Moggle, Inc. ("MMOG") is a development stage technology company with a $59 million market cap supported by $2.2 million in net assets and no revenue.  Since inception MMOG has incurred $4 million in operating expenses, with just $131k spent on R&D for products that face stiff competition.  With only $2.3 million in cash, inclusive of a $2 million equity raise late in November 2010, and quarterly cash burn of $900k, the company will run out of cash in 2-3 quarters.  This is consistent with the company's latest 10Q which notes that the cash balance may not be sufficient to continue operating through June 30, 2011.  This has led to the company's acknowledged need to issue equity. 

MMOG raised $2 million on November 26, 2010 through the issuance of 10,000,000 shares at $0.20/sh.  While we believe the equity is worthless, to be conservative we value the company at $0.20/sh, which is 75% below the current price of $0.80/sh and 78% below the prior day's stock price of $0.89/sh.  Following unsuccessful stock sales in 2008 (sought $12,000,000, raised $2,506) and 2009 (sought $12,000,000, raised $100,000), MMOG found a well connected Swiss banker (consulting fee paid to him is not disclosed) and in return he introduced MMOG to his wealthy clients who bought stock at $0.20/sh in the hope of flipping it in 6 months at a ~300-400% gain (there is a 6 month lock-up period).     

To be repetitive: MMOG trades at $0.80/sh, but less than two months ago sold 17% of the company for $0.20/sh.  There is zero revenue and if MMOG's products ever make it to market, they will compete against several established competitors, many of which give their software away for free.

Between now and June 30^th, one or more of the following will occur:

1.       MMOG successfully raises additional dilutive capital - MMOG views the recent $0.20/sh capital raise as a huge success and would like to repeat it.

2.       Shareholders that participated in the November equity raise flood the market with their stock in late May after the 6 month lock-up period ends.

3.       The company fails to raise additional capital as investors balk at funding a company without a viable product and zero revenue.

4.       Original investors who recently exercised all of their 14.1 million options/warrants at $0.11/sh (according to management) sell their stock in the open market.

For these reasons we believe MMOG is a very attractive short.  Short interest is <1% of float and MMOG is easy to borrow at our prime broker, GS.

Company history:

MMOG co-founders Peter Pelullo and Dr. Jo Webber met socially in early 2008.  Pelullo was looking to invest in the online gaming space and Webber had some experience in the area.  Together they decided to start a company and subsequently met a developer in Colorado building what he claimed to be the next World of Warcraft online gaming platform - it has been 3 years and nothing has been released.  The pair raised $1.8 million to start MMOG.  Pelullo invested $650k and Webber invested $75k and, aside from small friend and family investments, the rest of the money was raised from high net worth European investors with the help of a Swiss banker.  After MMOG had 45 individual investors, Pelullo took the company public through a filing with the SEC in order to more easily facilitate investments from high net worth Europeans.  After initially targeting online gaming without success, Webber decided that they could use the platform to provide a secure way for children to facilitate online transactions controlled by their parents.

To be straight forward, two people met at a neighborhood cocktail party.  They raised $1.8 million to launch a product and it failed.  They're now attempting to develop software that allows parents to control their children's online spending.  Similar products have been around for many years without gaining market traction (reality is that children don't have much money to spend as they're too young to work) and competitors currently give this software away for free.  MMOG has never recorded a dollar of revenue, but has a market cap of $59 million. 

Background:

MMOG aims to deliver a platform technology designed to manage interactions of children in the global online market.  The company's technology is designed to enable online businesses to function in a manner consistent with the Children's Online Privacy Protection Act ("COPPA") that regulates and protects the 13 and under age group.  The Company's technology provides the ability for children to play, transact and socialize in a secure online environment guided by parental control.  MMOG is development stage and has never sold any software.

After spending 2009 designing the platform and most of 2010 coding the technology through an outsourced development team in India, MMOG is ready to launch its Virtual Piggy product in Q1 2011 (update note: I wrote this over the weekend, but press release announced it launched today) and its ParentMatch/ParentPlayback product in Q3 2011, subject to financing availability.  Both of these products face several competitors and there is no reasonable likelihood that either is successful.  To reiterate an earlier point, cumulatively $131k has been spent on R&D for products competitors give away for free, yet the market capitalization is $59 million.

Why are we so lucky to have this opportunity?

1.       MMOG has zero institutional investors as confirmed by management, so no one has taken a close look at the company's fundamentals.

2.       A Swiss banker affiliated with the company commissioned First Berlin to initiate coverage of MMOG in early December for $35,000 (confirmed with management), causing excitement over the stock at the retail level.

3.       The company did not go public through a traditional IPO, and therefore, no investment bankers have ever underwritten its offerings allowing the company to go largely unnoticed.

Product Descriptions:

Virtual Piggy - provides an online piggy bank service that allows parents to setup and control their children's spending online, providing children with the ability to make online purchases with online retailers.  Parents can determine who is allowed to contribute to their child's account, on which sites the child can spend funds, and how much the child can spend.  The Virtual Piggy service tracks all spending and parents receive alerts and reports on spending patterns.  The company expects to earn revenue by charging participating vendors a transaction fee.  However, one of MMOG's competitors with a similar COPPA complaint product already on the market, BillMyParents.com, noted that the only way they could get retail partners was by charging the parent's a $0.50/sh transaction fee.  Retailers refused to sign up if they had to pay a fee themselves.  MMOG is currently exploring discussions with various vendors, but according to the company, no revenue has been booked as of December 28^th, 2010.

ParentMatch/ParentPlayback - ParentMatch provides filtering for parents to be able to control sites a child may access, types of content they may view, and with whom they can interact online.  In addition, an ID follows the child whenever he is on a computer unlike traditional controls, which are resident on a PC-by-PC basis.  ParentPlayback also provides guardians with a video transcript of their child's online session.  The only way for ParentMatch/ParentPlayback to work is if the child can be trusted to log into a portal when away from home before browsing the web, which we believe is a big drawback of the product (what kid is dumb enough to log into a portal so that they can get caught surfing inappropriate websites).  The company expects to earn revenue by charging parents a yet to be determined annual fee for the service.  MMOG does not expect sales from this product until Q4 2011 following a Q3 2011 launch.

Other - MMOG plans on rolling out an age verification product in March 2012 and they are currently discussing rolling out a mobile application in 2011 at the Board level.  The company does not expect revenue from either product in the next twelve months as it does not have enough funds to develop the products.

Valuation

MMOG has cumulatively earned zero dollars in revenue and spent $4 million since inception making the company impossible to value on traditional valuation metrics.  We believe the company's products will fail to gain traction in the marketplace - an assumption that makes it hard for us project any revenue for MMOG in the near future.  Management has communicated to us that they hope for revenue in Q1 2011 on its Virtual Piggy products, but that even if this launch were successful, profitability would be a 2012 event at the earliest.

As traditional valuation metrics are not available, we valued MMOG based on net asset value:

With $2.3 million in cash inclusive of the November equity raise, $41.3k in other assets, and $96.4k in accrued expenses and notes payable, MMOG trades at 28x book value.  However, management confirmed they've already burned $600k in cash since the equity raise, implying MMOG trades at 38x pro-forma book value.  As book value largely consists of a rapidly depleting cash balance and the company has no hope of profitability, we believe there is zero valuation support for the equity.

Competitive Industry

MMOG is launching its products into a very competitive market with several firms currently offering similar COPPA complaint products for free.  Of the 17 competitors we identified (list of comps in the appendix), we spoke with 11 and none of them have heard of MMOG.  Both of MMOG's products face larger, branded, better capitalized peers such as Bancorp and PayPal for Virtual Piggy and Symantec, McAfee, and Kaspersky for ParentMatch.  When we explained the company's proposed revenue model and asked about potential market opportunities, we received the following responses from industry insiders:

Virtual Piggy - As mentioned above, BillMyParents.com currently offers a COPPA compliant product to retailers and charges parents a $0.50/sh transaction fee as retailers would not sign up for the product if they were to be charged.  After a year of trying to sign on vendors, BillMyParents.com has only signed on four partners: Pacific Sunwear, Industrial Rideshop, Standard Boardshop, and Movietickets.com.  This is largely due to the disinterest both parents and retailers have in this type of product offering.  In fact, the CEO of a competitor told us that MMOG will have similar issues gaining traction for its product from parents and retailers for the following reasons:

1.       13+ year olds are not currently subject to COPPA laws, so this population is already able to spend freely across any website online eliminating a large part of MMOG's value proposition.

2.       Sub 13 year olds don't have very much money to spend, so the market size is very small and retailers see no value in integrating a solution based on a platform similar to MMOG's.

3.       Most parents say they want to monitor kids spending, but in reality they almost never take the time to set up spending controls or deal with monitoring.  Therefore, parent controlled kid spending products have traditionally failed in the marketplace as highlighted by PayPal's parent's managed student account offering having trouble gaining traction in the market.

ParentMatch/ParentPlayback - Insiders from both Norton and Kaspersky told us they simply bundle basic versions of their online child monitoring products with other core products for free and that there isn't much of a market for these products to be sold on an individual basis.  Norton has been bundling its Online Family products for over two years and the company noted that the current market for this type of product is mature with little growth. 

Capital Raise

With only $2.3 million in cash and quarterly cash burn of $900k (management recently indicated to us they were burning $300k/mth going into the Virtual Piggy launch), we estimate the company will run out of cash in 2-3 quarters.  Even First Berlin notes in its promotional initiation report that MMOG will need to raise funds by Q3 2011.  The company said in its latest 10Q: "Based on our current projections, we believe that should we raise a minimum of $2,000,000 of which there can be no assurance, such proceeds will be sufficient for us to continue our planned operations through June 30, 2011."

From the company's 10Q:  "The Company has incurred significant losses and experienced negative cash flow from operations during the development stage.  These conditions raise substantial doubt about the Company's ability to continue as a going concern.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.  The Company is in the development stage at September 30, 2010.  Successful completion of the Company's development program and, ultimately the attainment of profitable operations is dependent upon future events, including obtaining adequate financing to fulfill its development activities and achieving a level of sales adequate to support the Company's cost structure.  However, there can be no assurances that the Company will be able to secure additional equity investment or achieve an adequate sales level."

A summary of MMOG's prior capital raise failures:

-          In July 2008, MMOG tried to raise $12 million through the issuance of 12 million shares at $1/sh.  MMOG only raised $2,560 through the sale of 2,560 shares of stock and the company withdrew its registration statement.

-          In September 2009, MMOG attempted to raise $12 million through the issuance of 12 million shares under a new registration statement and the company only raised $100,000 through the sale of 100,000 shares of stock as of 9/30/2010.

-          In November 2010, MMOG successfully raised $2 million through the issuance of 10 million shares at a price of $0.20/sh, 78% below the prior day's stock price of $0.89/sh.  When we asked why management couldn't sell the stock near the market price, management commented that there was no interest at the market price.  Therefore, we consider this a failed equity raise and we believe the only reason wealthy European investors took the bait was the hope for an easy flip when the lock-up expires.

Significant Dilution

Since inception, MMOG has awarded 17.5 million options and warrants at strike prices ranging from $0.11-$0.80/sh with 81% of those (14.1 million option/warrants) struck at $0.11/sh.  According to management, the 14.1mm options/warrants to non-employees were given to initial investors as a sweetener when they originally invested in MMOG.  As of this week, management indicated to us that ALL of the 14.1 million options/warrants struck at $0.11/sh have been exercised in the last three months.  This alone will increase share count by ~20%.  Coupled with a new capital raise in the next three months (management told us they still need to raise capital despite the funds they'll receive from the exercise of the warrants), we believe MMOG will continue to materially dilute current shareholders.  

Risks:

Product launch succeeds - Virtual Piggy finds retail partners that alluded peers.

Illiquidity - as it is a micro-cap stock, MMOG's stock price could experience significant volatility.

Insider transactions - management has not been selling any of their stock.

Summary:

MMOG's products are undifferentiated and are unlikely to succeed in their target markets due to intense competition from well-known, large software companies.  MMOG is quickly running out of cash and needs to complete another dilutive equity offering - this will almost certainly come at a substantial discount to the current market price.  Through 3 separate calls, both co-founders and one executive each outlined a different strategic direction for the company highlighting confusion among top management regarding both their products and their company. 

If this was a viable product, a reputable VC fund or other institution would have backed MMOG.  Management states that no VC or institution is interested in MMOG.

Appendix: Competitors

Between now and June 30^th, one or more of the following will occur:

1.       MMOG successfully raises additional dilutive capital - MMOG views the recent $0.20/sh capital raise as a huge success and would like to repeat it.

2.       Shareholders that participated in the November equity raise flood the market with their stock in late May after the 6 month lock-up period ends.

3.       The company fails to raise additional capital as investors balk at funding a company without a viable product and zero revenue.

4.       Original investors who recently exercised all of their 14.1 million options/warrants at $0.11/sh (according to management) sell their stock in the open market.