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SUNGAME CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operation
(Edgar Glimpses Via Acquire Media NewsEdge) Statement Regarding Forward-Looking Information
The following discussion should be read in conjunction with our unaudited
consolidated financial statements and the accompanying notes included elsewhere
in this Quarterly Report on Form 10-Q.
Statement Regarding Forward-Looking Information. This report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934 and
the Private Securities Litigation Reform Act of 1995. All statements other than
statements of historical facts included in this Quarterly Report on Form 10-Q,
including without limitation, statements in this Management's Discussion and
Analysis of Financial Condition and Results of Operations regarding our
financial position, estimated working capital, business strategy, the plans and
objectives of our management for future operations and those statements preceded
by, followed by or that otherwise include the words "believe", "expects",
"anticipates", "intends", "estimates", "projects", "target", "goal", "plans",
"objective", "should", or similar expressions or variations on such expressions
are forward-looking statements. We can give no assurances that the assumptions
upon which the forward-looking statements are based will prove to be correct.
Because forward-looking statements are subject to risks and uncertainties,
actual results may differ materially from those expressed or implied by the
forward-looking statements. There are a number of risks, uncertainties and other
important factors that could cause our actual results to differ materially from
the forward-looking statements, including, but not limited to, the availability
and pricing of additional capital to finance operations.
Except as otherwise required by the federal securities laws, we disclaim any
obligations or undertaking to publicly release any updates or revisions to any
forward-looking statement contained in this Quarterly Report on Form 10-Q to
reflect any change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based. The
following discussion should be read in conjunction with our unaudited
consolidated financial statements and the accompanying notes included elsewhere
in this Quarterly Report on Form 10-Q.
Background
Sungame Corporation is a Delaware corporation established on November 14, 2006.
The Company merged with Freevi Corporation on April 15, 2011.
Prior to the merger Sungame were in the process of establishing 3D virtual world
communities.
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Our services
Since the merger we are offering three services:
1. www.Flightdeck.tv -A forum for social interaction in the genre of Facebook,
Myspace, and Google Circles, but with the unique aspect of a) being neutral so
that the forum is able to show content and comments from all major social
networks which makes it possible for the users to "get all information and share
all information" from one place and b) the focus on Video content makes the
forum more attractive for users to be on and stay online a longer period of time
also.
2. www.Vidirectory.com - A corporate online video directory with 20+ million
company listings, offering Social Media Marketing solutions to small and medium
sized companies in the United States. We offer online professionally produced
commercials to assist online searchers for goods or services to assist in
deciding what to purchase in their specific locality. In addition we provide our
clients with Social Media Marketing campaigns on all major platforms (Facebook,
Twitter, Pinterest, Tumblr), as well as Video Search Engine Optimization to
ensure that our clients, and their content, are more visible online.
3. Sungame Casual Game Development - Proprietary Casual Game development is in
partnership with Game Aggregators. Since 2010, we have been developing our
proprietary casual game engine with the following unique features: a) allowing
ourselves as well as the players to upload game assets and create their own
missions, b) making it simple to change the theme and artwork to create new
games for new audiences c) becoming fully compliant to Facebook game API so that
it will run properly on Facebook's social network. We are in the final phase of
the first game which will be launched in the future in partnership with the game
aggregator Wicked Interactive who has over 7 million active players mainly in
North America.
Our Revenue streams
The following revenue streams are defined for each service group:
www.Flightdeck.tv
1. Advertisement revenues
2. Sales of Virtual goods, for example music, books, applications
3. Casual Games revenues for example buying game improving assets such as
ammunition, weapons, energy.
4. Revenues from physical goods, any product where we partner up with a
distributor of products we decide to sell.
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www.Vidirectory.com
1. Subscription fees for Social Media services for clients advertising on the
site.
2. Setup fees. For all our services in addition to the above subscription fees,
we charge a setup fee.
3. Video Production fees
Sungame Casual Game Development
1. Shared revenues from Proprietary Casual Game development in partnership
with Game Aggregators. Game aggregators are internet portals that normally have
exclusive rights to market a number of games within one or many countries. The
Game Aggregator has a large number of registered and active players and they are
attractive for Game Developers based on the fact that they can speed up the time
from launch of a new game to high usage and revenue generation.
[[Image Removed: graphic1]]As shown in the image above, Sungame's Business Units are closely related to
each other.
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[[Image Removed: graphic2]]
The image above shows how both our Social Advertising platform (Vidirectory) and
Social Media Game Development platform (Sungame) are feeding our Social Media
Platform (Flightdeck) with content.
Our marketing, sales and target customers
For www.Flightdeck.tv, the service is in Open Beta version and we are, during Q3
and Q4, 2012, running our initial Social Media Marketing campaigns. In the
beginning of 2013, we expect to begin marketing to our target demographics.
For www.Vidirectory.com, sales were started during Q2, 2012 and this service is
expected to become revenue positive at the end of 2012. We have the first team
of sales representatives generating sales for the services for this business
unit.
For Sungame Casual Game Development, the development of the first game ("SPION")
is in its final stage and we believe to be able to launch this game before the
end of year 2012.
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Based on our market studies, we have identified four general types of users that
we will be our focus on during 2012-2016:
1. Social Media e-commerce consumers
2. Smartphone and Tablet users
3. Online Video consumers
4. The North American market
[[Image Removed: graphic3]]
More specifically, for our market campaigns, we will prioritize the following
target customers during 2012-2013:
1. The 10 largest cities in USA
2. The age group 18 - 30 years of age
3. Users of at least one social network (e.g. Facebook)
4. Users that are online in average not less than 1 hour/day
5. Users that spend in average not less than $20/month online
All our marketing activities will be focusing on consumers meeting one or more
of the above definitions.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2012 (Q3 2012)
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2011 (Q3 2011)
Revenues
For the three months ended September 30, 2012 we generated revenue of $3,260
compared to $602 for the three months ended September 30, 2011. The increase of
$2,658 is due to the product launch of Vidirectory.com.
Operating Expense
Operating expenses for the three months ended September 30, 2012 were $184,366
compared to $227,846 for the three months ended September 30, 2011. This net
decrease of $43,480 was due to less web development costs during the three
months ended September 30, 2012 versus the same period in the prior year.
Net Loss
The net loss for the three months ended September 30, 2012 was $181,959 compared
to a net loss of $227,533 for the three months ended September 30, 2011. The
$45,574 decrease in net loss is directly attributable to the decrease in
operating expenses described above. As of September 30, 2012, we have an
accumulated deficit of $1,548,641.
Net Loss Applicable to Common Stock
Net loss applicable to common stock was $0.01 for the three months ended
September 30, 2012 and $0.01 for the three months ended September 30, 2011.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2012 (Q3 2012)
COMPARED TO SIX MONTHS ENDED SEPTEMBER 30, 2011 (Q3 2011)Revenues
For the nine months ended September 30, 2012, we generated revenue of $15,695
compared to $32,854 for the nine months ended September 30, 2011. The decrease
of $17,159 was due to nonrecurring development work performed for a customer
during the nine months ended September 30, 2011.
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Operating Expenses
Operating expenses for the nine months ended September 30, 2012 were $544,377
compared to $448,194 for the nine months ended September 30, 2011. The increase
of $96,183 is primarily due to an increase in payroll costs post merger of
$81,500 during the nine months ended September 30, 2012 versus the same period
in the prior year.
Net Loss
The net loss for the nine months ended September 30, 2012 was $330,692 compared
to a net loss of $486,281 for the nine months ended September 30, 2011. The
$114,411 increase in net loss is directly attributable to the increase in
operating expenses described above and an increase in depreciation and
amortization of $38,853 as we capitalized $180,644 of software development costs
in the fourth quarter of 2011 and the first and third quarter of 2012 offset by
a decrease in web development costs of $69,836.
Net Loss Applicable to Common Stock
Net loss applicable to common stock was $0.01 for the nine months ended
September 30, 2012 and $0.01 for the nine months ended September 30, 2011.
LIQUIDITY AND CAPITAL RESOURCESAt September 30, 2012, we had cash on hand of $629 and total assets of $141,170;
consisting of cash of $629, net fixed assets of $719 and capitalized software of
$133,322. At September 30, 2012, we had total current liabilities of $1,794,831;
consisting of $272,722 of accounts payable, and related party advances of
$1,522,109. At September 30, 2012, we had a working capital deficit of
$1,787,402.
During the nine months ended September 30, 2012, cash used in operating
activities was ($465,392) compared to ($375,260) during the nine months ended
September 30, 2011. The increase is primarily due to the increase in net loss of
$114,411 for the nine months ended September 30, 2012 versus the same period in
the prior year.
During the nine months ended September 30, 2012, investment in capitalized
software was $180,644 compared to $0 during the nine months ended September 30,
2011. During the nine months ended September 30, 2012, we increased our advances
from related parties by $509,883 in financing activities. During the nine months
ended September 30, 2011, we increased our related party advances by $388,078 in
financing activities.
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Outlook
The United States has been experiencing a widespread and severe economic
recession that, among other things, has reduced availability of credit and
capital financing and heightened economic risks. We have been grossly
undercapitalized in 2012 and unable to raise a significant amount of capital,
other than receiving $509,833 in advances from our majority shareholder.
The continuing effects and duration of these developments and related
uncertainties on the Company's future operations and cash flows cannot be
estimated at this time but likely will be significant, and in its audit report
on our consolidated financial statements, our independent registered accounting
firm has expressed substantial doubt as to our ability to continue as a going
concern (see Note 2 to our consolidated financial statements).
We presently are unable to satisfy our obligations as they come due and do not
have enough cash to sustain our anticipated working capital requirements and our
business expansion plans for the remainder of 2012. Subject to unforeseen
effects of the economic risks and uncertainties discussed in the foregoing
paragraph and to our ability to raise working capital, we expect to continue for
the remainder of the calendar year 2012 to incur expenses related to software
development. The further delay of the rollout of our roducts will have material
adverse effects on our cash flow, results of operations and financial condition
including significant uncertainty as to our ability to continue as a going
concern. No assurance can be given that we will be able to secure any third
party financing or that such financing will be available to us on acceptable
terms.
Given the current financial market disruptions, credit crisis and economic
recession, it is difficult at this time to obtain any third-party financing on
acceptable terms, whether public or private equity or debt, strategic
relationships, capital leases or other arrangements. Furthermore, any additional
equity financing may be dilutive to stockholders, and debt financing, if
available, may involve restricting covenants. Strategic arrangements, if
necessary to raise additional funds, may require that we relinquish rights to
certain of our technologies or products or agree to other material obligations
and covenants.
Other than the insignificant revenue realized, we do not expect to begin to
realize revenue from our Facebook games until the third quarter of 2012. So far
though, we cannot provide assurance that the market will ever accept our
games. Any failure by us to sell our games within our expected schedule or on
terms acceptable to us will likely have a material adverse impact on our cash
flow, results of operations and financial condition. In addition, we expect to
face competition from larger, more formidable competitors as we enter the
Facebook games market. A lack of market acceptance of our Facebook games,
failure to obtain additional financing, or unforeseen adverse competitive,
economic, or other factors may adversely impact our cash position, and thereby
materially adversely affect our financial condition and business operations.
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We anticipate funding operations through private investments and loans made by
our current shareholders. However, we have no commitments for such funding as of
the date of this report. In addition, we anticipate generating revenue in the
near future, however, we have no current commitments or contracts that could
result in such revenue. Management will have complete discretionary control over
the actual utilization of said funds and there can be no assurance as to the
manner or time in which said funds will be utilized.
We foresee that we will need a minimum of $1,500,000 to fund our operations for
the next 12 months as follows:
System Development and Integration $ 700,000
Professional Fees $ 100,000
Sales, Marketing, Strategic Partnerships $ 100,000
General & Administrative $ 500,000
Working Capital $ 100,000
Total $ 1,500,000
We will need substantial additional capital to support our proposed future
operations. We have no significant revenues from operations. We have no
committed source for any funds as of the date hereof. No representation is made
that any funds will be available when needed. In the event funds cannot be
raised when needed, we may not be able to carry out our business plan, may never
achieve sales or royalty income, and could fail in business as a result of these
uncertainties.
Because of the limited financial resources that we have, it is unlikely that we
will be able to diversify our operations.
We anticipate generating the vast majority of our revenues from our advertisers.
Advertisers can generally terminate their contracts, at any time. Advertisers
could decide to not do business with us if their investment in advertising with
us does not generate sales leads, and ultimately customers, or if we do not
deliver their advertisements in an appropriate and effective manner. If we are
unable to remain competitive and provide value to advertisers, they may stop
placing ads with us, which would negatively harm future revenues and
business. In addition, expenditures by advertisers tend to be cyclical,
reflecting overall economic conditions and budgeting and buying patterns. Any
decreases in or delays in advertising spending due to general economic
conditions could delay or reduce our revenues or negatively impact our ability
to grow our revenues.
In the event we are unable to achieve additional capital raising through future
private or public offerings, we will limit operations to fit within our capital
availability. In such event, we will probably seek loans for operating
capital. We have not achieved any commitments for loans from any source. In any
event our business can be operated with a skeleton staff and have limited
advertising/marketing budget, which could cause us to remain unprofitable and
eventually fail.
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Going Concern
The independent registered public accounting firm's report on our financial
statements as of December 31, 2011 and 2010 includes a "going concern"
explanatory paragraph that describes substantial doubt about our ability to
continue as a going concern.
We are dependent on raising additional equity and/or, debt to fund any
negotiated settlements with our outstanding creditors and meet our ongoing
operating expenses. There is no assurance that we will be able to raise the
necessary equity and/or debt that we will need to be able to negotiate
acceptable settlements with our outstanding creditors or fund our ongoing
operating expenses. We cannot make any assurances that we will be able to raise
funds through such activities.
Capital Resources
We have only common stock as our capital resource.
We have no material commitments for capital expenditures within the next year,
however, if operations are commenced, substantial capital will be needed to pay
for software development, possible acquisitions and working capital.
Need For Additional Financing
We do not have capital sufficient to meet our cash needs. We have not generated
revenue and have minimal resources to conduct planned operations. We estimate
that our monthly expenses to commence planned operations within the next 12
months are approximately $125,000 (approximately $1,500,000 per year). Thus,
using currently available capital resources (the primary source of which is
non-binding commitments and expectations from management and current
shareholders), we expect to be able to conduct planned operations for a minimum
period of 3 to 4 months. We are currently relying solely on current shareholders
and management to provide the necessary funds to continue operations. We do not
have any commitments for such funding from shareholders or management.
At the present time, we have not made any arrangements to raise additional cash.
Management and current shareholders are expected, but have not committed, to
provide the necessary working capital so as to permit us to conduct planned
operations until such time as we have begun to generate revenue and/or have
become sufficiently funded. However, if we do not begin to generate revenue or
cannot raise additional needed funds, we will either have to suspend development
operations until we do raise the funds, or cease operations entirely.
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In addition, the United States and the global business community is experiencing
severe instability in the commercial and investment banking systems which is
likely to continue to have far-reaching effects on the economic activity in the
country for an indeterminable period. The long-term impact
on the United States economy and our operating activities and ability to raise
capital cannot be predicted at this time, but may be substantial.
Critical Accounting Policies
We have identified the policies below as critical to its business operations and
the understanding of our results from operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout Management's Discussion and Analysis of Financial Conditions and
Results of Operations where such policies affect our reported and expected
financial results. Note that our preparation of this document requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of expenses during the reporting
periods. There can be no assurance that actual results will not differ from
those estimates. During the nine months ended September 30, 2012, there were no
significant changes in our critical accounting policies and estimates. You
should refer to Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in our Annual Report on Form 10-K for the year
ended December 31, 2011 for a more complete discussion of our critical
accounting policies and estimates.
Risks and Uncertainties
We operate in an emerging industry that is subject to market acceptance and
technological change. Our operations are subject to significant risks and
uncertainties, including financial, operational, technological and other risks
associated with operating an emerging business, including the potential risk of
business failure.
Software Costs
The costs for internal use software, whether developed or obtained, are assessed
to determine whether they should be capitalized or expensed in accordance with
American Institute of Certified Public Accountants' Statement ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". Capitalized software costs are reflected as property and
equipment on the balance sheet and are to be amortized when we begin recording
revenue the deemed date that the software is placed in service.
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Income Taxes
We have effectively provided a full valuation allowance for the tax effects of
our net operating losses during the nine months ended September 30, 2012 and for
the period from inception (October 21, 2010) to September 30, 2012 to offset the
deferred tax asset that might otherwise have been recognized as a result of
operating losses in the current period and prior periods since, because of our
history of operating losses, management is unable to conclude at this time that
realization of such benefit is currently more likely than not.
Recent Accounting Pronouncements
There were no recent accounting pronouncements that would have a significant
effect on our future financial position, results of operations, and operating
cash flows.
Off-Balance Sheet Arrangements
As of September 30, 2012, we did not have any relationships with unconsolidated
entities or financial partners, such as entities often referred to as structured
finance or special purpose entities, that had been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. As such, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we were engaged in such
relationships.
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