SEC Info - Spiralfrog/Inc - 10SB12G/A

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.

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.

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.

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.

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.

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.

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.

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:

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%.

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:

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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 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 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.

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.

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.

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.

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 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.

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.

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.

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.

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.

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:

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.

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.

Delaware	14-1928717
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

Spiralfrog/Inc · 10SB12G/A · On 8/31/07

Filed On 8/31/07 2:42pm ET · SEC File 0-52707 · Accession Number 1013762-7-1635

Amendment to Registration of Securities of a Small-Business Issuer · Form 10-SB
Filing Table of Contents

10SB12G/A · Amendment to Registration of Securities of a Small-Business Issuer

This is an EDGAR HTML document rendered as filed. [ Alternative Formats ]

Spiralfrog/Inc · 10SB12G/A · On 8/31/07

Filed On 8/31/07 2:42pm ET · SEC File 0-52707 · Accession Number 1013762-7-1635

Amendment to Registration of Securities of a Small-Business Issuer · Form 10-SBFiling Table of Contents

10SB12G/A · Amendment to Registration of Securities of a Small-Business Issuer

This is an EDGAR HTML document rendered as filed. [ Alternative Formats ]

Amendment to Registration of Securities of a Small-Business Issuer · Form 10-SB
Filing Table of Contents