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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