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SGMZ > SEC Filings for SGMZ > Form 10-K on 29-Mar-2013All Recent SEC Filings

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Form 10-K for SUNGAME CORP


Annual Report

Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations.



Sungame Corporation ("We," "Us," "Our") was organized under the laws of the State of Delaware on November 14, 2006 as Sungame International, Inc. On November 17, 2006, we changed our name to Sungame Corporation. The Company merged with Freevi Corporation on April 15, 2011.

We are an early development stage company. Prior to the merger with Freevi Corporation, Sungame was in the process of establishing a 3D virtual world communities.

Our services

Since the merger we are offering three services:

1. -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.

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2. - A business directory service designed to help businesses attract customers to their online and physical locality by providing increased online visibility under the Company's Vidirectory service offering. The Company provides both free and paid products to local businesses. Premium versions of this directory listing service allows local businesses to promote themselves as a sponsored search result on the shopping platform when users are searching for related product keywords or are visiting related business pages.

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. During 2012, game development has been ongoing with prototyping tools to create missions in a simple way. The launch date of our first game (called Spion) is not decided at this point since further development is needed.

Our Revenue streams

The following revenue streams are defined for each service group:

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.

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

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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: graphic13]]

As shown in the image above, Sungame's Business Units are closely related to each other.
[[Image Removed: graphic14]]
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.

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Our marketing, sales and target customers

For, the service is in Open Beta version and we are running our initial Social Media Marketing campaigns. In the beginning of 2013, we expect to begin marketing to our target demographics.

For, sales have just begun.

Based on our market studies, we have identified four general types of users that we will be our focus on during 2013-2016:

1. Social Media e-commerce consumers

2. Smartphone and Tablet users

3. Online Video consumers

4. The North American market

[[Image Removed: graphic15]]

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More specifically, for our market campaigns, we will prioritize the following target customers during 2013-2014:

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.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates. We based our estimates on historical experiences and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions provide a basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and these differences may be material.

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 depreciated when we begin recording revenue the deemed date that the software is placed in service.

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Start-Up Costs

Start-up costs that would commonly be capitalized as Other Assets to be amortized over a period of five years have also been deemed to be impaired for the same reasons stated in the paragraph on "Software Costs". Based on these circumstances, management has elected to expense these start-up costs as well.

"Long-lived assets" are reviewed for impairment of value whenever events or changes in circumstances indicate that the carrying value of the assets might not be recoverable or at least at the end of each reporting period. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying value of an asset is not recoverable. For Long-lived assets to be held and used, management measures fair value based on quoted market prices or based on discounted estimates of future cash flows.

Income Taxes

We have effectively provided a full valuation allowance for the tax effects of our net operating losses during the years ended December 31, 2012 and December 31, 2011 and for the period from inception (October 21, 2010) to December 31, 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.



For the year ended December 31, 2012 we generated revenue of $22,504 compared to $4,569 for the year ended December 31, 2011. The increase of $17,935 is due to the product launch of

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Operating Expense

Operating expenses for the year ended December 31, 2012 was $710,856 compared to $731,068 for the year ended December 31, 2011. This net decrease of $20,212 was the result of an increase of $39,825 in software development costs and a decrease in salaries and wages of $55,452 as we added four administrative people due to the merger and had a staff reduction during the year ended December 31, 2012.

Net Loss

The net loss for the year ended December 31, 2012 was $691,181 compared to a net loss of $727,294 for the year ended December 31, 2011. The decrease in net loss of $36,113 is directly attributable to the increase in revenue and decrease in operating expenses described above. As of December 31, 2012, we have an accumulated deficit of $1,709,128.

Net Loss Applicable to Common Stock

Net income applicable to common stock was $0.00 for the years ended December 31, 2012 and December 31, 2011.



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 $653,593 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 2013. 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 2013 to incur expenses related to software development. The further delay of the rollout of our virtual world products, 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.

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So far though, we cannot provide assurance that the market will ever accept our products. Any failure by us to sell our products 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. A lack of market acceptance of our products, 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.

Cash Flows

Cash used in operating activities increased by $23,445 for the year ended December 31, 2012, versus the year ended December 31, 2011 primarily because of our decrease in net loss of $36,113. Our cash outflows from investing activities amounted to $59,975 for capitalized software. Our inflows from financing activities of $653,593 in the year ended December 31, 2012, consisted of $653,593 in advances from our majority shareholder.

Sources of Capital

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. Our probable inability to diversify our activities into more than one area will subject us to economic fluctuations within the virtual world industry and therefore increase the risks associated with our operations due to lack of diversification.

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.

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Going Concern

The independent registered public accounting firm's report on our financial statements as of December 31, 2012 and 2011 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.

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.

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.

Off-Balance Sheet Arrangements and Contractual Obligations

As of December 31, 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.

We presently do not use any derivative financial instruments to hedge our exposure to adverse fluctuations in interest rates, foreign exchange rates, fluctuations in commodity prices, or other market risks, nor do we invest in speculative financial instruments.

                                               Less than
Type of Obligation               Total         one year     1-3 years   3-5 years   Longer

 Loans payable majority
    shareholder               $ 1,503,447     $ 1,503,447
 Loans payable minority
    shareholder               $   162,372     $   162,372
Operating Lease Obligation:
 Real Estate                      13,864          13,864
Total                         $ 1,679,683     $ 1,679,683

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