operations.
The
songs we provide do not play on Apple iPods, which could result in fewer users
of our services.
As
the
first and largest legal music download site, Apple has managed to maintain
their
market share by limiting the playability of music and video content purchased
through iTunes, a closed proprietary interface that does not support any digital
rights management other than the Apple AAC format. Apple is the
category leader for portable digital music players with approximately 76% of
the
U.S. market share and 26% share of the worldwide market. Since launch
five years ago, more than 60 million iPods have been sold
globally. Over a five year period many have been replaced or upgraded
and the actual figure of working iPods is estimated to be nearer 40
million. Since our music and videos cannot be downloaded to an iPod,
users will need to purchase a portable digital music player that is compatible
with our services if they want to make their music portable. As a result, users
may be unable or unwilling to spend the additional money and may not use our
site.
We
distribute songs which have time out restrictions and have other usage
restrictions, any one of which may reduce the size of our
audience.
For
the
most part, we are required by the record labels to place restrictions on how
the
ad-supported music is used. For example, the downloads are restricted
to personal use only. While we believe most of our target audience
are using this service for personal reasons only and will accept this timeout
for the trade-off of assured quality music downloads which are fully licensed,
legal, and virus-free, among other added values, some young users may prefer
to
continue to steal music from pirate sites in order to circumvent any of these
restrictions, in particular our timeouts.
The
largest record label has imposed specific restrictions on the music we deliver,
in order to create some differentiation between ad-supported and paid for
music. In other words, the labels want to preserve some market for
music that is actually purchased with money. We do allow users
to move the music they download to their portable music players, their mobile
phones, and other portable devices. However, the major restriction is
that we do not allow users to “burn” CDs in most
cases. Therefore, some of the users who obtain music illicitly
from pirate sites with the explicit intent of burning CDs will continue to
use
pirate sites for this purpose. With the rapid growth of digital
music players and music enabled cell phones, we expect the number of such cases
to decline over time, but there is no guarantee as to how fast this will happen,
and what negative impact this could have on our projected revenues.
It
could take a long time to get our advertising revenues at the level we require
to properly compensate the recording industry.
We
expect
advertisers to migrate to us, but they are by nature conservative and will
require convincing that we are a desirable destination for the age 13-17 and
especially the overall age 18-34 demographic. Although there is a
significant shift of dollars to the Internet, any new publisher is going to
have
to prove its place on the advertisers’ schedule and fight for its share of the
available dollars. A new service, no matter how strong the proposition, will
come under additional scrutiny from the advertiser’s advertising agency and
media buying company. They will attempt to exploit our “newness” by
demanding test rates that are below true market value. In the very
beginning it may be prudent to take such deals in order to have the client
experience the service and see first hand the value that we can
deliver.
Mechanical
licenses may not be available for some songs.
Song
writers and music publishers have many protected rights. At least two types
of
rights for their music are implicated by our business plan. The first
is the right to make reproductions of the songs in recorded music; this right
is
called the mechanical license. We have been negotiating this
mechanical license with the companies and organizations that grant this license
on behalf of the writers. We believe that we will be able to obtain the
necessary rights for most of the music that we will distribute on the terms
that
we seek. However, there will be some music publishers who might
not grant us the necessary rights and their songs would thus be excluded from
our service.
Performance
rights might not be available for all songs.
Song
writers and music publishers also have a right to be paid a royalty whenever
their music is performed (those royalties are payable, for example, when a
song
is performed or played on the radio or on television or streamed on the
Internet). We might be liable for this expense, especially when
video is displayed on our web site or desktop software, such as when a music
video or “television commercial” is streamed, when we show a short film or TV
program, or if we provide games with music playing in the
background. Typically, these licenses are collected by “performing
right collecting societies”, such as ASCAP, BMI, and SESAC in the United States,
and other societies in each country around the world. While we
have already signed a license with BMI and SESAC and we believe we will conclude
a deal with ASCAP, there is no guarantee that we will, nor is there a guarantee
that we will obtain such license on the percentage terms we
seek. We made application to ASCAP for a license, and in so
doing were advised that they would take no action against the company for
performing songs in the ASCAP repertoire, but the terms of a license agreement
have not yet been concluded. If we are forced to pay a higher
percentage than we plan, this could adversely affect our operating
margins.
We
have a limited operating history with which to judge our
performance.
We
have
been in existence since October 2003 (date of filing Articles of Organization)
and engaged in developing our business model since February 2004. As
a result, we have only a limited operating history upon which to evaluate our
business and prospects. Our proposed business operations will be
subject to numerous risks associated with early stage enterprises and the
development, production and sale of the types of products and services that
we
offer. These risks apply particularly to us because the markets for
our technology and products are new and rapidly evolving. We cannot
assure shareholders that our business strategy will be successful or that we
will successfully address these risks. Our failure to do so could
materially adversely affect our business, financial condition and operating
results.
Our
future success depends on significant growth in our business and we may not
be
able to manage our future growth successfully.
Our
ability to offer broadband entertainment services successfully and implement
our
business plan in a rapidly evolving market requires an effective planning and
management process. Our growth could be limited if our management
team is not able to achieve the effective planning and rapid execution necessary
to fully exploit the market opportunities presented to us. In the
future, we plan to increase the scope of our operations at a rapid rate. Such
expansion efforts could be expensive and may strain our managerial and other
resources. To manage future growth effectively, we must maintain and
enhance our financial and accounting systems and controls, integrate new
personnel, manage expanded operations and our relationships with our customers,
suppliers and partners. If we do not manage growth properly, it could
harm our operating results.
If
we are unable to retain the services of Messrs. Mohen, Schrieberg and
Suomalainen or if we are unable to successfully recruit skilled personnel,
we
may not be able to continue our operations.
Our
success depends to a significant extent upon the continued services of Mr.
Joe
Mohen, our Chairman and Founder, Mr. Schrieberg, our Chief Executive Officer
and
Mr. Suomalainen, our Chief Technology Officer. Loss of the services of Messrs.
Mohen, Schrieberg or Suomalainen could have a material adverse effect on our
growth, revenues, and prospective business. We do not maintain key-man insurance
on the life of Messrs. Mohen, Schrieberg or Suomalainen. In addition, in order
to successfully implement and manage our business plan, we will be dependent
upon, among other things, successfully recruiting qualified skill personnel.
For
example, we may need to recruit very senior managers who have run major
television networks and there is no guarantee that a young company can attract
such talent. Immigration laws may further restrict our ability to attract or
hire qualified personnel. Competition for qualified individuals is
intense. There can be no assurance that we will be able to find, attract and
retain existing employees or that we will be able to find, attract and retain
qualified personnel on acceptable terms.
We
operate in business climates and industries that change rapidly and in
unexpected ways.
Rapid
technological change and uncertainty due to new and emerging technologies and
shifting consumer preferences characterize the broadband entertainment industry
and the target market industries to which we market and sell our
products. We may be unable to develop, integrate and market, on a
timely basis, the new and enhanced products and services necessary to keep
pace
with competitors. Our products and services may be rendered obsolete
by the offerings of our competitors or by changes in computing technologies
for
the fields addressed by our software. Failure to anticipate or to
respond to changing technologies, or significant delays in the development
or
introduction of products or services, could cause customers to delay or decide
against purchases of our products or services.
If
the technology we rely upon becomes obsolete, we may not be able to market
our
services.
The
technical features of our site will in large part determine the marketability
of
our product. New market entrants may succeed in developing and introducing
new
or enhanced systems having technologies and features superior to, or more
effective than, any technologies which have been or are being developed
rendering our services obsolete or less marketable. Accordingly, the ability
for
us to compete will be dependent on the timely enhancement of our existing
products as well as the development of future products. There can be no
assurance that we will be able to keep pace with technological developments,
or
that our products will not become obsolete. Technological obsolescence of the
existing technology remains a possibility, which would have a material adverse
affect on our operations.
We
face strong competition that could prevent us from adding new customers or
expanding our existing customer relationships.
The
market for broadband entertainment is intensely competitive, subject to rapid
change and significantly affected by new product introductions, pricing
strategies and other market activities of industry participants. Our
primary competitors are the illegal Peer-to-Peer services that have been under
fire from various international entertainment, legal and governmental
organizations for potentially breaching copyright and intellectual property
laws.
We
may not be able to protect adequately the trade secrets and confidential
information that we disclose to our employees.
We
rely
upon trade secrets, technical know-how and continuing technological innovation
to develop and maintain our competitive position. Competitors,
through their independent discovery (or improper means, such as unauthorized
disclosure or industrial espionage), may come to know our proprietary
information. We generally require employees and consultants to execute
confidentiality and assignment-of-inventions
agreements. These agreements typically provide that all
materials and confidential information developed by or made known to the
employee or consultant during his, her or its relationship with us are to be
kept confidential and that all inventions arising out of the employee’s or
consultant’s relationship with us are our exclusive property. Our
employees and consultants may breach these agreements and in some instances
we
may not have an adequate remedy. Additionally, in some instances, we
may have failed to require that employees and consultants execute
confidentiality and assignment-of-inventions agreements.
We
may not be able to adequately defend our intellectual property from third party
infringement, and third party challenges to our intellectual property may
adversely affect our rights and be time consuming and
costly.
Some
of
our competitors have, or are affiliated with companies having substantially
greater resources than we have, and those competitors may be able to sustain
the
costs of complex patent litigation to a greater degree and for longer periods
of
time than us. Uncertainties resulting from the initiation and
continuation of any intellectual property litigation could have a material
adverse effect on our ability to compete in the marketplace pending resolution
of the disputed matters. An adverse outcome could subject us to
significant liabilities to third parties and require us to license disputed
rights from third parties or cease using the technology. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt
to
copy aspects of our products or to obtain and use information that we regard
as
proprietary.
We
may be subject to claims of infringement by third parties that may adversely
affect our rights and may be costly and time consuming to
defend.
Third
parties may claim infringement by us of their intellectual property
rights. Our products may infringe other intellectual property rights
of third parties. We may be required to seek licenses for, or
otherwise acquire rights to, technology as a result of claims of infringement.
We may not possess proper ownership or access rights to the intellectual
property we use. Any claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management’s attention
and resources, cause product development delays or require us to enter into
royalty or licensing agreements. Royalty or licensing agreements, if
required, may not be available on terms acceptable to us, if at all. In the
event of a successful claim of product infringement against us, our failure
or
inability to license or design around the infringed technology could have a
material adverse effect on our business, financial condition and results of
operations.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
Forward-Looking
Statements
The
information in this report contains forward-looking statements. All statements
other than statements of historical fact made in report are forward looking.
In
particular, the statements herein regarding industry prospects and future
results of operations or financial position are forward-looking statements.
These forward-looking statements can be identified by the use of words such
as
“believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,”
“projects,” “expects,” “may,” “will,” or “should” or other variations or similar
words. No assurances can be given that the future results anticipated by the
forward-looking statements will be achieved. Forward-looking statements reflect
management’s current expectations and are inherently uncertain. Our actual
results may differ significantly from management’s
expectations.
The
following discussion and analysis should be read in conjunction with our
financial statements, included herewith. This discussion should not be construed
to imply that the results discussed herein will necessarily continue into the
future, or that any conclusion reached herein will necessarily be indicative
of
actual operating results in the future. Such discussion represents only the
best
present assessment of our management.
Background
We
were
formed in February 5, 2004 as Mohen Entertainment Portals, LLC, which then
merged with and into Mohen, Inc. on May 12, 2005. On August 6, 2007, we changed
our name to SpiralFrog, Inc. We are a development stage company seeking to
establish an advertising-funded, free and legal music download internet site
specifically targeted to the age 13-34 market. Substantially all
revenue will be produced from advertising appearing on our
website. We initiated a beta test of our website in Canada in April
2007 and went live in Canada in May 2007. We launched our website in the United
States, by invitation only, in August 2007. We intend to attract advertisers
who
desire to placed targeted advertisements on our website. During 2006, we
licensed sound records from Universal Music Group for use on our website in
North America. We are seeking to license additional rights from other
record labels and music publishers to broaden our offering.
Plan
of Operations
Over
the next 12 months, we plan to
aggressively expand our catalogue of music and videos available for download
to
our users. In addition, we hope to attract a significantly large
number of unique users and advertisers wanting to provide targeted marketing
to
our users. We anticipate that we will need approximately $18 million in order
to
fully implement our business plan over the next 12 months. Our
targeted goals and milestones for each of the next four quarters is as
follows:
July
to September 2007:
|
|
●
|
Sign
additional independent music labels to add one million or more audio
music
tracks to our content inventory.
|
● Expand
United States sales force by adding at least five sales people.
● Sign
additional United States publishing agreements.
● Launch
our website in the United States.
● Sign
second major record label.
● Hire
creative site director.
October
to December 2007:
|
|
●
|
Sign
additional United States music publishing
agreements.
|
|
|
●
|
Execute
marketing campaign in the United States aimed at 13-34 year olds,
through
one or more of the following approaches: hire gorilla marketing firms
for
unconventional promotions; consumer targeted press releases; advertising
on some of the youth community sites; or hiring “bloggers” to attract
attention to us on the internet.
|
|
|
●
|
Conduct
a private placement to raise up to $25
million.
|
|
|
●
|
Sign
third major music label and increase inventory to three million audio
tracks.
|
January
to March 2008:
● Achieve
at
least three million unique monthly users.
● Increase
marketing programs.
● Sign
fourth major music label.
● Hire
vice
president of business development to provide joint marketing agreements and
strategic alliances.
April
to June 2008:
● Pre-launch
in the United Kingdom.
● Provide
mobile integration with website.
● Add
advertising sponsorships sections to website.
As
of
December 31, 2006 and June 30, 2007, we had cash on hand of $498,009 and
$941,593, respectively. Development stage net loss for the year ended December
31, 2006 was $6,743,302 compared to $1,079,925 for the year ended December
31,
2005 and $4,140,671 for the six months ended June 30, 2007 compared to
$1,114,477 for the six months ended June 30, 2006, which was due to a temporary
stall in operations from a lack of capital. The loss for the year
ended December 31, 2006 consisted primarily of selling expenses, costs to
develop our website and software technology, and legal and accounting expenses
incident to our development stage activities. For the year ended
December 31, 2006, we used $137,460 in investing activities in connection with
the purchase of property and equipment. For the year ended December
31, 2006, we received $8,292,456 from financing activities, which was comprised
primarily of $7,901,456 (net of transaction fees) from the sale of Series B
Convertible Preferred Stock. For the year ended December 31,
2006, we used $7,657,023 in operating activities, including $6,743,302 in net
losses, $2,434,560 million for the payment of deferred music licenses and other
fees, $171,356 in prepaid expenses and other current assets, $35,658 in officer
loans and $34,022 in security deposits, which were offset by $1,440,000 in
amortization of deferred licenses, $262,334 in accounts payable and accrued
expenses, $35,658 in bad debts and $21,500 in depreciation.
We
expect significant capital
expenditures during the next 12 months, contingent upon raising
capital. These anticipated expenditures are for music license
acquisitions, website maintenance and development, overhead and working capital
purposes. We have sufficient funds to conduct our operations for a few months,
but not for 12 months or more. There can be no assurance that
financing will be available in amounts or on terms acceptable to us, if at
all.
We anticipate that we will require up to approximately $18 million to
fund our plan of operations for the next twelve months, depending on revenues,
if any, from operations.
By
adjusting our operations and development to the level of capitalization, we
believe we have sufficient capital resources to meet projected cash flow
deficits. However, if during that period or thereafter, we are not
successful in generating sufficient liquidity from operations or in raising
sufficient capital resources, on terms acceptable to us, this could have a
material adverse effect on our business, results of operations liquidity and
financial condition.
We
presently do not have any available credit, bank financing or other external
sources of liquidity. Due to our brief history and historical operating losses,
our operations have not been a source of liquidity. We will need to obtain
additional capital in order to expand operations and become profitable. In
order
to obtain capital, we may need to sell additional shares of our common stock
or
borrow funds from private lenders. There can be no assurance that we will be
successful in obtaining additional funding.
We
will
still need additional investments in order to continue operations to cash flow
break even. Additional investments are being sought, but we cannot guarantee
that we will be able to obtain such investments. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the lack of a trading
price of our common stock and a downturn in the U.S. stock and debt markets
could make it more difficult to obtain financing through the issuance of equity
or debt securities. Even if we are able to raise the funds required, it is
possible that we could incur unexpected costs and expenses, fail to collect
significant amounts owed to us, or experience unexpected cash requirements
that
would force us to seek alternative financing. Further, if we issue additional
equity or debt securities, stockholders may experience additional dilution
or
the new equity securities may have rights, preferences or privileges senior
to
those of existing holders of our common stock. If additional financing is not
available or is not available on acceptable terms, we will have to curtail
our
operations.
To
date,
we have generated minimal revenues ($3,102 as of June 30, 2007) and have
incurred operating losses in every quarter. Our independent
registered public accountants have stated in their report dated June 15, 2007,
that we are a development stage company. These factors among others may raise
substantial doubt about our ability to continue as a going concern.
In
April
2006, to obtain funding for our ongoing operations, we entered into a securities
purchase agreement with a 15 accredited investors pursuant to which the
investors purchased 10,414,654 shares of Series B Convertible Preferred Stock
at
a price per share of $0.85, for gross proceeds of approximately $8,852,456,
less
$951,000 in transaction fees (cash and warrants).
On
August
28, 2007, our Series B Convertible Preferred Stock was automatically
converted into shares of our common stock, upon the automatic effectivness
of
this Form 10-SB Registration Statment, as our securitires are now
registered under Section 12(g) of the Securities Exchange Act of 1934. The
10,414,654 shares of Series B Convertible Preferred Stock were
converted into shares of common stock on a one for
one
basis.
During
March and April 2007, we entered into securities purchase agreements with nine
accredited investors for the sale of an aggregate of $5,000,000 in senior
secured exchangeable notes, of which we received net proceeds of approximately
$4,500,000 after expenses and closing costs. On August 7, 2007, we
entered into an amended and restated securities purchase agreement, pursuant
to
which we sold an additional $5,000,000 in senior secured exchangeable
notes.
The
senior secured exchangeable notes bear interest at 12% per annum, payable
monthly commencing October 1, 2007, maturing on April 19, 2008 (August 7,
2012
for the senior secured exchangeable notes issued on August 7, 2007), and
are
exchangeable into our common stock, at the investor’s option, at a rate of $0.86
per share, subject to adjustment. Based on this conversion price, the
$10,000,000 in senior secured exchangeable notes are exchangeable into
approximately 11,627,907 shares of our common stock.
In
connection with the securities purchase agreements, we also entered into a
registration rights agreement providing for the filing, within 30 days after
the
senior secured exchangeable notes become exchangeable into shares of our common
stock, of a registration statement with the Securities and Exchange Commission
registering the common stock issuable upon exchange of the senior secured
exchangeable notes. We are obligated to use our best efforts to cause
the registration statement to be declared effective no later than 90 days after
such registration statement is filed and to insure that the registration
statement remains in effect until the earlier of (i) all of the shares of common
stock issuable upon conversion of the secured exchangeable debentures have
been
sold or (ii) such shares may be sold without restriction pursuant to Rule
144(k). In the event of a default of our obligations under the
registration rights agreement, we are required to pay to the investors, as
liquidated damages, (i) a cash amount equal to 1.5% of the aggregate purchase
of
the senior secured convertible notes, and (ii) for each 30 day period that
the
registration statement has not been filed or declared effective, as the case
may
be, a cash amount equal to 2% of the aggregate purchase of the senior secured
convertible notes.
The
senior secured exchangeable notes are collateralized by 3,734,847 shares of
Series A Convertible Preferred Stock and 2,930,000 shares of common stock of
seven of our shareholders and directors. In addition, we executed a security
agreement in favor of the investors granting them a first priority security
interest in all of our goods, inventory, contractual rights and general
intangibles, receivables, documents, instruments, chattel paper, and
intellectual property. The security agreement states that if an event
of default occurs under the secured convertible debentures or security
agreements, the investor has the right to take possession of the collateral,
to
operate our business using the collateral, and have the right to assign, sell,
lease or otherwise dispose of and deliver all or any part of the collateral,
at
public or private sale or otherwise to satisfy our obligations under these
agreements.
Off-Balance
Sheet Arrangements
We
do not
have any off balance sheet arrangements that are reasonably likely to have
a
current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.
Critical
Accounting Policies
Income
Taxes
We
account for our income taxes in accordance with SFAS No. 109, “Accounting for
Income Taxes.” Under SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and
their tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets or liabilities of a change in tax rates is recognized in
the
period that the tax change occurs. SFAS No. 109 also requires that deferred
tax
assets be reduced by a valuation allowance if it is more likely than not that
some or all of the deferred tax asset will not be realized. We have established
a valuation allowance related to the benefits of net operating losses for which
utilization in future periods is uncertain. We believe it is more likely than
not that we will not realize the benefits of these deductible differences in
the
near future and, therefore, a valuation allowance has been recorded to offset
such future tax benefits.
Revenue
Recognition
We
expect
that we will derive substantially all of our revenue from the sale of
advertising on our website. We anticipate to have four major advertising
revenues streams: Click Ad revenues will be recognized when an ad that is
placed in our website is successfully ‘Clicked’ and linked to another website or
area; Video revenues will be recognized when ads are played within the website;
Banner revenues will be recognized when an ad is displayed in our website;
and
Imprint revenues will be recognized once the established number of times an
ad
is to be shown is displayed. Any prepaid advertising payments received
will be treated as deferred revenues.
Revenue
shall not be recognized until it is realizable and earned, considering: the
existence/proof of an arrangement; delivery has occurred or the services have
been rendered; the price is fixed or determinable; and collectibility is
reasonably assured.
Research
and Development
In
accordance with SFAS No. 2, "Accounting for Research and Development Costs,"
all
research and development costs are expensed when they are incurred. Research
and
development expenses consist primarily of research and development activities
associated with the development of our technology. Since inception through
December 31, 2006, we have expended $886,729 for research and development
activities.
We
expense all costs incurred in the preliminary project stage for software
developed for internal use and capitalizes all external direct costs of
materials and services consumed in developing or obtaining internal-use computer
software in accordance with Statement of Position (“SOP”) 98-1, “Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use.” In
addition, for employees who are directly associated with and who devote time
to
internal-use computer software projects, to the extent of the time spent
directly on the project, we capitalize payroll and payroll-related costs of
such
employees incurred once the development has reached the applications development
stage. All costs incurred for upgrades, maintenance and enhancements that
do not result in additional functionality are expensed. To date, we did not
capitalize any software development costs as such technology has not
reached any definitive stage of functionality. These costs once capitalized
will be amortized to expense over the estimated life of
the software technology. We will periodically perform reviews of
the recoverability of capitalized software costs.
Web
Site Development Costs
We
adopted Emerging Issues Task Force Abstract (“EITF”) Issue number 00-2,
“Accounting for Web Site Development Costs.” EITF 00-2 provides guidance on the
accounting for the costs of development of company web sites, dividing the
web
site development costs into five stages: (1) the planning stage, during which
the business and/or project plan is formulated and functionalities,
necessary hardware and technology are determined, (2) the web site application
and infrastructure development stage, which involves acquiring or developing
hardware and software to operate the web site, (3) the graphics development
stage, during which the initial graphics and layout of each page are designed
and coded, (4) the content development stage, during which the information
to be
presented on the web site, which may be either textual or graphical in nature,
is developed, and (5) the operating stage, during which training,
administration, maintenance and other costs to operate the existing web site
are
incurred. The costs incurred in the web site application and infrastructure
stage, the graphics development stage and the content development stage are
capitalized; all other costs are expensed as incurred. To date, we did not
capitalize any web site development costs. Such costs once capitalized
will amortized to expense over the estimated life of the website
technology. We will periodically perform reviews of the recoverability of
capitalized web site costs.
Stock-Based
Compensation
Effective
January 1, 2006, we adopted SFAS No. 123(R), "Share Based Payment," using the
modified prospective transition method. There was no effect to the accompanying
financial statements pursuant to the adoption of SFAS No. 123R. SFAS No. 123R
is
a revision of SFAS No. 123, and supersedes APB Opinion No. 25, and its related
implementation guidance. SFAS No. 123(R) addresses all forms of share-based
payment awards including shares issued under employee stock purchase plans,
stock options, restricted stock and stock appreciation rights. Under SFAS No.
123(R), stock-based awards result in a cost that will be measured at fair value
on the award's grant date, based on the estimated number of awards that are
expected to vest that will result in a charge to operations.
Prior
to
January 1, 2006, we accounted for employee stock transactions in accordance
with
Accounting Principle Board ("APB") Opinion No. 25. "Accounting for Stock Issued
to Employees." We had adopted the pro forma disclosure requirements of SFAS
No.
123, "Accounting for Stock-Based Compensation."
Prior
to
our adoption of SFAS No. 123(R), SFAS No. 123 required that we provide pro-forma
information regarding net earnings and net earnings per share as if our
stock-based awards had been determined in accordance with the fair value method
prescribed therein. We previously adopted the disclosure portion of SFAS No.
148
"Accounting for Stock-based Compensation - Transition and Disclosure," requiring
quarterly SFAS No. 123 pro-forma disclosures. The pro-forma charge for
compensation cost related to stock-based awards granted was recognized over
the
service period. For stock options, the service period represents the period
of
time between the date of grant and the date each option becomes exercisable
without consideration of acceleration provisions (e.g., retirement, change
of
control, etc.).
There
were no stock options granted to employees during the year ended
2005.
The
cost
of stock-based compensation awards issued to non-employees for services are
recorded at either the fair value of the services rendered or the fair value
of
the stock-based award, whichever is more readily determinable, using the
measurement date guidelines enumerated in Emerging Issues Task Force ("EITF")
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."
Recent
Accounting Pronouncements
In
February 2006, the FASB issued SFAS No. 155 "Accounting for Certain Hybrid
Financial Instruments-an amendment of FASB Statements No. 133 and 140" ("FAS
155"). FAS 155 addresses the following: a) permits fair value re-measurement
for
any hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation; b) clarifies which interest-only strips
and
principal-only strips are not subject to the requirements of Statement 133;
c)
establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation;
d) clarifies that concentrations of credit risk in the form of subordination
are
not embedded derivatives; and e) amends Statement 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. FAS 155 is effective for all financial
instruments acquired or issued after the beginning of an entity's first fiscal
year that begins after September 15, 2006. We have not yet completed our
evaluation of the impact of adopting SFAS 155 on our results of operations
or
financial position, but do not expect the adoption to have a material
impact.
In
March
2006, the FASB issued SFAS 156 - "Accounting for Servicing of Financial Assets
-
an amendment of FASB Statement No. 140" ("SFAS 156"). SFAS 156 is effective
for
the first fiscal year beginning after September 15, 2006. SFAS 156 changes
the
way entities account for servicing assets and obligations associated with
financial assets acquired or disposed of. We have not yet completed our
evaluation of the impact of adopting SFAS 156 on our results of operations
or
financial position, but do not expect that the adoption of SFAS 156 will have
a
material impact.
In
July
2006, the Financial Accounting Standards Board issued Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement No. 109" (the "Interpretation"). The Interpretation establishes for
all entities a minimum threshold for financial statement recognition of the
benefit of tax positions, and requires certain expanded disclosures. The
Interpretation is effective for fiscal years beginning after December 31, 2006,
and is to be applied to all open tax years as of the date of effectiveness.
We
are in the process of evaluating the impact of the adoption of this
Interpretation. We do not expect this Interpretation to have a material impact
on our financial position or results of operations.
In
September 2006, the FASB issued Statement of Financial Accounting Standard
No.
157, "Fair Value Measurements" (“SFAS 157”). This statement defines fair value,
establishes a fair value hierarchy to be used in generally accepted accounting
principles and expands disclosures about fair value measurements. Although
this
statement does not require any new fair value measurements, the application
could change current practice. The statement is effective for fiscal years
beginning after November 15, 2007. We are currently evaluating the impact of
this statement and do not expect the adoption of this pronouncement to have
a
material impact on our financial position or results of operations.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Liabilities" ("SFAS No. 159"). SFAS No. 159 provides
companies with an option to report selected financial assets and liabilities
at
fair value, and establishes presentation and disclosure requirements designed
to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. The new guidance is
effective for fiscal years beginning after November 15, 2007. We are currently
evaluating the potential impact of this statement and do not expect the adoption
of this pronouncement to have a material impact on our financial position or
results of operations.
In
September 2006, the staff of the Securities and Exchange Commission issued
SAB
No. 108 which provides interpretive guidance on how the effects of the carryover
or reversal of prior year misstatements should be considered in quantifying
a
current year misstatement. SAB 108 becomes effective in fiscal 2007. The
adoption of this pronouncement is not expected to have an impact on our
financial position, results of operation or cash flows.
In
December 2006, the FASB approved FASB Staff Position (FSP) No. EITF 00-19-2,
"Accounting for Registration Payment Arrangements" ("FSP EITF 00-19-2"), which
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument
or
other agreement, should be separately recognized and measured in accordance
with
SFAS No. 5, "Accounting for Contingencies". FSP EITF 00-19-2 also requires
additional disclosure regarding the nature of any registration payment
arrangements, alternative settlement methods, the maximum potential amount
of
consideration and the current carrying amount of the liability, if any. The
guidance in FSP EITF 00-19-2 amends FASB Statements No. 133, "Accounting for
Derivative Instruments and Hedging Activities", and No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity", and FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of
Others", to include scope exceptions for registration payment
arrangements.
FSP
EITF
00-19-2 is effective immediately for registration payment arrangements and
the
financial instruments subject to those arrangements that are entered into or
modified subsequent to the issuance date of this FSP, or for financial
statements issued for fiscal years beginning after December 15, 2006, and
interim periods within those fiscal years, for registration payment arrangements
entered into prior to the issuance date of this FSP. The adoption of this
pronouncement is not expected to have a material impact on our financial
position, results of operations or cash flows. However, we will be required
to
pay the holders of our Series B Convertible Preferred Stock liquidated damages
of 2% per month for each share outstanding for each month after July 31, 2007
and through September 30, 2007 that we are not publicly listed.
ITEM
3. DESCRIPTION OF PROPERTY.
We
maintain our
principal office at 95 Morton Street, New York, New York
10014. Our telephone number at that office is (718)
839-9431.
Our current office space consists of approximately 5,000 square
feet. The lease is month-to-month at a cost of $21,500 per
month. In addition, we rent space for our servers in the State of Washington
at
a cost of $3,000 per month and in Asburn, Virginia at a cost of $6,800 per
month. We
believe that our current office space and facilities are sufficient to meet
our
present needs and do not anticipate any difficulty securing alternative or
additional space, as needed, on terms acceptable to us.
ITEM
4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The
following table sets forth certain information regarding beneficial ownership
of
our equity stock as of August 28, 2007:
|
·
|
by
each person who is known by us to beneficially own more than 5% of
our
equity stock;
|
|
·
|
by
each of our officers and directors;
and
|
|
·
|
by
all of our officers and directors as a
group.
|
|
|
TITLE
OF CLASS
|
NUMBER
OF SHARES OWNED (1)
|
PERCENTAGE
OF CLASS (2)
|
| |
|
|
|
|
Joe
Mohen
95
Morton Street
|
Common
Stock
|
4,008,153
(3)
|
14.02%
|
| |
|
|
|
|
Mel
Schrieberg
95
Morton Street
|
Common
Stock
|
1,480,000
|
6.02%
|
| |
|
|
|
|
Vesa
Suomalainen
95
Morton Street
|
Common
Stock
|
1,680,000
(4)
|
6.62%
|
| |
|
|
|
|
James
Campbell
95
Morton Street
|
Common
Stock
|
220,000
|
*
|
| |
|
|
|
|
George
Hayes
95
Morton Street
|
Common
Stock
|
250,000
|
1.02%
|
| |
|
|
|
|
Roger
Munford
95
Morton Street
|
Common
Stock
|
300,000
|
1.22%
|
| |
|
|
|
|
Orville
Hagler
95
Morton Street
|
Common
Stock
|
640,000
(5)
|
2.56%
|
| |
|
|
|
|
Jordan
Levin
95
Morton Street
|
Common
Stock
|
360,000
|
1.47%
|
| |
|
|
|
|
Frances
Preston
95
Morton Street
|
Common
Stock
|
360,000
|
1.47%
|
| |
|
|
|
|
Jerome
N. Gold
95
Morton Street
|
Common
Stock
|
360,000
|
1.47%
|
| |
|
|
|
|
Mark
Hutchens
95
Morton Street
|
Common
Stock
|
360,000
|
1.47%
|
| |
|
|
|
|
Steve
Norcia
95
Morton Street
|
Common
Stock
|
360,000
|
1.47%
|
|
|
TITLE
OF CLASS
|
NUMBER
OF SHARES OWNED (1)
|
PERCENTAGE
OF CLASS (2)
|
| |
|
|
|
|
Joe
Mohen
95
Morton Street
|
Common
Stock
|
4,008,153
(3)
|
14.02%
|
| |
|
|
|
|
Mel
Schrieberg
95
Morton Street
|
Common
Stock
|
1,480,000
|
6.02%
|
| |
|
|
|
|
Vesa
Suomalainen
95
Morton Street
|
Common
Stock
|
1,680,000
(4)
|
6.62%
|
| |
|
|
|
|
James
Campbell
95
Morton Street
|
Common
Stock
|
220,000
|
*
|
| |
|
|
|
|
George
Hayes
95
Morton Street
|
Common
Stock
|
250,000
|
1.02%
|
| |
|
|
|
|
Roger
Munford
95
Morton Street
|
Common
Stock
|
300,000
|
1.22%
|
| |
|
|
|
|
Orville
Hagler
95
Morton Street
|
Common
Stock
|
640,000
(5)
|
2.56%
|
| |
|
|
|
|
Jordan
Levin
95
Morton Street
|
Common
Stock
|
360,000
|
1.47%
|
| |
|
|
|
|
Frances
Preston
95
Morton Street
|
Common
Stock
|
360,000
|
1.47%
|
| |
|
|
|
|
Jerome
N. Gold
95
Morton Street
|
Common
Stock
|
360,000
|
1.47%
|
| |
|
|
|
|
Mark
Hutchens
95
Morton Street
|
Common
Stock
|
360,000
|
1.47%
|
| |
|
|
|
|
Steve
Norcia
95
Morton Street
|
Common
Stock
|
360,000
|
1.47%
|
| |
|
|
|
|
Robert
N. Gordon
95
Morton Street
|
Common
Stock
|
605,000
(6)
|
2.44%
|
| |
|
|
|
|
Albert
Hughes
95
Morton Street
|
Common
Stock
|
360,000
|
1.47%
|
| |
|
|
|
|
Mark
Strama
95
Morton Street
|
Common
Stock
|
420,000
|
1.71%
|
| |
|
|
|
|
Scott
Stagg
95
Morton Street
|
Common
Stock
|
5,124,736
(7)
|
17.26%
|
| |
|
|
|
|
Amir
Khan
95
Morton Street
|
Common
Stock
|
1,708,246
(8)
|
6.50%
|
| |
|
|
|
|
Tom
Mackell
95
Morton Street
|
Common
Stock
|
360,000
|
1.47%
|
| |
|
|
|
|
All
Officers and Directors
As
a Group (18 persons)
|
Common
Stock
|
18,946,135
(9)
|
50.74%
|
| |
|
|
|
|
Credit
Suisse Client Nominees (UK) Limited
c/o
Martin Feast Prime Brokerage Settlements
SCFB
(Europe) Ltd.
One
Cabot Square
London,
E14 4QJ United Kingdom
|
Common
Stock
|
3,000,000
|
12.21%
|
| |
|
|
|
|
Moore
Credit Fund (Master) LP
1251
Avenue of the Americas, 52nd
Floor
|
Common
Stock
|
2,941,177
|
11.97%
|
| |
|
|
|
|
Moore
Macro Fund
1251
Avenue of the Americas, 52nd
Floor
|
Common
Stock
|
2,941,176
|
11.97%
|
| |
|
|
|
|
Distressed
High Yield Trading Opportunities Fund, Ltd.
c/o
3V Capital Mgmt, LLC
3
Greenwich Office Park
51
East Weaver Street
|
Common
Stock
|
8,541,226
(10)
|
25.79%
|
| |
|
|
|
|
Joe
Mohen
|
Preferred
A
|
4,248,153
|
45.00%
|
| |
|
|
|
|
Vesa
Suomalainen
|
Preferred
A
|
800,000
|
8.47%
|
| |
|
|
|
|
West
Pacific Trust
Braeausgasse
28
Gilching
D82205 Germany
|
Preferred
A
|
630,000
|
6.67%
|
|
(1)
|
Beneficial
Ownership is determined in accordance with the rules of the Securities
and
Exchange Commission and generally includes voting or investment power
with
respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or
convertible within 60 days of August 15, 2007 are deemed outstanding
for
computing the percentage of the person holding such option or warrant
but
are not deemed outstanding for computing the percentage of any other
person. |
|
(2)
|
For
purposes of calculating the percentage beneficially owned, the number
of
shares of each class of stock deemed outstanding include 24,571,854
common
shares and 9,440,200 Series A Convertible Preferred Shares outstanding
as
of August 28, 2007. |
| (3) |
Represents
shares of common stock issuable upon conversion of Series A Convertible
Preferred Stock. |
| (4) |
Includes
800,000 shares of common stock issuable upon conversion of Series A
Convertible Preferred Stock. |
| (5)
|
Includes
400,000 shares of common stock issuable upon conversion of Series A
Convertible Preferred Stock. |
| (6)
|
Includes
245,000 shares of common stock issuable upon conversion of Series A
Convertible Preferred Stock. |
|
(7)
|
Includes
3,488,372 shares of common stock issuable upon exchange of senior secured
exchangeable notes and 1,636,364 shares of common stock issuable upon
conversion of warrants |
|
(8)
|
Includes
1,162,791 shares of common stock issuable upon exchange of senior secured
exchangeable notes and 545,455 shares of common stock issuable upon
conversion of warrants. |
|
(9)
|
Includes
5,938,153 shares of common stock issuable upon conversion of Series
A
Convertible Preferred Stock, 4,651,163 shares of common stock issuable
upon exchange of senior secured exchangeable notes and 2,181,819 shares
of
common stock issuable upon conversion of
warrants. |
|
(10)
|
Includes
5,813,953 shares of common stock issuable upon exchange of senior secured
exchangeable notes and 2,727,273 shares of common stock issuable upon
conversion of warrants. |
ITEM
5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS.
|
A.
|
Identification
of Directors and Executive Officers. The current officers and directors
will serve for one year or until their respective successors are
elected
and qualified. They are:
|
|
Name
|
|
Age
|
|
Position
|
|
Joe
Mohen
|
|
50
|
|
Chairman
|
|
Mel
Schrieberg
|
|
64
|
|
Chief
Executive Officer
|
|
Vesa
Suomalainen
|
|
44
|
|
Chief
Technology Officer
|
|
James
Campbell
|
|
34
|
|
Chief
Information Officer
|
|
George
Hayes
|
|
55
|
|
Senior
VP Sales and Marketing
|
|
Roger
Munford
|
|
50
|
|
General
Manager
|
|
Orville
Hagler
|
|
50
|
|
Secretary
|
|
Jordan
Levin
|
|
39
|
|
Director
|
|
Frances
Preston
|
|
71
|
|
Director
|
|
Jerome
N. Gold
|
|
61
|
|
Director
|
|
Mark
Hutchens
|
|
52
|
|
Director
|
|
Steve
Norcia
|
|
66
|
|
Director
|
|
Robert
N. Gordon
|
|
58
|
|
Director
|
|
Albert
Hughes
|
|
43
|
|
Director
|
|
Mark
Strama
|
|
39
|
|
Director
|
|
Scott
Stagg
|
|
44
|
|
Director
|
|
Amir
Khan
|
|
39
|
|
Director
|
|
Thomas
J. Mackell, Jr.
|
|
64
|
|
Director
|
Joe
Mohen, Chairman
Mr.
Mohen has been our Chairman since
founding our company. Between founding our company and May 2006, Mr.
Mohen was President. Previously, between July 2001 and July 2003, Mr. Mohen
was
the founder and Chairman of ParishPay, a New York, New York online payment
company that provides automated handling of donations for the Catholic Church
in
the United States, by making direct deductions of monthly offerings from
parishioners checking or credit card accounts. Mr. Mohen was a
co-founder and Chief Executive Officer of Election.com, where he worked from
1999 through 2001. Mr. Mohen was CEO of Proginet Corporation from
1991 thru 1996, which he founded in 1986.
Mel
Schrieberg, Chief Executive Officer
Mr.
Schrieberg has been our Chief Executive Officer since December 2006. Between
2002 and 2007, Mr. Schrieberg was the Chairman and Chief Executive Officer
of
Election Services Corporation, a Garden City, New York based election services
company. Mr. Schrieberg was a co-founder, President and Chief
Operating Officer of Election.com and held management positions with Xerox
Corporation, ROLM Systems, Inc., IBM and Automatic Data Processing. Mr.
Schrieberg received his Bachelor of Science degree in industrial management
from
the University of Rhode Island in 1968, his Masters in Business Administration
from Fairleigh Dickinson University in 1973 and attended the Executive
Entrepreneurial Program at Harvard University in 2005.
Vesa
Suomalainen, Chief Technology Officer
Mr.
Suomalainen has been our Chief Technology Officer since September 2004. Between
2000 and August 2004, Mr. Suomalainen was retired. Between 1988 and 2000, Mr.
Suomalainen worked for Microsoft Corporation, holding, among others, titles
of
general manager, director of product strategy and product unit
manager. Mr. Suomalainen received his Bachelor of Science degree in
computer engineering from the University of New Mexico in 1987.
James
Campbell, Chief Information Officer
Mr.
Campbell has been our Chief Information Officer since June 2006. Between
December 2001 and May 2006, Mr. Campbell worked for the New York State Office
of
Homeland Security, as the Deputy Assistant Director from December 2001 until
September 2003 and the Chief Information Officer from September 2003 until
May
2006. Between January 1996 and December 2001, Mr. Campbell was a software
engineer for Proginet Corporation. Mr. Campbell received his Bachelor of Science
degree in computer information systems from the Long Island University, C.W.
Post in 1996.
George
Hayes, Senior VP Sales and Marketing
Mr.
Hayes
has been our Senior VP Sales and Marketing since June 2007. Between February
2006 and June 2007, Mr. Hayes worked as an independent media and marketing
consultant. Between September 1975 and February 2006, Mr. Hayes worked for
McCann Worldgroup, an international advertising company. During that time,
Mr.
Hayes worked in several positions, including Executive Vice President of
Universal McCann, which he held for the last several years working at McCann.
Mr. Hayes also worked for J. Walter Thompson as a media planner. Mr. Hayes
received his Bachelors degree from Georgetown University in 1973.
Roger
Munford, General Manager
Mr.
Munford has been our General Manager since May 2006. Between June 2000 and
May
2006, Mr. Munford was the General Manager, Online, for Dennis Publishing, Inc.,
based in New York, New York.
Orville
Hagler, Secretary
Mr.
Hagler has been our Secretary and Vice President Entertainment Programming
since
November 2003. Between January 2002 and November 2003, Mr. Hagler was the data
administrator and DBA of New Technology, Financial Services for TIAA-CREF in
New
York.
Jordan
Levin, Director
Mr.
Levin
has been a director since January 2007. Since February 2006, Mr.
Levin has been the co-founder of Generate LLC, a Los Angeles, California based
management and production company. Between January and December 2005, Mr. Levin
was self-employed as a strategic consultant. In October 2004, Mr. Levin was
a
Freelance Director for the television show, Everwood. Between September 2003
and
June 2004, Mr. Levin was the Chief Executive Officer of The WB Network. Between
June 2001 and September 2003, Mr. Levin was the President of Entertainment
at
The WB Network. Between August 1994 and June 2001, Mr. Levin
worked for The WB Television Network, as the VP of Programming, the Sr. VP
of
Programming and EVP of Programming. Mr. Levin graduated from the University
of
Texas at Austin in 1989 with a degree in television and film
theory.
Frances
Preston, Director
Ms.
Preston has been a director since April 2005. Between 1986 and 2004,
Ms. Preston was the President and CEO of Broadcast Music Inc. (BMI). Since
retiring as President and CEO, Ms. Preston has served as an advisor to BMI
and
continues to serve as a member of their board of directors. Ms. Preston serves
on the Recording Academy’s President’s Advisory Council and on the board of
directors for the Grammy Foundation. She is a member of the Board of Directors
of the National Academy of Popular Music/Songwriters Hall of Fame, a Board
Member of the Rhythm & Blues Foundation, the Rock & Roll Hall of Fame,
the National Music Museum (DC) and a past member of the National Advisory Board
of the George Foster Peabody Awards.
Jerome
N. Gold, Director
Mr.
Gold
has been a director since January 2007. Mr. Gold is the Chief
Financial Officer for RP Realty Partners LLC, a position he has held since
March
2006. Between August 2005 and March 2006, Mr. Gold was the Senior Managing
Director of Corporate Finance/Restructuring at FTI Consulting Inc. within FTI's
Transaction Advisory Services group, residing in the Los Angeles office. Between
May 2004 and June 2005, Mr. Gold was the chief financial officer at Platinum
Equity LLC, a private equity firm specializing in leveraged buyouts and
operating acquired portfolio companies. Between March 2001 and May
2004, Mr. Gold was managing director of his own consulting firm, Gold
International, which specialized in advisory and M&A services for media,
entertainment and communications. Between 1992 and 2001, Mr. Gold served as
Chief Financial Officer of Warner Music Group. Prior to Warner Music, Mr. Gold
was a partner at Ernst & Young. Mr. Gold attended Baruch College at City
University New York and is a Certified Public Accountant.
Mark
Hutchens, Director
Mr.
Hutchens has been a director since January 2007. Between January 2003
and December 2006, Mr. Hutchens was retired. Between January 2001 and December
2002, Mr. Hutchens was the CEO of Radiant Data, a systems software company.
Between August 1988 and May 1999, Mr. Hutchens was the CEO of Insession, a
systems software company.
Steve
Norcia, Director
Mr.
Norcia has been a director since January 2007. Mr. Norcia is the
principal and founder of Topsail Group LLC, an Old Saybrook, Connecticut based
consulting company, a position he has held since December
2002. Between September 2000 and January 2002, Mr. Norcia was the VP
Business Development for Agency.com, a New York, New York based interactive
agency. Between 1996 and August 2000, Mr. Norcia was the Managing Director
of
the New York office of DDB, a New York, New York based advertising agency.
Mr.
Norcia received Bachelor of Arts degree from the University of Connecticut
in
1962.
Robert
N. Gordon, Director
Mr.
Gordon has been a director since November 2003. Mr. Gordon is a
Principal in Strategic Horizons, Inc., a position he has held since
1996.
Albert
Hughes, Director
Mr.
Hughes has been a director since January 2007. Mr. Hughes is the
President of Axis Group, LLC, a Berkley Heights, New Jersey based computer
consulting company, a position he has held since August 1996. Mr.
Hughes received Bachelor of Arts degrees in both Computer Science and Economics
from Rutgers University in 1985. Prior to founding Axis Group, Mr. Hughes was
a
partner at Strategic Network Designs. Mr. Hughes also worked for
Eicon Technology and Booz Allen Hamilton.
Mark
Strama, Director
Mr.
Strama has been a director since January 2007. Mr. Strama has been a
member of the Texas House of Representatives since 2004. From 2000 through
December 2003, Mr. Strama served as a Senior Vice President at Election.com,
after Election.com acquired NewVoter.com, a company Mr. Strama founded in 1999
and served as Chief Executive Officer. Previously, Mr. Strama was Director
of
Programs at Rock the Vote, a non-profit voter registration campaign sponsored
by
the music industry and MTV. Mr. Strama served as chief of staff to Texas State
Senator Rodney Ellis from 1991 through 1995, and also served on the staff of
Ann
Richards' 1990 campaign for Governor of Texas.
Scott
Stagg, Director
Mr.
Stagg
has been a director since April 18, 2007. Mr. Stagg is the managing
member of 3V Capital Management, a Greenwich, Connecticut based hedge fund,
a
position he has held since July 2003. Between April 2003 and December
2005, Mr. Stagg was the director of research for Libertas Partners, a Greenwich,
Connecticut based broker-dealer. Between February 2002 and February
2003, Mr. Stagg was an executive director at UBS Asset Management. Mr. Stagg
received his Bachelor of Arts from the State University of New York in 1984
and
his Masters of Business Administration from the University of Chicago in
1993.
Amir
Khan, Director
Mr.
Khan
has been a director since April 18, 2007. Mr. Stagg is the portfolio
member of 3V Capital Management, a Greenwich, Connecticut based hedge fund,
a
position he has held since March 2007. Between August 2004 and March
2007, Mr. Khan was the chief operating officer for Libertas Partners, a
Greenwich, Connecticut based broker-dealer. Between February 2001 and
August 2004, Mr. Khan was the chief operating officer for Debttraders, Inc.,
a
New York, New York based broker-dealer. Mr. Khan holds a Bachelors
degree in chemical engineering, a Masters of Business Administration and is
a
Certified Financial Analyst.
Thomas
J. Mackell, Jr., Director
Mr.
Mackell has served as a director since February 2007. Mr. Mackell has been
a
Director of the Federal Reserve Bank of Richmond since January 2003, the Deputy
Chairman between June 2003 and December 2004, and the is the President and
Chairman of the Board of Directors since January 2005. Mr. Mackell is
the President of the Association of Benefit Administrators, Inc., a position
he
has held since 1981. Between September 2000 and January 2005, Mr.
Mackell worked for The Kamber Group, Inc., in various positions, including
Group
and Vice Chair, Executive Vice President and President and Chief Operating
Officer. Mr. Mackell earned a bachelor’s degree from Seton Hall University and
attended St. John’s University School of Law. Mr. Mackell earned a
master’s degree from Long Island University and a doctorate from Rutgers
University. Mr. Mackell holds Series 6 and 63 securities
licenses.
The
following is a summary of the committees on which our directors
serve.
Audit
Committee
Our
Audit
Committee currently consists of Albert Hughes, Bob Gordon, Frances Preston
and
Thomas Mackell, with Mr. Hughes elected as Chairman of the Committee. Mr.
Mackell is our audit committee financial expert.
Our
Audit
Committee’s responsibilities include: (i) reviewing the independence,
qualifications, services, fees, and performance of the independent auditors,
(ii) appointing, replacing and discharging the independent auditor, (iii)
pre-approving the professional services provided by the independent auditor,
(iv) reviewing the scope of the annual audit and reports and recommendations
submitted by the independent auditor, and (v) reviewing our financial reporting
and accounting policies, including any significant changes, with management
and
the independent auditor.
Compensation
Committee
Our
Compensation Committee currently consists of Steve Norcia, Frances Preston,
Mark
Hutchens, Mel Schrieberg and Thomas Mackell, with Mr. Norcia elected as Chairman
of the Committee. Our Compensation Committee has responsibility for
assisting the Board of Directors in, among other things, evaluating and making
recommendations regarding the compensation of our executive officers and
directors, assuring that the executive officers are compensated effectively
in a
manner consistent with our stated compensation strategy and periodically
evaluating the terms and administration of our incentive plans and benefit
programs.
Nominating
Committee
Our
Nominating Committee currently consists of Mel Schrieberg, Steve Norcia, Mark
Strama and Jordan Levin, with Mr. Schrieberg elected as Chairman of the
Committee. Our Nominating Committee has responsibility for assisting the Board
in, among other things, effecting the organization, membership and function
of
the Board and its committees. The Nominating Committee shall identify and
evaluate the qualifications of all candidates for nomination for election as
directors.
Technology
Committee
Our
Technology Committee currently consists of Mark Hutchens, Albert Hughes and
Jerry Gold, with Mr. Hutchens elected as Chairman of the Committee. Our
Technology Committee is responsible for reviewing, evaluating and making
recommendations to the Board on major strategies and other subjects relating
to
our approach to technical and commercial innovation; the innovation development,
technology acquisition and decision-making process to assure ongoing growth;
and
the effectiveness of our technological efforts and investments in developing
new
products and businesses.
|
(c)
|
Family
Relationships.
|
None.
|
(d)
|
Involvement
in Certain Legal
Proceedings.
|
None.
ITEM
6. EXECUTIVE COMPENSATION.
Director
Compensation
Directors
do not currently receive any cash compensation in connection with their
services. Outside directors are entitled to receive grants of common stock
or
options to purchase common stock through our stock option plan at the discretion
of the board of directors. We reimburse all directors for certain expenses
in
connection with attendance at board meetings.
Executive
Compensation
Summary
Compensation Table (1)
|
Name
& Principal Position
|
Year
|
Salary
($)
|
All
Other Compensation ($)
|
Total
($)
|
|
Joseph
Mohen, Chairman and Former President (2)
|
2006
2005
2004
|
—
—
—
|
421,240
(3)
—
—
|
421,240
—
—
|
| |
|
|
|
|
|
Robin
Kent, Former Chief Executive Officer (4)
|
2006
2005
|
340,000
—
|
—
—
|
340,000
—
|
| |
|
|
|
|
|
Eric
McClean, Former Chief European Operations (5)
|
2006
|
196,155
|
—
|
196,155
|
| |
|
|
|
|
|
Orville
Hagler, Secretary
|
2006
2005
2004
|
87,459
—
—
|
69,500
(6)
—
—
|
156,959
—
—
|
(1)
As
permitted under the rules promulgated by the Securities and Exchange Commission,
this table omits columns that are not applicable.
(2)
Mr.
Mohen was our President until May 2006.
(3)
Represents consulting fees of $241,240 in 2006 pursuant to his consulting
agreement and $180,000 in settlement of consulting fees owed from prior
years.
(4)
Mr.
Kent was our Chief Executive Officer between May 2006 and December
2006.
(5)
Mr.
McClean was our Chief of European Operations from May 2006 until December
2006.
(6)
Represents settlement of salary owed from prior years.
Employment/Consulting
Agreements
Mel
Schrieberg
Effective
March 6, 2007, we entered into an employment agreement with Mel Schrieberg
to
serve as our Chief Executive Officer for a term of three years, which shall
automatically renew for additional one year periods unless either party gives
90
days prior written notice. Pursuant to the agreement, until such time as we
receive financing and revenues, Mr. Schrieberg will not receive a
salary. Prior to achieving United States based revenue, Mr.
Schrieberg receives an annual salary of $198,000. Upon achieving United States
based revenue, Mr. Schrieberg receives an annual salary of $265,000 and upon
our
company achieving a cash flow positive run rate, Mr. Schrieberg receives an
annual salary of $350,000. In addition, Mr. Schrieberg shall receive incentive
compensation at an annual rate of 50% of the base salary. In addition, Mr.
Schrieberg is entitled to participate in any and all benefit plans, from time
to
time, in effect for our employees, along with vacation, sick and holiday pay
in
accordance with our policies established and in effect from time to time. Mr.
Schrieberg is also entitled to receive a monthly automobile allowance, up to
$1,000 per month, and we will reimburse Mr. Schrieberg for all maintenance,
gasoline and other normal expenses associated with the use of the automobile.
In
addition, we will purchase disability and life insurance policies for Mr.
Schrieberg.
Vesa
Suomalainen
Effective
December 11, 2005, we entered into an employment agreement with Vesa Suomalainen
to serve as our Chief Technology Officer. Pursuant to the agreement, receives
an
annual salary of $175,000. In addition, Mr. Suomalainen received
240,000 shares of common stock, subject to buy-back in the event that Mr.
Suomalainen resigns prior to September 1, 2007. In addition, Mr. Suomalainen
is
entitled to participate in any and all benefit plans, from time to time, in
effect for our employees, along with vacation, sick and holiday pay in
accordance with our policies established and in effect from time to time. Mr.
Suomalainen will also receive up to an additional 240,00 shares of restricted
stock if remains employed through January 2010.
George
Hayes
Effective
June 7, 2007, we entered into an employment agreement with George Hayes to
serve
as our Senior Vice President of Marketing and Sales for a term of three years,
which shall automatically renew for additional one year periods unless either
party gives 90 days prior written notice. Pursuant to the agreement, until
such
time as we launch our music services and are receiving United States based
revenue, Mr. Hayes receives an annual salary of $175,000. Upon achieving United
States based revenue for a period of three months, Mr. Hayes receives an annual
salary of $225,000. In addition, Mr. Hayes shall receive incentive compensation
at an annual rate of 35% of the base salary. In addition, Mr. Hayes is entitled
to participate in any and all benefit plans, from time to time, in effect for
our employees, along with vacation, sick and holiday pay in accordance with
our
policies established and in effect from time to time. Mr. Hayes also received
250,000 shares of restricted common stock upon execution of the employment
agreement.
Orville
Hagler
Effective
February 4, 2004, we entered into an employment agreement with Orville Hagler
to
serve as our Vice President, Internet Properties for a term of three years,
which shall automatically renew for additional one year periods unless either
party gives 30 days prior written notice. Pursuant to the agreement, Mr. Hagler
receives an annual salary of $139,000. In addition, Mr. Hagler is entitled
to
participate in any and all benefit plans, from time to time, in effect for
our
employees, along with vacation, sick and holiday pay in accordance with our
policies established and in effect from time to time. Mr. Hagler will
also receive an additional 240,000 shares of restricted stock if he remains
employed through January 2010.
Joseph
Mohen
Effective
January 15, 2004, we entered into a consulting agreement, which was amended
on
April 27, 2006, with Joseph Mohen, our Chairman, for a term until June 30,
2011,
which shall automatically renew for additional one year periods unless either
party gives 30 days prior written notice. Pursuant to the agreement, Mr. Mohen
receives annual consulting fees of $360,000.
ITEM
7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Other
than as disclosed below, there have been no transactions, or proposed
transactions, which have materially affected or will materially affect us in
which any director, executive officer or beneficial holder of more than 10%
of
the outstanding common stock, or any of their respective relatives, spouses,
associates or affiliates, has had or will have any direct or material indirect
interest. We have no policy regarding entering into transactions with affiliated
parties.
We
have
obtained our directors & officers and errors and omissions insurance
policies from Arden Financial Services. Brian Mohen, the brother of
our Chairman, Joseph Mohen, owns a portion of Arden Financial
Services.
During
March 2007, we borrowed $63,000 from Vesa Suomalainen, our Chief Technology
Officer, with interest at 10%, maturing on April 1, 2007. The loan
was collateralized by certain of our computer equipment. The loan was repaid
in
full on April 27, 2007, including default charges of approximately
$3,300.
ITEM
8. DESCRIPTION OF SECURITIES.
COMMON
STOCK
We
are
authorized to issue up to 150,000,000 shares of common stock, par value $.001.
As of August 28, 2007, there were 24,571,854 shares of common stock outstanding.
Such number includes 1,129,722 and 5,520,278 shares of common stock that
are
vested and unvested, respectively, granted to officers, directors and employees
pursuant to our stock option plan. When a restricted stock grant
recipient no longer works for us (or serves on our board for directors) for
any
reason, (i) all unvested shares of common stock granted pursuant to our stock
option plan are forfeited, and (ii) all vested shares of common stock granted
pursuant to our stock option plan are subject to repurchase.
Holders
of our common stock are entitled to one vote per share on all matters to be
voted upon by the stockholders. The election of directors requires a
plurality of votes cast by our stockholders. All other actions by our
stockholders requires a majority of votes cast. Holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
by the Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities
and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable. The rights, preferences and privileges of holders of our common
stock are subject to, and may be adversely affected by, the rights of holders
of
shares of any series of preferred stock which we may designate and issue in
the
future without further stockholder approval.
PREFERRED
STOCK
We
are
authorized to issue up to 40,000,000 shares of preferred stock, $.01 par value.
The shares of preferred stock may be issued in series, and shall have such
voting powers, full or limited, or no voting powers, and such designations,
preferences and relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions providing for the issuance of such
stock adopted from time to time by the Board of Directors. The Board of
Directors is expressly vested with the authority to determine and fix in the
resolution or resolutions providing for the issuances of preferred stock the
voting powers, designations, preferences and rights, and the qualifications,
limitations or restrictions thereof, of each such series to the full extent
now
or hereafter permitted by the laws of the State of Delaware.
Series
A Convertible Preferred Stock
In
July
2005, our Board of Directors adopted and created a series of preferred stock
consisting of 12,000,000 shares designated as Series A Convertible Preferred
Stock. The Series A Convertible Preferred Stock is convertible into our common
stock, at the option of the holder, at any time into one share of common
stock.
The Series A Convertible Preferred Stock will automatically convert into
common
stock upon the occurrence of certain events. The Series A Convertible
Preferred Stock contains anti-dilution provisions in the event of a
consolidation, merger or sale; subdivision or combination; or if we issue
discounted stock. The Series A Convertible Preferred Stock is entitled to
one
vote per share of all matters requiring shareholder vote, and will vote together
with the holders of our common stock, and not as a separate class. As of
August
28, 2007, there were 9,440,200 shares of Series A Preferred Stock
outstanding.
Series
B Convertible Preferred Stock
On
April
21, 2006, our Board of Directors adopted and created a series of preferred
stock
consisting of 24,000,000 shares designated as Series B Convertible Preferred
Stock. On August 28, 2007, all issued and outstanding shares of
Series B Preferred Stock were converted into shares of common
stock.
OPTIONS
As
of August 28, 2007, we had 675,000
options issued and outstanding pursuant to our Employee Stock Option Plan,
exercisable at $0.11 per share.
WARRANTS
We
have
warrants outstanding to purchase 460,000 shares of our common stock, exercisable
at $0.85 per share expiring June 30, 2011. In connection with
a private placement in August 2007, we agreed to issue warrants to purchase
6,000,000 shares of our common stock, exercisable at $1.00 per share expiring
five years from issuance.
CONVERTIBLE
SECURITIES
During
March and April 2007, we entered into securities purchase agreements with
nine
accredited investors for the sale of an aggregate of $5,000,000 in senior
secured exchangeable notes, of which we received net proceeds of approximately
$4,500,000 after expenses and closing costs. On August 7, 2007, we
entered into an amended and restated securities purchase agreement, pursuant
to
which we sold an additional $5,000,000 in senior secured exchangeable
notes.
The
senior
secured exchangeable notes bear interest at 12% per annum, payable monthly
commencing October 1, 2007, maturing on April 19, 2008 (August 7, 2012
for the
senior secured exchangeable notes issued on August 7, 2007), and are
exchangeable into our common stock, at the investor’s option, at a rate of $0.86
per share, subject to adjustment. Based on this conversion price, the
$10,000,000 in senior secured exchangeable notes are exchangeable into
approximately 11,627,907 shares of our common stock.
The
exchange price of the senior secured exchangeable notes will be adjusted in
the
following circumstances:
|
·
|
If
we pay a stock dividend, engage in a stock split, reclassify our
shares of
common stock or engage in a similar transaction, the exchange price
of the
senior secured exchangeable notes will be adjusted
proportionately;
|
|
·
|
If
we issue rights, options or warrants to all holders of our common
stock
entitling them to subscribe for or purchase shares of common stock
at a
price per share less than $0.86 per share, then the exchange price
of the
senior secured exchangeable notes will be adjusted on a weighted-average
basis;
|
|
·
|
If
we issue shares, rights, warrants, options or other securities or
debt
that are convertible into or exchangeable for shares of our common
stock,
at a price per share less than $0.86 per share, then the exchange
price
will be adjusted to such lower price on a full-ratchet
basis;
|
|
·
|
If
we distribute to all holders of our common stock evidences of indebtedness
or assets or rights or warrants to subscribe for or purchase any
security,
then the exchange price of the senior secured exchangeable notes
will be
adjusted based upon the value of the distribution as a percentage
of the
market value of our common stock on the record date for such distribution;
and
|
|
·
|
If
we engage in a merger, consolidation or sale of more than one-half
of our
assets, then the investors will have the right to (i) demand that
we
prepay the senior secured exchangeable notes, (ii) exchange the senior
secured exchangeable notes into the shares of stock and other securities,
cash and property receivable by holders of our common stock following
such
transaction, or (iii) in the case of a merger or consolidation, require
the surviving entity to issue senior secured exchangeable notes with
similar terms.
|
In
connection
with the securities purchase agreements, we also entered into a registration
rights agreement providing for the filing, within 30 days after August
28, 2007,
of a registration statement with the Securities and Exchange Commission
registering the common stock issuable upon exchange of the senior secured
exchangeable notes. We are obligated to use our best efforts to cause
the registration statement to be declared effective no later than 90 days
after
such registration statement is filed and to insure that the registration
statement remains in effect until the earlier of (i) all of the shares
of common
stock issuable upon conversion of the secured exchangeable debentures have
been
sold or (ii) such shares may be sold without restriction pursuant to Rule
144(k). In the event of a default of our obligations under the
registration rights agreement, we are required to pay to the investors,
as
liquidated damages, (i) a cash amount equal to 1.5% of the aggregate purchase
of
the senior secured convertible notes, and (ii) for each 30 day period that
the
registration statement has not been filed or declared effective, as the
case may
be, a cash amount equal to 2% of the aggregate purchase of the senior secured
convertible notes.
The
senior secured exchangeable notes are collateralized by 3,734,847 shares of
Series A Convertible Preferred Stock and 2,930,000 shares of common stock of
seven of our shareholders and directors. In addition, we executed a security
agreement in favor of the investors granting them a first priority security
interest in all of our goods, inventory, contractual rights and general
intangibles, receivables, documents, instruments, chattel paper, and
intellectual property. The security agreement states that if an event
of default occurs under the secured convertible debentures or security
agreements, the investor has the right to take possession of the collateral,
to
operate our business using the collateral, and have the right to assign, sell,
lease or otherwise dispose of and deliver all or any part of the collateral,
at
public or private sale or otherwise to satisfy our obligations under these
agreements.
PART
II
ITEM
1. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
|
(a)
|
Market
Information. Our Common Stock is not trading on any stock exchange
or
market. We are not aware of any market activity in our
stock.
|
|
(b)
|
Holders.
As of August 28, 2007, there were 62 record holders of 24,571,854
shares of our Common Stock.
|
|
(c)
|
Dividends.
We have not paid any cash dividends to date and do not anticipate
or
contemplate paying dividends in the foreseeable future. It is the
present
intention of management to utilize all available funds for execution
of
the Registrant’s business, as set forth
herein.
|
ITEM
2. LEGAL PROCEEDINGS.
From
time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. We are currently not aware
of any such legal proceedings or claims that we believe will have, individually
or in the aggregate, a material adverse affect on our business, financial
condition or operating results.
ITEM
3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
There
are
not and have not been any disagreements between us and our accountants on any
matter of accounting principles, practices or financial statement
disclosure.
ITEM
4. RECENT SALES OF UNREGISTERED SECURITIES.
On
September 29, 2004, we sold 24,000 shares of Series A Convertible Preferred
Stock for gross proceeds of $1,000.
On
January 18, 2005, we sold 38,000 shares of Series A Convertible Preferred Stock
for gross proceeds of $6,115.
On
February 28, 2005, we sold 30,000 shares of Series A Convertible Preferred
Stock
for gross proceeds of $10,000.
On
March
23, 2005, we sold 120,000 shares of Series A Convertible Preferred Stock for
gross proceeds of $60,000.
During
the quarter ended March 31, 2005, we issued 200,000 shares of common stock,
valued at $0.05 per share, to a consultant for services rendered.
On
April
8, 2005, we sold 70,000 shares of Series A Convertible Preferred Stock for
gross
proceeds of $35,000.
On
May
16, 2005, we sold 85,000 shares of Series A Convertible Preferred Stock for
gross proceeds of $39,197.
During
the quarter ended June 30, 2005, we issued 6,460,000 shares of common stock,
valued at $0.05 per share, to employees, board members and consultants for
compensation and services rendered.
On
July
19, 2005, we sold 2,133 shares of Series A Convertible Preferred Stock for
gross
proceeds of $2,000.
On
August
9, 2005, we sold 30,000 shares of Series A Convertible Preferred Stock for
gross
proceeds of $15,000.
On
October 1, 2005, we sold 1,067 shares of Series A Convertible Preferred Stock
for gross proceeds of $1,000.
In
April
2006, we issued 10,414,654 shares of Series B Preferred stock for $0.85 per
share, or $8,852,456, through a private placement offering. In connection with
the private placement, we paid $560,000 in transaction fees and also issued
a
warrant to purchase 460,000 shares of Series B Preferred Stock, which may be
converted into common stock at the same conversion rate of one-for-one, to
the
financial advisers who brokered the transaction. The warrant expires in June
2011 and has an exercise price of $0.85.
During
the year ended December 31, 2006, we issued 387,000 common stock options to
employees.
During
the year ended December 31, 2006, we issued 270,000 shares of restricted common
stock to employees and consultants.
During
March and April 2007, we entered into securities purchase agreements with nine
accredited investors for the sale of an aggregate of $5,000,000 in senior
secured exchangeable notes, of which we received net proceeds of approximately
$4,500,000 after expenses and closing costs. On August 7, 2007, we
entered into an amended and restated securities purchase agreement, pursuant
to
which we sold an additional $5,000,000 in senior secured exchangeable
notes.
The
senior secured exchangeable notes bear interest at 12% per annum, payable
monthly commencing October 1, 2007, maturing on April 19, 2008 (August 7, 2012
for the senior secured exchangeable notes issued on August 7, 2007), and are
exchangeable into our common stock, at the investor’s option, at a rate of $0.86
per share, subject to adjustment. Based on this conversion price, the
$10,000,000 in senior secured exchangeable notes are exchangeable into
approximately 11,627,907 shares of our common stock. The investor
cannot exchange the senior secured convertible notes into shares of our common
stock until our common stock has been registered with the Securities and
Exchange Commission under Section 12(b) or 12(g) of the Securities Exchange
Act
of 1934. In addition, so long as any shares of our Series B
Convertible Preferred Stock is outstanding, the investors are prohibited from
exchanging their senior secured exchangeable notes into shares of our common
stock.
On
May 7,
2007, we issued options to purchase an aggregate of 170,000 shares of our common
stock pursuant to our stock incentive plan to five employees for employment
services.
On
June
7, 2007, we issued 250,000 shares of our common stock to one employee pursuant
to an employment agreement.
On
August 28,
2007, we issued 10,414,654 shares of our common stock to 14 investors upon
the
automatic conversion of all issued and outstanding shares of series B preferred
stock.
*
All of
the above offerings and sales were deemed to be exempt under rule 506 of
Regulation D and Section 4(2) of the Securities Act of 1933, as amended.
No
advertising or general solicitation was employed in offering the securities.
The
offerings and sales were made to a limited number of persons, all of whom
were
accredited investors, business associates of SpiralFrog, Inc. or executive
officers of SpiralFrog, Inc., and transfer was restricted by SpiralFrog,
Inc. in
accordance with the requirements of the Securities Act of 1933. In addition
to
representations by the above-referenced persons, we have made independent
determinations that all of the above-referenced persons were accredited
or
sophisticated investors, and that they were capable of analyzing the merits
and
risks of their investment, and that they understood the speculative nature
of
their investment.
ITEM
5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section
145 (“Section 145”) of the Delaware General Corporation Law, as amended (the
“DGCL”), permits indemnification of directors, officers, agents and controlling
persons of a corporation under certain conditions and subject to certain
limitations. Section 145 empowers a corporation to indemnify any person who
was
or is a party or is threatened to be made a party to any threatened, pending
or
completed action, suit or proceeding whether civil, criminal, administrative
or
investigative, by reason of the fact that he or she is or was a director,
officer or agent of the corporation or another enterprise if serving at the
request of the corporation. Depending on the character of the proceeding, a
corporation may indemnify against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with such action, suit or proceeding if the person indemnified
acted in good faith and in a manner he or she reasonably believed to be in
or
not opposed to, the best interests of the corporation, and, with respect to
any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. In the case of an action by or in the right of the
corporation, no indemnification may be made with respect to any claim, issue
or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine that despite
the
adjudication of liability such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Section 145
further provides that to the extent a present or former director or officer
of a
corporation has been successful in the defense of any action, suit or proceeding
referred to above or in the defense of any claim, issue or matter therein,
such
person shall be indemnified against expenses (including attorneys’ fees)
actually and reasonably incurred by such person in connection therewith.
Our
Certificate of Incorporation (the “Charter”), provides that no current or former
director of the Registrant shall be personally liable to the Registrant or
its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability: (a) for any breach of the director’s duty of loyalty to
the Registrant or its stockholders; (b) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law; (c)
under
Section 174 of the DGCL; or (d) for any transaction from which the director
derived any improper personal benefit. The Registrant’s Charter also authorizes
the Registrant, to the fullest extent permitted by applicable law, to provide
indemnification of, and advanced expenses to, the Registrant’s agents and any
other persons to which the DGCL permits.
In
accordance with Section 145, the Registrant’s Bylaws provide that the Registrant
shall indemnify its officers and directors, and any employee who serves as
an
officer or director of any corporation at the Registrant’s request. According to
Article XIV of the Bylaws, directors and officers as well as employees and
individuals may be indemnified against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation as
a
derivative action) if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation,
and
with respect to any criminal action or proceeding, had no reasonable cause
to
believe their conduct was unlawful.
Mohen,
Inc.
(A
Development Stage Company)
FINANCIAL
STATEMENTS
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Contents
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Page
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Report
of Independent Registered Public Accounting Firm
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F-2
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F-3
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F-4
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F-5
— F-6
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F-7
— F-8
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Notes
to Financial Statements
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F-9 -
F-23
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F-24
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F-25
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F-26
— F-28
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F-29
— F-30
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Notes
to Unaudited Financial Statements
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F-31
— F-41
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Audit Committee of the
Board
of
Directors and Stockholders
of
Mohen,
Inc.
We
have
audited the accompanying balance sheet of Mohen, Inc. (A Development Stage
Enterprise) (the “Company”) as of December 31, 2006, and the related statements
of operations, changes in stockholders’ deficiency and cash flows for the years
ended December 31, 2006 and 2005 and for the period from February 5, 2004
(Inception) to December 31, 2006. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Mohen, Inc. (A Development Stage
Enterprise), as of December 31, 2006, and the results of its operations and
its
cash flows for the years ended December 31, 2006 and 2005 and for the period
from February 5, 2004 (Inception) to December 31, 2006 in conformity with
accounting principles generally accepted in the United States of
America.
As
discussed in Note 1 to the financial statements, the Company continues to
generate operating losses and has a significant working capital deficiency
as of
December 31, 2006. The Company has yet to generate
revenues. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. Management’s plans
regarding these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
/s/
MARCUM & KLEIGMAN, LLP
New
York,
New York
MOHEN
INC
(A
Development Stage Enterprise)
BALANCE
SHEET
12/31/2006
|
ASSETS
|
|
|
|
|
|
| |
|
|
|
|
|
| |
|
|
|
|
|
| Current
assets: |
|
|
|
|
|
|
Cash
|
|
|
$ |
498,009
|
|
|
Prepaid
expenses
|
|
|
|
118,396
|
|
|
Other
current
assets
|
|
|
|
52,960
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
|
669,365
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
|
115,960
|
|
|
Deferred
licenses and other fees, net
|
|
|
|
4,060,000
|
|
|
Security
deposits
|
|
|
|
34,022
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
$
|
4,879,347
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Accounts
payable and accrued
expenses
|
|
|
$
|
644,497
|
|
|
Due
to related parties
|
|
|
|
30,000
|
|
|
Redeemable
warrants
|
|
|
|
391,000
|
|
|
Accrued
minimum
royalties
|
|
|
|
3,065,440
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
|
4,130,937
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
B Redeemable Convertible Preferred Stock, $0.01 par value;
|
|
|
|
|
|
|
24,000,000
shares authorized;
10,414,654 shares issued and outstanding
|
|
|
|
7,901,456
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
Series
A convertible preferred
stock, $0.01 par value; 12,000,000 shares
authorized;
|
|
|
|
|
|
|
9,440,200 shares
issued and outstanding
|
|
|
|
94,402
|
|
|
Common
stock, $.001 par value;
48,000,000 shares authorized;
|
|
|
|
|
|
|
9,347,200 shares issued and outstanding
|
|
|
|
9,347
|
|
|
Additional
paid-in capital
|
|
|
|
488,343
|
|
|
Deficit
accumulated during the
development stage
|
|
|
|
(7,745,138
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' deficiency
|
|
|
|
(7,153,046
|
)
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' deficiency
|
|
|
$
|
4,879,347
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
MOHEN
INC
(A
Development Stage Enterprise)
STATEMENTS
OF OPERATIONS
12/31/2006
|
|
|
|
|
|
|
|
|
For the Period
from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Years
Ended
|
|
|
(Inception)
to
|
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
$ |
1,527,044
|
|
|
$ |
--
|
|
|
$ |
1,527,043
|
|
|
Research and development expenses
|
|
|
787,229
|
|
|
|
99,500
|
|
|
|
886,729
|
|
|
Royalty and license expenses
|
|
|
1,440,000
|
|
|
|
-
|
|
|
|
1,440,000
|
|
|
General and administrative expenses
|
|
|
3,005,971
|
|
|
|
980,425
|
|
|
|
4,449,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OPERATING EXPENSES
|
|
|
6,760,244
|
|
|
|
1,079,925
|
|
|
|
8,303,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(6,760,244 |
) |
|
|
(1,079,925 |
) |
|
|
(8,303,080 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
16,942
|
|
|
|
-
|
|
|
|
16,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$ |
(6,743,302 |
) |
|
$ |
(1,079,925 |
) |
|
$ |
(8,286,138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and fully diluted loss per common share
|
|
$ |
(0.72 |
) |
|
$ |
(0.15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted
|
|
|
9,347,200
|
|
|
|
7,180,769
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
MOHEN
INC
(A
Development Stage Enterprise)
STATEMENTS
OF STOCKHOLDERS' DEFICIENCY
12/31/2006
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
Series A Convertible
|
|
|
Additional
|
|
|
During
the
|
|
|
Total
|
|
|
|
|
Common
Stock
|
|
|
Preferred
Stock
|
|
|
Paid-in
|
|
|
Development
|
|
|
Stockholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stage
|
|
|
Deficiency
|
|
|
|
|
|
--
|
|
|
$ |
--
|
|
|
|
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock to founders at $0.01 for services, compensation and
fees;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
8,650,000
|
|
|
|
86,500
|
|
|
|
11,558
|
|
|
|
--
|
|
|
|
98,058
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
50,000
|
|
|
|
500
|
|
|
|
24,500
|
|
|
|
--
|
|
|
|
25,000
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
100,000
|
|
|
|
1,000
|
|
|
|
99,000
|
|
|
|
--
|
|
|
|
100,000
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
240,000
|
|
|
|
2,400
|
|
|
|
7,600
|
|
|
|
--
|
|
|
|
10,000
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
24,000
|
|
|
|
240
|
|
|
|
760
|
|
|
|
--
|
|
|
|
1,000
|
|
|
Distributions
to series A preferred stockholders
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(161,277 |
) |
|
|
|
|
|
|
(161,277 |
) |
|
Issuance
of stock to founders at $0.01 for services, compensation and
fees;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,567,200
|
|
|
|
2,567
|
|
|
|
--
|
|
|
|
--
|
|
|
|
23,105
|
|
|
|
--
|
|
|
|
25,672
|
|
Issuance
of stock at $0.01 for services, compensation and fees; April 1- June
30,
2004
|
|
|
120,000
|
|
|
|
120
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1,080
|
|
|
|
--
|
|
|
|
1,200
|
|
|
Contributed
capital from waiver of accrued compensation (Note 9)
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
360,000
|
|
|
|
|
|
|
|
360,000
|
|
|
Net
loss
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(462,911 |
) |
|
|
(462,911 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,687,200
|
|
|
|
2,687
|
|
|
|
9,064,000
|
|
|
|
90,640
|
|
|
|
366,326
|
|
|
|
(462,911 |
) |
|
|
(3,258 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
38,000
|
|
|
|
380
|
|
|
|
5,735
|
|
|
|
--
|
|
|
|
6,115
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
30,000
|
|
|
|
300
|
|
|
|
9,700
|
|
|
|
--
|
|
|
|
10,000
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
120,000
|
|
|
|
1,200
|
|
|
|
58,800
|
|
|
|
--
|
|
|
|
60,000
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
70,000
|
|
|
|
700
|
|
|
|
34,300
|
|
|
|
--
|
|
|
|
35,000
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
85,000
|
|
|
|
850
|
|
|
|
38,347
|
|
|
|
--
|
|
|
|
39,197
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
2,133
|
|
|
|
21
|
|
|
|
1,979
|
|
|
|
--
|
|
|
|
2,000
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
30,000
|
|
|
|
300
|
|
|
|
14,700
|
|
|
|
--
|
|
|
|
15,000
|
|
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1,067
|
|
|
|
11
|
|
|
|
989
|
|
|
|
--
|
|
|
|
1,000
|
|
|
Distributions
to series A preferred stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107,543 |
) |
|
|
--
|
|
|
|
(107,543 |
) |
Issuance
of stock at $0.05 for services, compensation and fees; January 1-
March
31, 2005
|
|
|
200,000
|
|
|
|
200
|
|
|
|
--
|
|
|
|
--
|
|
|
|
9,800
|
|
|
|
--
|
|
|
|
10,000
|
|
Issuance
of stock at $0.05 for services, compensation and fees; April 1- June
30,
2005
|
|
|
6,460,000
|
|
|
|
6,460
|
|
|
|
--
|
|
|
|
--
|
|
|
|
316,540
|
|
|
|
--
|
|
|
|
323,000
|
|
|
Recapitalization
of Mohen's accumulated deficit at time of merger
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(541,000 |
) |
|
|
541,000
|
|
|
|
--
|
|
|
Contributed
capital from waiver of accrued compensation (Note 9)
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
110,500
|
|
|
|
--
|
|
|
|
110,500
|
|
|
Net
loss
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(1,079,925 |
) |
|
|
(1,079,925 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,347,200
|
|
|
|
9,347
|
|
|
|
9,440,200
|
|
|
|
94,402
|
|
|
|
319,173
|
|
|
|
(1,001,836 |
) |
|
|
(578,914 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation expense related to employee stock
options
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1,188
|
|
|
|
--
|
|
|
|
1,188
|
|
|
Stock
based compensation expense related to issuance of restricted stock
units
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1,650
|
|
|
|
--
|
|
|
|
1,650
|
|
|
Contributed
capital from waiver of accrued compensation (Note 9)
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
166,332
|
|
|
|
--
|
|
|
|
166,332
|
|
|
Net
loss
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(6,743,302 |
) |
|
|
(6,743,302 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,347,200
|
|
|
$ |
9,347
|
|
|
|
9,440,200
|
|
|
$ |
94,402
|
|
|
$ |
488,343
|
|
|
$ |
(7,745,138 |
) |
|
$ |
(7,153,046 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
MOHEN
INC
(A
Development Stage Enterprise)
STATEMENTS
OF CASH FLOWS
12/31/2006
|
|
|
|
|
|
|
|
|
For
the Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Years Ended
|
|
|
(Inception)
to
|
|
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(6,743,302 |
) |
|
$ |
(1,079,925 |
) |
|
$ |
(8,286,138 |
) |
|
Adjustments
to reconcile net loss to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
21,500
|
|
|
|
--
|
|
|
|
21,500
|
|
|
Amortization
of deferred licenses
and other fees
|
|
|
1,440,000
|
|
|
|
--
|
|
|
|
1,440,000
|
|
|
Bad
debts
|
|
|
35,658
|
|
|
|
--
|
|
|
|
35,658
|
|
|
Common
stock issued for
compensation and services
|
|
|
--
|
|
|
|
333,000
|
|
|
|
457,930
|
|
|
Stock
based compensation expense
related to employee stock options
|
|
|
1,188
|
|
|
|
--
|
|
|
|
1,188
|
|
|
Stock
based compensation expense
related to issuance of restricted stock units
|
|
|
1,650
|
|
|
|
--
|
|
|
|
1,650
|
|
|
Changes
in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other
current assets
|
|
|
(171,356 |
) |
|
|
--
|
|
|
|
(171,356 |
) |
|
Security
deposits
|
|
|
(34,022 |
) |
|
|
--
|
|
|
|
(34,022 |
) |
|
Officer
loans
|
|
|
(35,658 |
) |
|
|
--
|
|
|
|
(35,658 |
) |
|
Changes
in operating liabilites:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued
expenses
|
|
|
262,334
|
|
|
|
685,737
|
|
|
|
1,311,328
|
|
|
Accrued
minimum royalties
|
|
|
(2,434,560 |
) |
|
|
--
|
|
|
|
(2,434,560 |
) |
|
Other
current
liabilites
|
|
|
(455 |
) |
|
|
455
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ADJUSTMENTS
|
|
|
(913,721 |
) |
|
|
1,019,192
|
|
|
|
593,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(7,657,023 |
) |
|
|
(60,733 |
) |
|
|
(7,692,480 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(137,460 |
) |
|
|
--
|
|
|
|
(137,460 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(137,460 |
) |
|
|
--
|
|
|
|
(137,460 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Series A Convertible Preferred
stock
|
|
|
--
|
|
|
|
168,312
|
|
|
