UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended September 30, 2009
or
o
TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from __________ to __________
Commission
file number:
333-131651
BETAWAVE
CORPORATION
(Exact
name of registrant as specified in its charter)
|
Delaware
|
20-2471683
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
|
|
706 Mission Street, 10th
Floor
San
Francisco, CA 94103
(Address
of principal executive offices) (Zip Code)
|
|
|
|
(415)
738-8706
(Registrant’s
telephone number, including area code)
|
|
|
|
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x
Yes
o
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
o
Yes
o
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer
o
|
Accelerated
filer
o
|
|
|
|
|
Non-accelerated
filer
o
(Do not
check if a smaller reporting company)
|
Smaller
reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
o
Yes
x
No
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: The issuer had 29,229,284 shares of
common stock outstanding as of November 13, 2009.
BETAWAVE CORPORATION
TABLE
OF CONTENTS
|
|
Page
No.
|
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
Item
1.
|
Financial
Statements
|
2
|
|
|
|
Condensed
Consolidated Balance Sheets (Unaudited)
|
2
|
|
|
|
Condensed
Consolidated Statements of Operations (Unaudited)
|
3
|
|
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited)
|
4
|
|
|
|
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
|
5
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
16
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
23
|
|
|
Item
4.
|
Controls
and Procedures
|
23
|
|
PART II - OTHER
INFORMATION
|
|
|
|
Item
1.
|
Legal
Proceedings
|
25
|
|
|
Item
1A.
|
Risk
Factors
|
25
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
39
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
39
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
39
|
|
|
Item
5.
|
Other
Information
|
39
|
|
|
Item
6.
|
Exhibits
|
39
|
|
SIGNATURES
|
40
|
|
EXHIBIT
INDEX
|
41
|
PART
I - FINANCIAL INFORMATION
|
ITEM
1.
|
FINANCIAL
STATEMENTS.
|
Betawave Corporation
Condensed
Consolidated Balance Sheets (Unaudited)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
4,013,825
|
|
|
$
|
11,863,121
|
|
|
Restricted
cash
|
|
53,750
|
|
|
|
---
|
|
|
Trade accounts
receivable
|
|
1,679,651
|
|
|
|
3,108,136
|
|
|
Prepaid
expenses
|
|
242,417
|
|
|
|
961,829
|
|
|
Total current
assets
|
|
5,989,643
|
|
|
|
15,933,086
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
103,888
|
|
|
|
236,448
|
|
|
Financing
costs, net of amortization of $29,843
|
|
89,530
|
|
|
|
---
|
|
|
Deposits
|
|
117,179
|
|
|
|
113,029
|
|
|
Total
assets
|
$
|
6,300,240
|
|
|
$
|
16,282,563
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
$
|
1,683,590
|
|
|
$
|
4,085,886
|
|
|
Line of
credit
|
|
1,500,000
|
|
|
|
---
|
|
|
Accrued
liabilities
|
|
1,589,069
|
|
|
|
1,601,840
|
|
|
Deferred
revenue
|
|
78,283
|
|
|
|
109,243
|
|
|
Total current
liabilities
|
|
4,850,942
|
|
|
|
5,796,969
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
---
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred
Stock: $0.001 par value; 10,000,000 shares authorized; 7,065,293 shares
issued and outstanding at September 30, 2009 and December 31,
2008
|
|
7,065
|
|
|
|
7,065
|
|
|
Common Stock:
$0.001 par value; 400,000,000 shares authorized; 29,229,284 shares issued
and outstanding at September 30, 2009 and December 31, 2008
|
|
29,230
|
|
|
|
29,230
|
|
|
Notes
receivable from stockholders
|
|
(18,910
|
)
|
|
|
(18,910
|
)
|
|
Additional
paid-in capital
|
|
53,854,113
|
|
|
|
51,563,483
|
|
|
Accumulated
deficit
|
|
(52,422,200
|
)
|
|
|
(41,095,274
|
)
|
|
Total
stockholders’ equity
|
|
1,449,298
|
|
|
|
10,485,594
|
|
|
Total
liabilities and stockholders’ equity
|
$
|
6,300,240
|
|
|
$
|
16,282,563
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
Betawave
Corporation
Condensed
Consolidated Statements of Operations (Unaudited)
|
|
|
Three
|
|
|
Three
|
|
|
Nine
|
|
|
Nine
|
|
|
|
|
Months
|
|
|
Months
|
|
|
Months
|
|
|
Months
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
1,725,499
|
|
|
$
|
2,786,139
|
|
|
$
|
5,396,244
|
|
|
$
|
4,725,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenues
|
|
|
2,441,052
|
|
|
|
2,058,456
|
|
|
|
5,695,477
|
|
|
|
4,213,193
|
|
|
Sales and
marketing
|
|
|
2,033,598
|
|
|
|
1,630,472
|
|
|
|
6,243,389
|
|
|
|
4,726,805
|
|
|
Product
development
|
|
|
130,241
|
|
|
|
248,100
|
|
|
|
463,586
|
|
|
|
588,044
|
|
|
General
and administrative
|
|
|
1,419,023
|
|
|
|
1,210,582
|
|
|
|
4,335,488
|
|
|
|
4,092,548
|
|
|
Total cost of
revenues and expenses
|
|
|
6,023,914
|
|
|
|
5,147,610
|
|
|
|
16,737,940
|
|
|
|
13,620,590
|
|
|
Operating
loss
|
|
|
(4,298,415
|
)
|
|
|
(2,361,471
|
)
|
|
|
(11,341,696
|
)
|
|
|
(8,894,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
4,323
|
|
|
|
5,662
|
|
|
|
12,876
|
|
|
|
15,846
|
|
|
Miscellaneous
income
|
|
|
502
|
|
|
|
---
|
|
|
|
72,376
|
|
|
|
100
|
|
|
Interest
expense
|
|
|
(37,879
|
)
|
|
|
(893,227
|
)
|
|
|
(70,482
|
)
|
|
|
(2,111,570
|
)
|
|
Total other
income (expense)
|
|
|
(33,054
|
)
|
|
|
(887,565
|
)
|
|
|
14,770
|
|
|
|
(2,095,624
|
)
|
|
Net loss before
provision for income taxes
|
|
|
(4,331,469
|
)
|
|
|
(3,249,036
|
)
|
|
|
(11,326,926
|
)
|
|
|
(10,990,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
Net
loss
|
|
$
|
(4,331,469
|
)
|
|
$
|
(3,249,036
|
)
|
|
$
|
(11,326,926
|
)
|
|
$
|
(10,990,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted
|
|
$
|
(0.15
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used to compute net loss per share – basic and diluted
|
|
|
29,229,284
|
|
|
|
25,494,739
|
|
|
|
29,229,284
|
|
|
|
25,518,896
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
Betawave
Corporation
Condensed
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
Nine
Months
|
|
|
Nine
Months
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(11,326,926
|
)
|
|
$
|
(10,990,486
|
)
|
|
Adjustments to
reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Loss on
disposal of fixed assets
|
|
|
1,976
|
|
|
|
---
|
|
|
Depreciation
and amortization of property and equipment
|
|
|
159,012
|
|
|
|
195,118
|
|
|
Amortization
of financing costs and convertible note fees
|
|
|
29,843
|
|
|
|
385,089
|
|
|
Stock-based
compensation
|
|
|
2,256,836
|
|
|
|
1,339,841
|
|
|
Non
cash interest expense
|
|
|
---
|
|
|
|
1,645,863
|
|
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Trade accounts
receivable
|
|
|
1,428,485
|
|
|
|
(1,122,922
|
)
|
|
Prepaid
expenses
|
|
|
719,412
|
|
|
|
62,681
|
|
|
Other
assets
|
|
|
(4,150
|
)
|
|
|
(2,000
|
)
|
|
Accounts
payable
|
|
|
(2,402,297
|
)
|
|
|
2,303,295
|
|
|
Accrued
liabilities
|
|
|
(12,770
|
)
|
|
|
1,835,455
|
|
|
Deferred
revenue
|
|
|
(30,960
|
)
|
|
|
70,000
|
|
|
Net cash used
in operating activities
|
|
|
(9,181,539
|
)
|
|
|
(4,278,066
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Funds
held as restricted cash
|
|
|
(53,750
|
)
|
|
|
(550,000
|
)
|
|
Purchase
of property and equipment
|
|
|
(28,428
|
)
|
|
|
(33,396
|
)
|
|
Net
cash used in investing activities
|
|
|
(82,178
|
)
|
|
|
(583,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Payment of
financing costs
|
|
|
(85,579
|
)
|
|
|
---
|
|
|
Advances from a
stockholder
|
|
|
---
|
|
|
|
610,000
|
|
|
Borrowing on
line of credit
|
|
|
1,800,000
|
|
|
|
---
|
|
|
Payment on line
of credit
|
|
|
(300,000
|
)
|
|
|
---
|
|
|
Proceeds from
issuance of unsecured convertible original discount notes due June 2010
and related warrants, net of fees of $101,300
|
|
|
---
|
|
|
|
3,188,700
|
|
|
Net cash
provided by financing activities
|
|
|
1,414,421
|
|
|
|
3,798,700
|
|
|
Net decrease in
cash and cash equivalents
|
|
|
(7,849,296
|
)
|
|
|
(1,062,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of the period
|
|
|
11,863,121
|
|
|
|
1,108,834
|
|
|
Cash and cash
equivalents at the end of the period
|
|
$
|
4,013,825
|
|
|
$
|
46,072
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
Betawave
Corporation
Notes
to the Condensed Consolidated Financial Statements (Unaudited)
General
-
Betawave Corporation (the “Company,” “we,” “our,” or “us”) sells online
advertising for the websites in our network of sites (the “Betawave Network”).
We have assembled a network of some of the leading websites in the most popular
online categories: immersive casual gaming, virtual world, social play and
entertainment. We specialize in helping brand marketers reach the highly
attentive audiences on these sites through innovative ad formats.
The
Company was incorporated in the State of Nevada on February 2, 2005 as Unibio
Inc. On September 14, 2006, the Company changed its name from Unibio Inc. to
GoFish Corporation. In January 2009, the Company changed its name from GoFish
Corporation to Betawave Corporation and launched a rebranding campaign focused
on attention-based digital media. On September 21, 2009, we reincorporated from
the State of Nevada to the State of Delaware.
Management's Plan
-
The Company has incurred operating losses and negative cash flows since
inception. Management expects that the Company’s revenues will increase from
current levels as a result of increased sales of advertising on the Betawave
Network. The Company also expects to incur additional expenses for the
development and expansion of the Betawave Network and the continuing integration
of its businesses. In addition, the Company anticipates gains in operating
efficiencies as a result of the increase to its sales and marketing
organization. However, the Company expects that operating losses and negative
cash flows will continue for the foreseeable future but anticipates that losses
will decrease from current levels to the extent that the Company continues to
grow and develop. The Company’s expectations are subject to risks and
uncertainties that could cause actual results or events to differ materially
from those expressed or implied by such expectations, including those identified
under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on
Form 10-Q and those discussed in other documents we file with the Securities and
Exchange Commission (the “SEC”). While the Company believes that it will be able
to expand operations and gain market share, there can be no assurance that such
progress will be possible. For example, in the event that the Company requires
additional financing, such financing may not be available on terms that are
favorable or at all. Failure to generate sufficient cash flows from operations
or raise additional capital would have a material adverse effect on the
Company’s ability to achieve its intended business objectives. These factors
raise substantial doubt about the Company’s ability to continue as a going
concern.
Going Concern -
The Company's condensed consolidated financial statements have been
presented on a basis that contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
continues to face significant risks associated with the successful execution of
its strategy given the current market environment for similar companies. The
condensed consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
|
2.
|
Summary
of Significant Accounting Policies
|
Basis of
Presentation
-
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with United States Generally Accepted Accounting
Principles (“U.S. GAAP”) for interim financial information. Accordingly, they do
not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. The unaudited interim condensed consolidated
financial statements have been prepared on the same basis as the annual
consolidated financial statements as discussed below. In the opinion of
management, all adjustments, consisting of normal recurring adjustments
necessary for the fair presentation of the financial statements, have been
included. The results of operations for any interim period are not necessarily
indicative of the results of operations for the full year or any other
subsequent interim period. Further, the preparation of condensed consolidated
financial statements requires management to make estimates and assumptions that
affect the recorded amounts reported therein. Actual results could differ from
those estimates. A change in facts or circumstances surrounding the estimate
could result in a change to estimates and impact future operating
results.
The
condensed consolidated financial statements and related disclosures have been
prepared with the presumption that users of the interim financial statements
have read or have access to the Company’s audited consolidated financial
statements for the preceding fiscal year. Accordingly, the accompanying
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2008 filed with the SEC on March 31, 2009 (our “2008 Form
10-K”).
Comprehensive
Loss -
The
Company has no components of comprehensive loss other than its net loss and,
accordingly, comprehensive loss is the same as the net loss for all periods
presented.
Reclassifications
-
Certain reclassifications were made to the prior period condensed
consolidated financial statements in order to conform to the current condensed
consolidated financial statement presentation.
Net Loss Per
Share
-
Basic
net loss per share is calculated based on the weighted-average number of shares
of common stock outstanding during the period excluding those shares that are
subject to repurchase by the Company. Diluted net loss per share would give
effect to the dilutive effect of stock options, warrants, convertible debt and
preferred stock. Dilutive securities have been excluded from the diluted net
loss per share computations as they have an antidilutive effect due to the
Company’s net loss.
The
following outstanding stock options, warrants, convertible debt and preferred
stock (on an as-converted into common stock basis) were excluded from the
computation of diluted net loss per share as they had an antidilutive effect for
the three and nine months ended September 30, 2009 and 2008:
|
|
|
|
Three
|
|
Three
|
|
Nine
|
|
Nine
|
|
|
|
|
|
Months
|
|
Months
|
|
Months
|
|
Months
|
|
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
|
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
Shares
issuable upon exercise of employee and non-employee stock
options
|
|
243,540
|
|
1,854,821
|
|
243,540
|
|
1,854,821
|
|
|
|
Nonvested
restricted stock
|
|
---
|
|
300,000
|
|
---
|
|
300,000
|
|
|
|
Shares
issuable upon conversion of convertible notes
|
|
---
|
|
8,411,358
|
|
---
|
|
8,411,358
|
|
|
|
Total
|
|
243,540
|
|
10,566,179
|
|
243,540
|
|
10,566,179
|
|
Concentration of
Credit Risk -
Financial instruments that potentially subject the Company
to significant concentrations of credit risk consist principally of cash and
cash equivalents and accounts receivable. The Company’s credit risk is managed
by investing its cash in a certificate of deposit account. The receivables
credit risk is controlled through credit approvals, credit limits and monitoring
procedures.
The
Company places its cash in commercial banks. Accounts in the United States are
secured by the Federal Deposit Insurance Corporation. The Company’s total
deposits at the commercial banks usually exceed the balances
insured.
Accounts
Receivable Concentrations
- At September 30, 2009, four customers
accounted for 20%, 7%, 7% and 6%, respectively, of the Company’s accounts
receivable. At December 31, 2008, three customers accounted for 26%,
13% and 7%, respectively, of the Company’s accounts receivable.
Revenue
Concentrations -
The
Company’s
revenues are generated mainly from advertisers who purchase inventory in the
form of graphical, text-based or video ads on the Betawave Network. These
advertisers’ respective agencies facilitate the purchase of inventory on behalf
of their advertisers. For the three months ended September 30, 2009, five
customers accounted for 20%, 14%, 10%, 7% and 6%, respectively, of the Company’s
revenues. For the nine months ended September 30, 2009, five customers accounted
for 18%, 11%, 7%, 6% and 5%, respectively, of the Company’s revenues. For the
three months ended September 30, 2008, five customers accounted for 12%, 11% ,
9%, 7% and 6%, respectively, of the Company’s revenues. For the nine months
ended September 30, 2008, five customers accounted for 21%, 8%, 7%, 7% and 5%,
respectively, of the Company’s revenues.
Stock-Based
Compensation -
Effective January 1, 2006, the Company adopted the
fair value recognition provisions of the FASB’s Statement of Financial
Accounting Standards (“SFAS”) No. 123 (revised 2004),
Share-Based Payment
(“SFAS
123(R)”) using the modified prospective transition method. Under that transition
method, compensation cost recognized for the periods ended December 31, 2008 and
2007 includes: (a) compensation cost for all stock-based payments granted prior
to, but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123,
Accounting for Stock-Based
Compensation
(“SFAS 123”), and (b) compensation cost for all stock-based
payments granted or modified subsequent to January 1, 2006, based on the grant
date fair value estimated in accordance with the provisions of SFAS
123(R).
Stock-based
compensation expense for performance-based options granted to non-employees is
determined in accordance with FASB Accounting Standards Codification (“ASC”)
Topic 718,
Stock
Compensation
(“ASC 718”), and ASC 505-50 at the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured. The fair value of options granted to
non-employees is measured as of the earlier of the performance commitment date
or the date at which performance is complete (“measurement date”). When it is
necessary under U.S. GAAP to recognize the cost for the transaction prior to the
measurement date, the fair value of unvested options granted to non-employees is
re-measured at the balance sheet date.
The
Company currently uses the Black-Scholes option pricing model to determine the
fair value of stock options. The determination of the fair value of stock-based
payment awards on the date of grant using an option-pricing model is affected by
our stock price as well as by assumptions regarding a number of complex and
subjective variables. These variables include our expected stock price
volatility over the term of the awards, actual and projected employee stock
option exercise behaviors, risk-free interest rate and expected dividends. We
estimate the volatility of our common stock at the date of the grant based on a
combination of the implied volatility of publicly traded options on our common
stock and our historical volatility rate. The dividend yield assumption is based
on historical dividend payouts. The risk-free interest rate is based on observed
interest rates appropriate for the term of our employee options. We use
historical data to estimate pre-vesting option forfeitures and record
stock-based compensation expense only for those awards that are expected to
vest. For options granted, we amortize the fair value on a straight-line basis.
All options are amortized over the requisite service periods of the awards,
which are generally the vesting periods. If factors change we may decide to use
different assumptions under the Black-Scholes option model and stock-based
compensation expense may differ materially in the future from that recorded in
the current period.
Included
in cost of revenues and expenses is $738,918 and $320,327 of stock-based
compensation for the three months ended September 30, 2009 and 2008,
respectively. For the three months ended September 30, 2009, this amount
included $110 of stock-based compensation related to non-employees on the
issuance of options, $220 related to warrants and $738,588 related to employees.
For the three months ended September 30, 2008, this amount included $24,006 of
stock-based compensation related to non-employees on the issuance of options,
$9,913 related to warrants, $37,000 on the issuance of restricted stock and
$249,408 related to employees.
Included
in cost of revenues and expenses is $2,256,836 and $1,339,841 of stock-based
compensation for the nine months ended September 30, 2009 and 2008,
respectively. At September 30, 2009, this amount included ($8,457) of
stock-based compensation related to non-employees, $2,263,452 of stock-based
compensation related to employees and $1,841 related to warrants. At September
30, 2008, this amount included $34,495 of stock-based compensation related to
non-employees, $1,185,422 of stock-based compensation related to employees,
$86,333 related to restricted stock and $33,591 related to the
warrants.
The
following table presents stock-based compensation expense included in the
Condensed Consolidated Statements of Operations related to employee and
non-employee stock options, restricted shares and warrants as follows for the
three months and the nine months ended September 30, 2009 and 2008:
|
|
|
|
Three
Months Ended September 30, 2009
|
|
|
Three
Months Ended September 30, 2008
|
|
|
Nine
Months
Ended September 30, 2009
|
|
|
Nine
Months
Ended September 30, 2008
|
|
|
|
Cost
of revenues
|
|
$
|
---
|
|
|
$
|
44,538
|
|
|
$
|
(1,794
|
)
|
|
$
|
111,767
|
|
|
|
Sales
and marketing
|
|
|
218,819
|
|
|
|
86,902
|
|
|
|
661,141
|
|
|
|
402,262
|
|
|
|
Product
development
|
|
|
3,264
|
|
|
|
13,009
|
|
|
|
81,846
|
|
|
|
40,140
|
|
|
|
General
and administrative
|
|
|
516,835
|
|
|
|
175,878
|
|
|
|
1,515,643
|
|
|
|
785,672
|
|
|
|
Total stock-based
compensation
|
|
$
|
738,918
|
|
|
$
|
320,327
|
|
|
$
|
2,256,836
|
|
|
$
|
1,339,841
|
|
Stock-based
compensation cost is measured at the grant date, based on the calculated fair
value of the award, and is recognized as an expense over the service period,
generally the vesting period of the equity grant.
The fair
value of each option grant has been estimated on the date of grant using the
Black-Scholes valuation model with the following assumptions (weighted-average)
for the nine months ended September 30, 2009 and 2008:
|
|
|
|
Nine
Months Ended
September
30, 2009
|
|
|
Nine
Months Ended
September
30, 2008
|
|
|
|
Risk
free interest rate
|
|
|
2.33
|
%
|
|
|
3.18
|
%
|
|
|
Expected
lives
|
|
|
6.02
years
|
|
|
|
5.80
years
|
|
|
|
Expected
volatility
|
|
|
71.05
|
%
|
|
|
70.59
|
%
|
|
|
Dividend
yields
|
|
|
0
|
%
|
|
|
0
|
%
|
The
Company estimates the fair value of stock options using the Black-Scholes
valuation model. Key input assumptions used to estimate the fair value of stock
options include the exercise price of the award, expected option term, expected
volatility of the stock over the option’s expected term, risk-free interest rate
over the option’s expected term, and the expected annual dividend yield. The
Company believes that the valuation technique and approach utilized to develop
the underlying assumptions are appropriate in calculating the fair values of the
stock options granted in the nine months ended September 30, 2009 and
2008.
Adopted
Accounting Pronouncements
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles” as codified by Accounting Standards Codification (“ASC”) 105. This
standard establishes two levels of GAAP, authoritative and non-authoritative.
The FASB Accounting Standards Codification (the “Codification”) became the
source of authoritative, non-governmental GAAP, except for rules and
interpretive releases of the SEC, which are sources of authoritative GAAP for
SEC registrants. All other non-grandfathered, non-SEC accounting literature not
included in the Codification became non-authoritative. We adopted ASC 105 in the
third quarter of 2009 and include references to the ASC within our Condensed
Consolidated Financial Statements. As the Codification was not intended to
change or alter existing GAAP, it did not have any impact on our Condensed
Consolidated Financial Statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” as
codified by ASC 820. This ASC establishes specific criteria for the fair value
measurements of financial and nonfinancial assets and liabilities that are
already subject to fair value under current accounting rules. ASC 820 also
requires expanded disclosures related to fair value measurements. As permitted
under ASC 820, we elected a one-year delay in applying certain fair value
measurements of non-financial instruments, except for those measured at fair
value on at least an annual basis. We fully adopted ASC 820 on January 1,
2009. See Note 3 for information about fair value measurements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” as amended by FSP FAS 141(R)-1, “Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from Contingencies”
as codified by ASC 805. Under ASC 805, an entity is generally required to
recognize the assets acquired, liabilities assumed, contractual contingencies,
and contingent consideration at their fair value on the acquisition date. In
circumstances where the acquisition-date fair value for a contingency cannot be
determined during the measurement period, a contingency is recognized as of the
acquisition date based on the estimated amount if it is probable that an asset
or liability exists as of the acquisition date and the amount can be reasonably
estimated. It further requires acquisition-related costs to be recognized
separately from the acquisition and expensed as incurred, restructuring costs to
be expensed in periods subsequent to the acquisition date, and changes in
accounting for deferred tax asset valuation allowances and acquired income tax
uncertainties after the measurement period to impact the provision for income
taxes. In addition, acquired in-process research and development is capitalized
as an intangible asset and amortized over its estimated useful life. We adopted
ASC 805 on January 1, 2009. The adoption did not have a significant impact
on our Condensed Consolidated Financial Statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51” as codified by ASC 810-10-65-1, which establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. ASC 810-10-65-1 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. ASC 810-10-65-1 is
effective for fiscal years beginning after December 15, 2008. We adopted
ASC 810-10-65-1 on January 1, 2009. The adoption did not have an impact on
our Condensed Consolidated Financial Statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133” as codified by ASC 815-10-50, which requires enhanced disclosures
about an entity’s derivative and hedging activities. ASC 815-10-50 is effective
for fiscal years beginning after November 15, 2008. We adopted ASC
815-10-50 on January 1, 2009. The adoption did not have an impact on our
Condensed Consolidated Financial Statements.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1 “Interim Disclosures about Fair
Value of Financial Instruments” as codified by ASC 320-10-50. This ASC requires
interim disclosures regarding the fair values of financial instruments that are
within the scope of ASC 320. This ASC also requires disclosure of the methods
and significant assumptions used to estimate the fair value of financial
instruments on an interim basis as well as changes in those methods and
significant assumptions from prior periods. ASC 320-10-50 does not change the
accounting treatment for these financial instruments and is effective for
interim reporting periods ending after June 15, 2009. We adopted ASC
320-10-50 on April 1, 2009. The adoption did not have an impact on our Condensed
Consolidated Financial Statements.
In April
2009, the FASB issued FSP FAS 115-2 and FSP FAS 124-2 “Recognition and
Presentation of Other-Than-Temporary Impairments” as codified by ASC 320-10-65.
This ASC amends the requirements for the recognition and measurement of
other-than-temporary impairments for debt securities by modifying the
pre-existing “intent and ability” indicator. Under ASC 320-10-65, for impaired
debt securities, an other-than-temporary impairment is triggered when there is
intent to sell the security, it is more likely than not that the security will
be required to be sold before recovery, or the security is not expected to
recover the entire amortized cost of the security. ASC 320-10-65 also changes
the presentation of other-than-temporary impairments in the income statement for
those impairments attributed to credit losses. ASC 320-10-65 is effective for
interim and annual reporting periods ending after June 15, 2009. We adopted
ASC 320-10-65 on April 1, 2009. The adoption did not have an impact on our
Condensed Consolidated Financial Statements.
In April 2009, the FASB issued FSP FAS 157-4
“Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly” as codified by ASC 820. This ASC provides additional guidance for
estimating fair value when the volume and level of activity for the asset or
liability have significantly decreased. This ASC also includes guidance on
identifying circumstances that indicate when a transaction is not orderly. ASC
820 also requires disclosure of the inputs and valuation techniques used to
measure fair value and a discussion of changes in valuation techniques in
interim and annual periods. ASC 820 is effective for interim and annual
reporting periods ending after June 15, 2009. We adopted ASC 820 on
April 1, 2009. The adoption did not have an impact on our Condensed
Consolidated Financial Statements.
In May 2009, the FASB issued SFAS No. 165,
“Subsequent Events” as codified by ASC 855, which establishes general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
The provisions of ASC 855 are effective for interim and annual reporting periods
ending after June 15, 2009. We adopted ASC 855 for our second quarter ended
June 30, 2009. The adoption did not have a significant impact on our Condensed
Consolidated Financial Statements.
Recent
Accounting Pronouncements
In August
2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05,
“Measuring Liabilities at Fair Value” (ASU 2009-05). This update provides
amendments to ASC 820, “Fair Value Measurements and Disclosure” for the fair
value measurement of liabilities. ASU 2009-05 provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
of such liability using one or more of the techniques prescribed by the update.
ASU 2009-05 is effective for interim and annual periods beginning after
August 28, 2009 and will be effective for Betawave beginning in the fourth
quarter of 2009. We are currently evaluating the potential impact of ASU 2009-05
on our Condensed Consolidated Financial Statements.
FASB ASC
820-10-30 specifies a hierarchy of valuation techniques based upon whether the
inputs to those valuation techniques reflect assumptions other market
participants would use based upon market data obtained from independent sources
(observable inputs) or reflect the company’s own assumptions of market
participant valuation (unobservable inputs). In accordance with FASB ASC
820-10-30, these two types of inputs have created the following fair value
hierarchy:
|
·
|
|
L
evel
1 - Quoted prices in active markets that are unadjusted and accessible at
the measurement date for identical, unrestricted assets or
liabilities;
|
|
|
·
|
|
Level
2 - Quoted prices for identical assets and liabilities in markets that are
not active, quoted prices for similar assets and liabilities in active
markets or financial instruments for which significant inputs are
observable, either directly or indirectly;
|
|
|
·
|
|
Level
3 - Prices or valuations that require inputs that are both significant to
the fair value measurement and unobservable.
|
|
FASB ASC
820-10-30 requires the use of observable market data if such data is available
without undue cost and effort.
Measurement
of Fair Value - The Company measures fair value as an exit price using the
procedures described below for all assets and liabilities measured at fair
value. When available, the company uses unadjusted quoted market prices to
measure fair value and classifies such items within Level 1. If quoted market
prices are not available, fair value is based upon internally developed models
that use, where possible, current market-based or independently-sourced market
parameters such as interest rates and currency rates. Items valued using
internally generated models are classified according to the lowest level input
or value driver that is significant to the valuation. Thus, an item may be
classified in Level 3 even though there may be inputs that are readily
observable. If quoted market prices are not available, the valuation model used
generally depends on the specific asset or liability being valued.
Credit
risk adjustments are applied to reflect the Company’s own credit risk when
valuing all liabilities measured at fair value. The methodology is consistent
with that applied in developing counterparty credit risk adjustments, but
incorporates the Company’s own credit risk as observed in the credit default
swap market.
The
following table presents the Company’s assets and liabilities that are measured
at fair value on a recurring basis at September 30, 2009:
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,013,825
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
4,013,825
|
|
|
|
Restricted
cash
|
|
|
53,750
|
|
|
|
---
|
|
|
|
---
|
|
|
|
53,750
|
|
|
|
Total
assets
|
|
$
|
4,067,575
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
4,067,575
|
|
|
4.
|
Property
and Equipment
|
Property
and equipment, net consisted of the following at September 30, 2009 and December
31, 2008:
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Computer
equipment and software
|
|
$
|
678,651
|
|
|
$
|
652,877
|
|
|
|
Leasehold
improvements
|
|
|
145,794
|
|
|
|
145,794
|
|
|
|
Furniture
and fixtures
|
|
|
7,737
|
|
|
|
7,737
|
|
|
|
Total
property and equipment
|
|
|
832,182
|
|
|
|
806,408
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(728,294
|
)
|
|
|
(569,960
|
)
|
|
|
Property
and equipment, net
|
|
$
|
103,888
|
|
|
$
|
236,448
|
|
Depreciation
and amortization expense totaled $45,266 and $65,055 for the three months ended
September 30, 2009 and 2008, and $159,012 and $195,118 for the nine months ended
September 30, 2009 and 2008, respectively.
Accrued
liabilities consisted of the following at September 30, 2009 and December 31,
2008:
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Accrued vendor obligations
|
|
$
|
1,075,937
|
|
|
$
|
687,928
|
|
|
|
Accrued compensation
|
|
|
465,888
|
|
|
|
777,290
|
|
|
|
Accrued city and county taxes
|
|
|
16,707
|
|
|
|
41,836
|
|
|
|
Other
|
|
|
30,537
|
|
|
|
94,786
|
|
|
|
Total accrued
liabilities
|
|
$
|
1,589,069
|
|
|
$
|
1,601,840
|
|
On March
27, 2009, the Company entered into a Loan and Security Agreement (as amended,
the “Loan and Security Agreement”) with Silicon Valley Bank (“SVB”) that
provides for a secured revolving credit arrangement to provide advances in an
aggregate principal amount of up to $4,000,000 on the terms and conditions set
forth in the Loan and Security Agreement. The Loan and Security Agreement
consists of a $4,000,000 credit facility with a $500,000 sublimit for stand-by
letters of credit, a $500,000 sublimit for cash management services and a
$500,000 sublimit for foreign exchange contracts. The borrowings are secured
based upon a percentage of certain eligible billed and unbilled receivables. The
Company may borrow, repay and reborrow under the line of credit facility at any
time. As of March 27, 2009, the advances under the line of credit facility
accrue interest at a per annum rate equal to 3.0% above the greater of (i)
Silicon Valley Bank’s announced prime rate or (ii) 7.0%. This interest rate
shall be adjusted upward at times when the Company’s liquidity ratio (as
described in the Loan and Security Agreement) equals less than 2.25 to 1.00. The
Company is required to pay a termination fee if the Loan and Security Agreement
is terminated prior to March 27, 2011 (the “Maturity Date”) in an amount equal
to the interest that would have accrued on an advance of an aggregate principal
amount of $1 million through the Maturity Date.
The
Company’s Loan and Agreement is collateralized by substantially all of the
Company’s assets and requires the Company to comply with customary affirmative
and negative covenants principally relating to liens, indebtednesss,
investments, distributions to shareholders, use and disposition of assets, the
satisfaction of a liquidity ratio test and minimum tangible net worth
requirements. At September 30, 2009, the Company was in compliance with all
covenants, except as set forth in the Amendment. In addition, the Loan and
Security Agreement contains customary events of default. Upon occurrence of an
uncured event of default, among other things, Silicon Valley Bank may declare
that all amounts owing under the credit arrangement are due and payable and the
applicable interest rate shall become 4% above the rate that would otherwise
apply. The line of credit and facility expire on the Maturity Date. As of
September 30, 2009, there is $1,500,000 outstanding under this revolving credit
arrangement. At September 30, 2009, we did not have any funds available for
borrowing.
On
November 9, 2009, the Company and SVB entered into a Waiver and Third Amendment
to Loan and Security Agreement (the “Waiver and Amendment”). Under the terms of
the Waiver and Amendment, SVB agreed: (i) to waive an event of default existing
as a result of the Company’s violation of a minimum tangible net worth covenant
under the Loan and Security Agreement and (ii) that such minimum tangible net
worth covenant would not apply from October 1, 2009 to November 23, 2009. In
addition, the Waiver and Amendment amended the Loan and Security Agreement to,
among other things: (i) add a covenant to the Loan and Security Agreement that
requires the Company to maintain at least $1.5 million in unrestricted cash on
deposit in the Company’s unrestricted operating, sweep and other accounts with
SVB and its affiliates and (ii) reduce the borrowing base available under the
Loan and Security Agreement from $4 million to the lesser of (a) the sum of 80%
of eligible accounts and, at SVB’s discretion, 60% of extended eligible accounts
and (b) $1.5 million.
|
7.
|
Stock
Options and Warrants
|
In 2004,
the Company’s Board of Directors (the “Board”) adopted a 2004 Stock Plan (the
“2004 Plan”). The 2004 Plan authorized the Board of Directors to grant incentive
stock options and nonstatutory stock options to employees, directors, and
consultants for up to 2,000,000 shares of common stock. Options vested over a
period of time according to the Option Agreement, and are exercisable for a
maximum period of ten years after date of grant. In May 2006, the Company
increased the shares reserved for issuance under the 2004 Plan from 2,000,000 to
4,588,281. Upon completion of the October 2006 mergers, the Company decreased
the shares reserved under the 2004 Plan from 4,588,281 to 804,188 and froze the
2004 Plan resulting in no additional options being available for grant under the
2004 Plan.
In 2006,
the Company’s Board of Directors adopted a 2006 Stock Plan (the “2006 Plan”).The
2006 Plan authorized the Board of Directors to grant incentive stock options and
nonstatutory stock options to employees, directors, and consultants for up to
2,000,000 shares of common stock. In October 2006, the Board of Directors
increased the shares available under the 2006 Plan to 4,000,000 shares. Options
vest over a period according to the Option Agreement, and are exercisable for a
maximum period of ten years after date of grant. In March 2008, the Board of
Directors froze the 2006 Plan resulting in no additional options being available
for grant under the 2006 Plan.
On
October 24, 2007, the Company’s Board of Directors approved the Non-Qualified
Stock Option Plan (as amended, the “Non-Qualified Plan”). The purposes of the
Non-Qualified Plan are to attract and retain the best available personnel, to
provide additional incentives to employees, directors and consultants and to
promote the success of our business. The Non-Qualified Plan initially provided
for a maximum aggregate of 3,600,000 shares of our common stock that may be
issued upon the exercise of options granted pursuant to the Non-Qualified Plan.
On November 1, 2007, the Board adopted an amendment to the Non-Qualified Plan to
increase the total number of shares of our common stock that may be issued
pursuant to the Non-Qualified Plan from 3,600,000 shares to 4,000,000
shares. On December 18, 2007, the Board adopted a further amendment
to the Non-Qualified Plan to increase the total number of shares of our common
stock that may be issued pursuant to the Non-Qualified Plan from 4,000,000
shares to 5,500,000 shares. On February 5, 2008, the Board adopted an additional
amendment to the Non-Qualified Plan to increase the total plan shares that may
be issued from 5,500,000 shares to 10,500,000 shares. On June 4, 2008,
the Board further increased the number of shares reserved under the
2007 Plan to 16,500,000. On December 2, 2008 the Board increased the
number of shares reserved under the 2007 Plan to 69,141,668. On
January 16, 2009, the Board increased the number of shares reserved under the
2007 Plan to 82,963,169. The Board (or any committee composed of
members of the Board appointed by it to administer the Non-Qualified Plan), has
the authority to administer and interpret the Non-Qualified Plan. The
administrator has the authority to, among other things, (i) select the
employees, consultants and directors to whom options may be granted, (ii) grant
options, (iii) determine the number of shares underlying option grants, (iv)
approve forms of option agreements for use under the Non-Qualified Plan, (v)
determine the terms and conditions of the options and (vi) subject to certain
exceptions, amend the terms of any outstanding option granted under the
Non-Qualified Plan. The Non-Qualified Plan authorizes grants of
nonqualified stock options to eligible employees, directors and consultants. The
exercise price for an Option shall be determined by the administrator. The term
of each option under the Non-Qualified Plan shall be no more than ten years from
the date of grant. The Non-Qualified Plan became effective upon its
adoption by the Board and will continue in effect for a term of ten years,
unless sooner terminated. The Board may at any time amend, suspend or
terminate the Non-Qualified Plan. The Non-Qualified Plan also
contains provisions governing: (i) the treatment of options under the
Non-Qualified Plan upon the occurrence of certain corporate transactions
(including merger, consolidation, sale of all or substantially all the assets of
our company, or complete liquidation or dissolution of our company) and changes
in control of our company, (ii) transferability of options and (iii) tax
withholding upon the exercise or vesting of an option.
On March
31, 2008, the Board adopted the Betawave Corporation 2008 Stock Incentive Plan
(as amended, the “2008 Plan”). The 2008 Plan permits options and other equity
compensation to be awarded to employees, directors and consultants. As
originally adopted, the 2008 Plan provided for the issuance of up to 2,400,000
shares of the Company’s common stock pursuant to awards granted thereunder, up
to 2,200,000 of which may be issued pursuant to incentive stock options granted
thereunder. On June 4, 2008, the Board adopted an amendment to the
2008 Plan to (i) decrease the maximum aggregate number of shares of Common Stock
that may be issued pursuant to awards granted under the plan from 2,400,000
shares to 1,500,000 shares and (ii) decrease the maximum aggregate number of
shares of the Company’s common stock that may be issued pursuant to incentive
stock options granted under the plan from 2,200,000 shares to 1,500,000 shares.
On December 2, 2008 the Board increased the number of shares reserved under the
Plan to a maximum of 19,224,774. The 2008 Plan is administered, with respect to
grants to employees, directors, officers, and consultants, by the plan
administrator (the “Administrator”), defined as the Board or one or more
committees designated by the Board. The Board is currently the Administrator for
the 2008 Plan.
A summary
of stock option transactions for the period January 1, 2008 through September
30, 2009 is as follows:
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
|
|
|
Options
available for grant
|
|
|
Number
of options
|
|
|
Weighted
average exercise price
|
|
|
|
Balances
at January 1, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
shares reserved
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
frozen under the 2004 and 2006 Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at
January 1, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
shares reserved
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table
summarizes information concerning outstanding options as of September 30,
2009:
|
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Exercise
price
|
|
|
Number
of Options
|
|
|
Weighted
Average Remaining Contractual Life (in Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Number
of Options
|
|
|
Weighted
Average Remaining Contractual Life (in Years)
|
|
|
Aggregate
Intrinsic Value
|
|
$
|
0.06
|
|
|
|
139,100
|
|
|
|
4.74
|
|
|
|
|
|
136,404
|
|
|
|
4.71
|
|
|
|
|
$
|
0.07
|
|
|
|
215,000
|
|
|
|
9.95
|
|
|
|
|
|
---
|
|
|
|
8.82
|
|
|
|
|
$
|
0.08
|
|
|
|
617,000
|
|
|
|
9.86
|
|
|
|
|
|
307,000
|
|
|
|
9.89
|
|
|
|
|
$
|
0.16
|
|
|
|
6,927,078
|
|
|
|
9.70
|
|
|
|
|
|
146,687
|
|
|
|
4.71
|
|
|
|
|
$
|
0.19
|
|
|
|
29,765
|
|
|
|
9.14
|
|
|
|
|
|
11,536
|
|
|
|
9.14
|
|
|
|
|
$
|
0.20
|
|
|
|
48,027,092
|
|
|
|
9.17
|
|
|
|
|
|
15,186,645
|
|
|
|
9.18
|
|
|
|
|
$
|
0.23
|
|
|
|
4,825,000
|
|
|
|
8.53
|
|
|
|
|
|
2,920,834
|
|
|
|
8.47
|
|
|
|
|
$
|
0.24
|
|
|
|
102,000
|
|
|
|
8.68
|
|
|
|
|
|
58,625
|
|
|
|
8.68
|
|
|
|
|
$
|
0.25
|
|
|
|
65,000
|
|
|
|
8.84
|
|
|
|
|
|
38,333
|
|
|
|
8.84
|
|
|
|
|
$
|
0.27
|
|
|
|
400,000
|
|
|
|
8.08
|
|
|
|
|
|
255,556
|
|
|
|
8.08
|
|
|
|
|
$
|
0.29
|
|
|
|
100,000
|
|
|
|
8.50
|
|
|
|
|
|
100,000
|
|
|
|
8.50
|
|
|
|
|
$
|
0.35
|
|
|
|
4,840,000
|
|
|
|
8.34
|
|
|
|
|
|
3,844,862
|
|
|
|
8.34
|
|
|
|
|
$
|
0.37
|
|
|
|
1,742,650
|
|
|
|
8.04
|
|
|
|
|
|
1,417,046
|
|
|
|
8.05
|
|
|
|
|
$
|
0.42
|
|
|
|
130,000
|
|
|
|
8.28
|
|
|
|
|
|
54,167
|
|
|
|
8.28
|
|
|
|
|
$
|
0.60
|
|
|
|
2,777,309
|
|
|
|
9.17
|
|
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
$
|
0.80
|
|
|
|
5,277,309
|
|
|
|
8.94
|
|
|
|
|
|
1,041,667
|
|
|
|
8.68
|
|
|
|
|
$
|
1.00
|
|
|
|
2,777,309
|
|
|
|
9.17
|
|
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
$
|
1.20
|
|
|
|
2,777,309
|
|
|
|
9.17
|
|
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
$
|
1.40
|
|
|
|
2,777,309
|
|
|
|
9.17
|
|
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
$
|
3.08
|
|
|
|
40,000
|
|
|
|
7.22
|
|
|
|
|
|
26,667
|
|
|
|
7.22
|
|
|
|
|
$
|
3.65
|
|
|
|
64,271
|
|
|
|
7.12
|
|
|
|
|
|
64,271
|
|
|
|
7.12
|
|
|
|
|
$
|
3.78
|
|
|
|
15,000
|
|
|
|
7.64
|
|
|
|
|
|
8,750
|
|
|
|
7.64
|
|
|
|
|
$
|
3.80
|
|
|
|
65,000
|
|
|
|
7.55
|
|
|
|
|
|
39,271
|
|
|
|
7.55
|
|
|
|
|
$
|
5.79
|
|
|
|
147,083
|
|
|
|
7.34
|
|
|
|
|
|
106,667
|
|
|
|
7.34
|
|
|
|
|
|
|
|
|
|
84,877,584
|
|
|
|
9.08
|
|
$
|
239,354
|
|
|
25,764,988
|
|
|
|
8.82
|
|
$
|
11,596
|
The
weighted-average grant date fair value of the options granted during the three
month periods ended September 30, 2009 and 2008 were $0.07 and $0.17,
respectively.
On
December 2, 2008, the Company granted (under the Non-Qualified Plan) certain
employees options to purchase 14,991,620 shares of Company common
stock. These options will only vest with a change in control of the
Company, as defined in the option agreement. As the condition for
vesting is not probable, the Company has not recognized any compensation expense
related to these options at September 30, 2009. At September 30,
2009, 13,886,545 of these options remain outstanding.
At
September 30, 2009, there was $5,383,040 of total unrecognized compensation cost
related to nonvested stock-based compensation arrangements granted under the
plans. This cost is expected to be recognized over the weighted
average period of 2.21 years.
The
Company did not realize any tax benefits from tax deductions of stock-based
payment arrangements during the nine month periods ended September 30, 2009 and
2008.
Stock-based
compensation expense related to stock options granted to non-employees is
recognized as earned. In accordance with ASC 505-50, the Company re-values the
non-employee stock-based compensation, at each reporting date, using the
Black-Scholes pricing model. As a result, stock-based compensation expense will
fluctuate as the estimated fair market value of the Company’s common stock
fluctuates. The Company recorded stock-based compensation expense related to
non-employees of ($6,616) and $154,419 for the nine month periods ended
September 30, 2009 and 2008, respectively.
A summary of
outstanding Common Stock Warrants included those issued as non-employee
compensation as of September 30, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Securities
into which warrants are convertible and reference
|
|
Shares
|
|
|
Exercise
Price
|
|
Expiration
Date
|
|
|
Common
Stock-
Non-employee
compensation
|
|
|
300,000
|
|
|
$
|
1.75
|
|
February 2013
|
|
|
Common
Stock-
Non-employee
compensation
|
|
|
80,000
|
|
|
$
|
0.20
|
|
February 2013
|
|
|
Common
Stock-
Non-employee
compensation
|
|
|
3,133,333
|
|
|
$
|
1.72
|
|
October 2011
|
|
|
Common
Stock-
Series A preferred
stock units
|
|
|
56,522,344
|
|
|
$
|
0.20
|
|
December 2013
|
|
|
Common
Stock-
Non-employee
compensation
|
|
|
6,665,343
|
|
|
$
|
0.20
|
|
December 2013
|
|
|
Common
Stock-
Non-employee
compensation
|
|
|
50,000
|
|
|
$
|
0.20
|
|
November 2013
|
|
|
Common
Stock
|
|
|
600,000
|
|
|
$
|
0.20
|
|
March 2014
|
|
|
Total
|
|
|
67,351,020
|
|
|
|
|
|
|
Cash paid during the nine months ended September
30, 2009 and 2008 is as follows:
|
|
|
|
Nine
Months Ended September 30, 2009
|
|
|
Nine
Months Ended
September 30, 2008
|
|
|
|
Interest
|
|
$
|
40,639
|
|
|
$
|
279,000
|
|
|
|
Income
taxes
|
|
$
|
---
|
|
|
$
|
---
|
|
Supplemental disclosure of non-cash investing and
financing activities for the nine months ended September 30, 2009 and 2008 is as
follows:
|
|
|
|
Nine
Months Ended September 30, 2009
|
|
|
Nine
Months Ended September 30,
2008
|
|
|
|
Issuance
of warrants to Silicon Valley Bank
|
|
$
|
33,794
|
|
|
$
|
---
|
|
|
|
Issuance
of common stock to publisher
|
|
$
|
---
|
|
|
$
|
102,000
|
|
|
|
Common
stock issued upon conversion of convertible notes
|
|
$
|
---
|
|
|
$
|
40,000
|
|
|
|
Initial
recording of warrant liability
|
|
$
|
---
|
|
|
$
|
213,175
|
|
|
|
Initial
recording of beneficial conversion factor
|
|
$
|
---
|
|
|
$
|
772,500
|
|
|
|
Convertible
notes issued upon conversion of amounts due to a
stockholder
|
|
$
|
---
|
|
|
$
|
210,000
|
|
|
ITEM 2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations provides information that we believe is relevant to an assessment and
understanding of our financial condition and results of operations. This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the unaudited condensed
consolidated financial statements and related notes thereto included under the
heading “Financial Statements” in Part I, Item 1 of this Quarterly Report on
Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December
31, 2008 filed with the Securities and Exchange Commission (the “SEC”) on March
31, 2009.
This
Quarterly Report on Form 10-Q, including this Management’s Discussion and
Analysis of Financial Condition and Results of Operations, contains, in addition
to historical information, forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions. Any statements that are not statements of historical fact are
forward-looking statements. When used, the words “believe,” “plan,” “intend,”
“anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense
or conditional constructions (e.g., “will,” “may,” “could,” “should,” etc.) or
similar expressions identify certain of these forward-looking
statements. These forward-statements include, without limitation: (i)
management’s expectation the steps it took in September and October 2009 will
improve the Company's performance; (ii) our expectation that we will experience
quarter-over-quarter revenue growth in the fourth quarter of 2009;
(iii) our belief that we can return to year-over-year revenue growth in the
first quarter of 2010; (iv) our expectation that large sites will continue to
lose traffic to smaller sites; and (v) our belief that the media buying
community's interests aligh with our long-term positioning.
These
forward-looking statements are subject to risks and uncertainties that could
cause actual results or events to differ materially from those expressed or
implied by the forward-looking statements in this Quarterly Report on Form 10-Q.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this Quarterly Report on Form 10-Q, and in
particular, the risks discussed under the heading “Risk Factors” in Part II,
Item 1A of this Quarterly Report on Form 10-Q and those discussed in other
documents we file with the SEC. We undertake no obligation to revise or publicly
release the results of any revision to these forward-looking statements. Given
these risks and uncertainties, readers are urged not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
Quarterly Report on Form 10-Q.
Overview
Betawave
Corporation (the “Company,” “we,” “our,” or “us”) sells online advertising for
the websites in our network of sites (the “Betawave Network”). We have assembled
a network of some of the leading websites in the most popular online categories:
immersive casual gaming, virtual world, social play and entertainment. We
specialize in helping brand marketers reach the highly attentive audiences on
these sites through innovative ad formats.
Trends
in Our Business
During 2009,
we increased our “reach” to 32 million unique U.S. visitors according to
comScore’s September 2009 figures, representing growth of 28% for the
year. Time spent on the websites in the Betawave Network reached 58
minutes spent per visitor per month. The Betawave Network continues to perform
very well against the competition in several key categories. The Betawave
Network reaches more online users than any other youth media company, including
Disney, Nickelodeon and Cartoon Network. In addition to its youth
audience, Betawave’s Lifestyle Channel has the highest time spent across core
women demographics. When comparing time-on-site with Lifestyle
competitors, visitors on the Betawave Network ranked as the most attentive
audiences with an average of 63 minutes of time spent on the site per month,
over 240% higher than our primary competitor in the women’s
space. The Betawave Network also places at or near the top in total
audience reach and time spent in several other key categories.
Despite this,
we still faced a challenging macroeconomic environment in which online
advertising revenues declined 5.3% in the United States for the first six months
of 2009 compared with the same period in 2008 (according to the Internet
Advertising Bureau). We were not immune to this trend and in the
third quarter of 2009, the Company experienced its first ever year-over-year
quarterly revenue decline. We believe there are several reasons for this
decline. In addition to the decrease in overall ad spending, the economic
crisis caused a severe compression in advertising planning cycles. This had the
effect of making it more difficult to sell the types of immersive, rich custom
advertising that the Company specializes in because of the longer lead times
which are frequently necessary. In addition, the majority of our
revenue in the third quarter of 2008 came from retail advertisers. In 2009, the
retail industry was severely affected by the recent financial crisis and as a
result, in general, retailers (i) reduced their advertising budgets, in some
cases, dramatically, (ii) reduced the number of media companies that they
advertised with, and (iii) consolidated their media spend with companies that
integrated an online and television presence (such as Disney). Finally, we
believe that the change in the Company’s name from GoFish to Betawave in January
2009 may have caused some confusion in the marketplace, which led to our missing
certain you-focused sales opportunities, such as “back-to-school” advertising
campaigns.
We have taken
several steps in an effort to improve our performance. In September 2009, we
replaced our Vice President of Sales with a new Chief Revenue Officer who we
believe can effectively lead the Company’s sales efforts in the current climate
and in a climate of macroeconomic growth, as well. In addition, we
have adjusted our sales positioning and messaging to better adjust to the
changes we have seen in the market. Finally, we terminated several
underperforming salespeople in the third quarter and we reduced overall
headcount and cut expenses in October 2009. As a result of these efforts, we
have noticed an improvement in some of our predictive metrics for the fourth
quarter 2009. We believe that we will experience quarter-over-quarter revenue
growth in the fourth quarter of 2009 and that we can return to year-over-year
revenue growth in the first quarter of 2010.
After a
decrease in online advertising spending of 3% for the entire year of 2009,
eMarketer believes that the online advertising downturn is coming to a close.
They predict a return to growth in 2010, with total online advertising revenue
reaching $34.5 billion in 2014, comprising almost 20% of total US advertising
spending (up from 14% in 2009). In addition to an overall increase in online
advertising spending, we believe that the advertiser’s ability to effectively
reach consumers is being impacted by several trends taking place on the
Internet, such as “deportalization,” which describes the trend of Internet
traffic moving from large portals to smaller, niche sites. We expect that, in
the next several years, the large sites will continue to lose traffic to smaller
sites, such as the mid-tail sites in the Betawave Network, allowing us to
provide the size and scale of portals, with the immersive experience and
customization of niche sites. In addition, the media buying community has
expressed interest in campaign measurement tools that go beyond impressions or
click-through rates. We believe this aligns positively with our long-term
positioning.
One of the
principal effects of the recent economic crisis has been to disrupt many of the
long held norms and practices of the advertising industry. Although we believe
that certain industry trends, such as higher spending in online advertising
during the second half of the year, peaking during the fourth quarter holiday
season, will continue, it is generally believed that other industry norms, such
as the length of the sales cycle and certain purchasing practices are in flux.
We cannot be certain where things will end up after the current
upheaval.
In general,
the demand for high quality salespeople in online advertising sales is very
competitive and requires paying competitive market salaries in order to obtain
the results we seek to grow our business. The focus on our sales group will be a
key component of our growth in 2010.
Results
of Operations - Three and Nine Months Ended September 30, 2009 Compared to Three
and Nine Months Ended September 30, 2008
Revenues
Total
revenues decreased to $1,725,499 for the three months ended September 30, 2009
from $2,786,139 for the three months ended September 30, 2008, representing a
decrease of $1,060,640. Revenues for the three months ended September 30, 2009
consisted of advertising fees, primarily from graphical and rich-media ads. This
decrease reflected lower sales from advertising that was sold across the
Betawave Network. We believe this decrease was the result of a general
decline in online advertising in the United States, the severe
compression in advertising planning cycles caused by the economic crisis and the
impact the economic crisis had on the retail industry.
Total
revenues increased to $5,396,244 for the nine months ended September 30, 2009
from $4,725,728 for the nine months ended September 30, 2008, representing an
increase of $670,516. This increase reflected higher sales from advertising that
was sold across the Betawave Network. Revenues for the nine months ended
September 30, 2009 consisted of advertising fees, primarily from graphical and
rich-media ads.
Cost
of Revenues
Cost of
revenues for the three and nine months ended September 30, 2009 consisted
primarily of direct payments to publishers for revenue share on advertising
revenues, costs associated with hosting our websites and ad serving costs for
impressions delivered in connection with advertising revenues.
Cost of
revenues increased to $2,441,052 for the three months ended September 30, 2009
from $2,058,456 for the three months ended September 30, 2008, representing an
increase of $382,596. This increase consisted of $510,372 of payments made to
publishers that was offset by a decrease of $45,869 for game design, $19,135 for
ad serving, $3,036 for web hosting costs, $15,198 for licensing expenses and
$44,538 for stock-based compensation expenses.
For the nine
months ended September 30, 2009, cost of revenues increased to $5,695,477 from
$4,213,193 for the nine months ended September 30, 2008, representing an
increase of $1,482,284. The increase included $1,646,877 of payments made to
publishers, $29,112 for ad serving costs, $133,290 for custom media player and
game design. These increases were offset by a $126,645 reduction for
web hosting, $87,997 for licensing expenses and $112,353 for stock-based
compensation expenses.
Sales
and Marketing
Sales and
marketing expenses for the three and nine months ended September 30, 2009
consisted primarily of advertising and other marketing related expenses,
compensation-related expenses, sales commissions, and travel costs.
Sales and
marketing expenses increased to $2,033,598 for the three months ended September
30, 2009 from $1,630,472 for the three months ended September 30, 2008,
representing an increase of $403,126. This increase was attributable to a
$427,847 increase in personnel and other benefits related costs, including a
$137,738 increase in stock-based compensation expenses and a $40,019 increase in
advertising and other marketing related expenses. These increases were offset by
a $12,217 decrease in professional services for public relations and related
devopment research expense, a $17,817 decrease in travel expenses and a $34,706
decrease in allocation of facilities, IT and other operating
expenses.
For the nine
months ended September 30, 2009, sales and marketing expenses increased to
$6,243,389 from $4,726,805 for the nine months ended September 30, 2008,
representing an increase of $1,516,584. This increase was attributable to a
$1,222,310 increase in personnel and other benefits related costs, including a
$265,223 increase in stock-based compensation expenses, a $27,130 increase in
advertising and other marketing related expenses, a $79,940 increase in
professional services for public relations and related development research
expense, a $41,807 increase in travel expenses and a $145,397 increase in
allocation of facilities, IT and other operating expenses.
Employees in
sales and marketing at September 30, 2009 and 2008 were 33 and 29,
respectively.
Product
Development
Product
development expenses for the three and nine months ended September 30, 2009
consisted primarily of compensation-related expenses incurred for the
development of, and enhancement to, systems that enable us to drive and support
revenue-generating activities across the Betawave Network.
Product
development expenses decreased to $130,241 for the three months ended September
30, 2009 from $248,100 for the three months ended September 30, 2008,
representing a decrease of $117,859. This decrease was attributable primarily to
a $91,822 reduction in compensation related expenses, including a $9,745
decrease in stock-based compensation expenses and a $26,037 decrease in
allocation of facilities, IT and other operating expenses.
For the nine
months ended September 30, 2009, product development expense decreased to
$463,586 from $588,044 for the nine months ended September 30, 2008,
representing a decrease of $124,458. The decrease was attributed primarily to
$45,455 reduction in compensation related expenses, including a $41,706 increase
in stock-based compensation expenses, and a $79,003 decrease in allocation
of facilities, IT and other operating expenses.
Employees in
product development at September 30, 2009 and 2008 were 4 and 5,
respectively.
General
and Administrative
General and
administrative expenses for the three and nine months ended September 30, 2009
consisted primarily of compensation-related expenses related to our executive
management, finance and human resource organizations and legal, accounting,
insurance and other operating expenses to the extent not otherwise allocated to
other functions.
General and
administrative expenses increased to $1,419,023 for the three months ended
September 30, 2009 from $1,210,582 for the three months ended September 30,
2008, representing an increase of $208,441. This increase was attributable to a
$384,548 increase in compensation-related expenses, including a $363,778
increase in stock-based compensation expenses and a $11,535 increase in travel
expenses. This increase was partly offset by a $134,821 decrease in
accounting, investor relations and other professional services, a $23,333
decrease in the amortization of deferred financing costs and a $29,488 decrease
in unallocated facilities, IT and other operating expenses.
For the nine
months ended September 30, 2009, general and administrative expenses increased
to $4,335,488 from $4,092,548 for the nine months ended September 30, 2008,
representing an increase of $242,940. The increase was attributable to a
$1,139,950 increase in personnel and other benefits related costs, including a
$759,074 increase in stock-based compensation expenses. These increases were
offset by a $433,531 decrease in accounting, investor relations and other
professional services, a $274,128 decrease in the amortization of deferred
financing costs, a $6,280 reduction in travel expenses and a $183,071 decrease
in unallocated facilities, IT and other operating expenses.
Employees in
general and administrative at September 30, 2009 and 2008 were 11 and 7,
respectively.
Other
Income and
Expenses
Other income
(expense) decreased to $33,054 of expense for the three months ended September
30, 2009 from $887,565 of expense for the three months ended September 30, 2008.
For the nine months ended September 30, 2009, other income (expense) changed to
$14,770 of income from $2,095,624 of expense for the nine months ended September
30, 2008, representing a change of $2,110,394.
Interest
income is derived primarily from short-term interest earned on operating cash
balances. Miscellaneous income for the nine months ended September 30, 2009
consisted of a settlement from a claim with a third party.
Interest
expense for the three and nine months ended September 30, 2009 relates to the
financing costs for the Company’s directors and officers insurance policy and
the interest expense for the three and nine months ended September 30, 2008
relates to financing costs for the Company’s directors and officers insurance
policy and the Company’s convertible debt, which was retired in December
2008.
Liquidity
and Capital Resources
To date, we
have funded our operations primarily through private sales of securities and
borrowings. As of September 30, 2009, we had $4,013,825 in cash and cash
equivalents and $53,750 in restricted cash. Because we expect to continue to
incur an operating loss for the full 2009 fiscal year, we will likely need to
raise additional capital in the future, which may not be available on reasonable
terms or at all. The raising of additional capital will likely dilute our
current stockholders’ ownership interests.
As of
September 30, 2009, we had a secured revolving credit arrangement with Silicon
Valley Bank available that provides advances in an aggregate principal amount of
up to $4,000,000 on the terms and conditions set forth in a Loan and Security
Agreement, dated as of March 27, 2009 (the “Loan and Security Agreement”). The
Loan and Security Agreement consists of a $4,000,000 credit facility with a
$500,000 sublimit for stand-by letters of credit, $500,000 sublimit for cash
management services and a $500,000 sublimit for foreign exchange contracts. The
borrowings are secured based upon a percentage of certain eligible billed and
unbilled receivables. We may borrow, repay and reborrow under the line of credit
facility at any time. The advances under the line of credit facility shall
accrue interest at a per annum rate equal to 3.0% above the greater of (i)
Silicon Valley Bank’s announced prime rate or (ii) 7.0%. This interest rate
shall be adjusted upward at times when our liquidity ratio (as described in the
Loan and Security Agreement) equals less than 2.25 to 1.00. We are required to
pay a termination fee if the Loan and Security Agreement is terminated prior to
March 27, 2011 (the “Maturity Date”) in an amount equal to the interest that
would have accrued on an advance of an aggregate principal amount of $1
million through the Maturity Date.
The Company’s
Loan and Security Agreement is collateralized by substantially all of our assets
and requires us to comply with customary affirmative and negative covenants
principally relating to liens, indebtedness, investments, distributions to
shareholders, use and disposition of assets, the satisfaction of a liquidity
ratio test and minimum tangible net worth requirements. At September 30, 2009,
the Company was in compliance with all covenants except as set forth in the
Amendment. In addition, the Loan and Security Agreement contains customary
events of default. Upon occurrence of an uncured event of default, among other
things, Silicon Valley Bank may declare that all amounts owing under the credit
arrangement are due and payable and the applicable interest rate shall become 4%
above the rate that would otherwise apply. The line of credit and facility
expire on the Maturity Date. As of September 30, 2009, there is $1,500,000
outstanding under this revolving credit arrangement. At September 30, 2009, we
did not have any funds available for borrowing under this revolving credit
arrangement.
On November
9, 2009, the Company and SVB entered into a Waiver and Third Amendment to Loan
and Security Agreement (the “Waiver and Amendment”). Under the terms of the
Waiver and Amendment, SVB agreed: (i) to waive an event of default existing as a
result of the Company’s violation of a minimum tangible net worth covenant under
the Loan and Security Agreement and (ii) that such minimum tangible net worth
covenant would not apply from October 1, 2009 to November 23, 2009. In addition,
the Waiver and Amendment amended the Loan and Security Agreement to, among other
things: (i) add a covenant to the Loan and Security Agreement that requires the
Company to maintain at least $1.5 million in unrestricted cash on deposit in the
Company’s unrestricted operating, sweep and other accounts with SVB and its
affiliates and (ii) reduce the borrowing base available under the Loan and
Security Agreement from $4 million to the lesser of (a) the sum of 80% of
eligible accounts and, at SVB’s discretion, 60% of extended eligible accounts
and (b) $1.5 million.
Net cash used in
operating activities was $9,181,539 and $4,278,066 for the nine months ended
September 30, 2009 and 2008, respectively. For the nine months ended September
30, 2009, the cash used in operating activities was primarily due to a net loss
of $8,879,259, which is net of non cash expenses of $2,447,667, and a negative
change in working capital of $302,280. The non cash expense items included loss
on disposal of fixed assets of $1,976, depreciation and amortization of
$159,012, amortization of financing costs of $29,843 and stock-based
compensation of $2,256,836. For the nine months ended September 30, 2008, the
primary use of cash was due to a net loss of $7,424,575, which is net of non
cash expenses of $3,565,911, and a change in working capital of $3,146,509. The
non cash expense items included depreciation and amortization of $195,118,
amortization of convertible note fees of $385,089, stock-based compensation of
$1,339,841 and non cash interest expense of $1,645,863.
As of September 30, 2009, we had
$4,013,825 in cash and cash equivalents, which represented a decrease of
$1,721,737 from $5,735,562 in cash and cash equivalents as of June 30,
2009.
Net cash used
in investing activities was $82,178 and $583,396 for the nine months ended
September 30, 2009 and 2008, respectively. For the nine months ended September
30, 2009, net cash used in investing activities consisted of $53,750 deposited
as security for a letter of credit and $28,428 for the purchase of property and
equipment. For the nine months ended September 30, 2008, net cash used in
investing activities consisted of $550,000 deposited as security for a letter of
credit and the purchase of property and equipment of $33,396.
Net cash
provided by financing activities was $1,414,421and $3,798,700 for the nine
months ended September 30, 2009 and 2008, respectively. The net cash provided by
financing activities for the nine months ended September 30, 2009 consisted of
borrowings of $1,800,000 under the revolving credit arrangement with Silicon
Valley Bank, offset by the repayment of $300,000 on the bank line and the
payment of $85,579 for financing costs related to the revolving credit
arrangement. The net cash from financing activities for the nine months ended
September 30, 2008 consisted of $610,000 of advances from a stockholder and net
proceeds of $3,188,700 from the issuance of our unsecured convertible 15%
original issue discount notes due June 8, 2010, which were retired in December
2008.
Critical Accounting Policies
Our
discussion and analysis of our financial condition and results of operations is
based upon our condensed consolidated financial statements, which have been
prepared in accordance with United States Generally Accepted Accounting
Principles (“U.S. GAAP”). The preparation of these condensed consolidated
financial statements requires us to make estimates, judgments and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses,
and the related disclosure of contingent assets and liabilities. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the results of which form the
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.
An accounting
policy is considered to be critical if it requires an accounting estimate to be
made based on assumptions about matters that are highly uncertain at the time
the estimate is made, and if different estimates that reasonably could have been
used, or changes in the accounting estimate that are reasonably likely to occur,
could materially impact the condensed consolidated financial statements. We
believe that the following critical accounting policies reflect the more
significant estimates and assumptions used in the preparation of the condensed
consolidated financial statements.
Revenue
Recognition
We recognize
revenues from the display of graphical advertisements on the websites of the
publishers in the Betawave Network as “impressions” are delivered up to the
amount contracted for by the advertiser. An “impression” is delivered when an
advertisement appears in pages viewed by users. Arrangements for these services
generally have terms of less than one year.
We recognize
these revenues as such because the services have been provided, and the other
criteria set forth under ASC 605-10:
Revenue Recognition
have been
met: namely, the fees charged by the Company are fixed or determinable, the
advertisers understand the specific nature and terms of the agreed-upon
transactions and collectability is reasonably assured. In accordance with ASC
605-45,
Reporting Revenue
Gross as Principal Versus Net as an Agent
(“ASC 605-45”), Betawave
reports revenues on a gross basis principally because the Company is the primary
obligor to the advertisers.
Cost
of Revenues and Expenses
Cost of
revenues and expenses primarily consist of payments to publishers in the
Betawave Network, personnel-related costs, including payroll, recruitment and
benefits for executive, technical, corporate and administrative employees, in
addition to professional fees, insurance and other general corporate expenses.
We believe that a key element to the execution of our strategy is the hiring of
personnel in all areas that are vital to our business. Our investments in
personnel include hiring employees in the areas of business development, sales
and marketing, advertising, service and general corporate marketing and
promotions.
Accounting
for Stock-Based Compensation
Prior to
January 1, 2006, we used the intrinsic value method to record stock-based
compensation for employees, which requires that deferred stock-based
compensation be recorded for the difference between an option’s exercise price
and the fair value of the underlying common stock on the grant date of the
option.
Effective
January 1, 2006, we adopted the fair value recognition provisions of FASB
Statement No. 123 (R),
Share-Based Payment
, (“SFAS
123 (R)”) using the modified prospective transition method. Under that
transition method, compensation cost recognized for the periods ended December
31, 2008 and 2007 includes: (a) compensation cost for all stock-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of FASB
Statement No. 123,
Accounting
for Stock-Based Compensation
(“SFAS 123”), and (b) compensation cost for
all stock-based payments granted or modified subsequent to January 1, 2006,
based on the grant date fair value estimated in accordance with the provisions
of SFAS 123(R).
Stock-based
compensation expense for performance-based options granted to non-employees is
determined in accordance with FASB ASC Topic 718,
Stock Compensation
(“ASC 718”) and ASC 505-50,
at the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured. The fair value of
options granted to non-employees is measured as of the earlier of the
performance commitment date or the date at which performance is complete
(“measurement date”). When it is necessary under U.S. GAAP to recognize the cost
for the transaction prior to the measurement date, the fair value of unvested
options granted to non-employees is remeasured at the balance sheet
date.
We currently
use the Black-Scholes option pricing model to determine the fair value of stock
options. The determination of the fair value of stock based payment awards on
the date of grant using an option-pricing model is affected by our stock price
as well as by assumptions regarding a number of complex and subjective
variables. These variables include our expected stock price volatility over the
term of the awards, actual and projected employee stock option exercise
behaviors, risk-free interest rate and expected dividends. We estimate the
volatility of our common stock at the date of the grant based on a combination
of the implied volatility of publicly traded options on our common stock and our
historical volatility rate. The dividend yield assumption is based on historical
dividend payouts. The risk-free interest rate is based on observed interest
rates appropriate for the term of our employee options. We use historical data
to estimate pre-vesting option forfeitures and record stock-based compensation
expense only for those awards that are expected to vest. For options granted, we
amortize the fair value on a straight-line basis. All options are amortized over
the requisite service periods of the awards, which are generally the vesting
periods. If factors change we may decide to use different assumptions under the
Black-Scholes option model and stock-based compensation expense may differ
materially in the future from that recorded in the current periods.
Property
and Equipment
Property and
equipment are recorded at cost less accumulated depreciation and amortization.
Major improvements are capitalized, while repair and maintenance costs that do
not improve or extend the lives of the respective assets are expensed as
incurred. Depreciation and amortization charges are calculated using the
straight-line method over the following estimated useful lives:
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Estimated
Useful Life
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Computer
equipment and software
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3
years
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Furniture
and fixtures
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5
years
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Leasehold
improvements
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Shorter
of estimated useful life or lease
term
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Upon
retirement or sale of property or equipment, the associated cost and related
accumulated depreciation are removed from the balance sheet and the resulting
gain or loss is reflected in operating expenses. If factors change we may decide
to use shorter or longer estimated useful lives and depreciation and
amortization expense may differ materially in the future from that recorded in
the current periods.
Impairment
of Long-Lived Assets
We
continually evaluate whether events and circumstances have occurred that
indicate the remaining estimated useful life of long-lived assets may warrant
revision or that the remaining balance of long-lived assets may not be
recoverable. When factors indicate that long-lived assets should be evaluated
for possible impairment, we typically make various assumptions about the future
prospects the asset relates to, consider market factors and use an estimate of
the related undiscounted future cash flows over the remaining life of the
long-lived assets in measuring whether they are recoverable. If the estimated
undiscounted future cash flows exceed the carrying value of the asset, a loss is
recorded as the excess of the asset’s carrying value over its fair value. There
have been no such impairments of long-lived assets through September 30,
2009.
Assumptions
and estimates about future values are complex and often subjective. They can be
affected by a variety of factors, including external factors such as industry
and economic trends, and internal factors such as changes in our business
strategy and our internal forecasts. Although we believe the assumptions and
estimates we have made in the past have been reasonable and appropriate,
different assumptions and estimates could materially affect our reported
financial results. More conservative assumptions of the anticipated future
benefits could result in impairment charges, which would increase net loss and
result in lower asset values on our balance sheet. Conversely, less conservative
assumptions could result in smaller or no impairment charges, lower net loss and
higher asset values.
Income
Taxes
We are
subject to federal and state income taxes in the United States of America. We
use the asset and liability approach to account for income taxes. This
methodology recognizes deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax base of assets and liabilities and operating loss and tax
carryforwards. We then record a valuation allowance to reduce deferred tax
assets to an amount that more likely than not will be realized. In evaluating
our ability to recover our deferred income tax assets we consider all available
positive and negative evidence, including our operating results, ongoing tax
planning and forecasts of future taxable income. Through December 31, 2008, we
have provided a valuation allowance of approximately $15.8 million against our
entire net deferred tax asset, primarily consisting of net operating loss
carryforwards. In the event we were to determine that we would be able to
realize our deferred income tax assets in the future in excess of their net
recorded amount, we would make an adjustment to the valuation allowance which
would reduce the provision for income taxes.
Advertising
and Promotion Costs
Expenses
related to advertising and promotions of products are charged to expense as
incurred. Advertising and promotional costs totaled $0 and $0 for the three and
nine months ended September 30, 2009, respectively, and $10,000 and $129,414 for
the three and nine months ended September 30, 2008, respectively.
Recent
Accounting Pronouncements
See “Recent
Accounting Pronouncements” under Note 2 to the unaudited
condensed consolidated financial statements included under the heading
“Financial Statements” in Part I, Item 1 of this Quarterly Report on Form 10-Q
for information on recent accounting pronouncements.
Off
Balance Sheet Arrangements
We do not
have any off balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
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ITEM
3.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
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Not
applicable.
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ITEM
4.
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CONTROLS
AND PROCEDURES.
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Evaluation
of Disclosure Controls and Procedures
As of the end
of the period covered by this Quarterly Report on Form 10-Q, our management
performed, with the participation of our Chief Executive Officer and Chief
Accounting Officer, an evaluation of the effectiveness of our disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure
controls and procedures are designed to reasonably ensure that information
required to be disclosed in the report we file or submit under the Exchange Act
is recorded, processed, summarized, and reported within the time periods
specified in the SEC’s forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and our
Chief Accounting Officer, to allow timely decisions regarding required
disclosures.
As previously
disclosed in our 2008 Form 10-K, in connection with our assessment of our
internal control over financial reporting as of December 31, 2008 as required
under Section 404 of the Sarbanes-Oxley Act of 2002, we had identified the
following material weaknesses in our internal control over financial
reporting:
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Our
control environment did not sufficiently promote effective internal
control over financial reporting resulting in recurring material
weaknesses which were not
remediated.
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Our
board of directors has not established adequate financial reporting
monitoring activities to mitigate the risk of management override,
specifically:
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a
majority of our board of directors is not
independent;
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no
financial expert on our board of directors has been
designated;
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no
formally documented financial analysis is presented to our board of
directors, specifically fluctuation, variance, trend analysis or business
performance reviews;
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delegation
of authority has not been formally
communicated;
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an
effective whistleblower program has not been
established;
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there
is insufficient oversight of external audit specifically related to fees,
scope of activities, executive sessions, and monitoring of results;
and
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there
is insufficient oversight of accounting principle
implementation.
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Due
to an insufficient number of personnel in our accounting group there have
been material audit adjustments to the annual financial
statements.
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We
have not maintained sufficient competent evidence to support the effective
operation of our internal controls over financial reporting, specifically
related to our board of director’s oversight of quarterly and annual SEC
filings; and management’s review of SEC filings, journal entries, account
analyses and reconciliations, and critical spreadsheet
controls.
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We
have not sufficiently restricted access to data or adequately divided, or
compensated for, incompatible functions among personnel to reduce the risk
that a potential material misstatement of the financial statements would
occur without being prevented or detected. Specifically we have not
divided the authorizing of transactions, recording of transactions,
reconciling of information, and maintaining custody of assets within the
financial closing and reporting, revenues and accounts receivable,
purchases and accounts payable, and cash receipts and disbursements
processes.
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A material weakness
is a deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis by our internal controls. As previously disclosed
in our 2008 Form 10-K, because of the material weaknesses noted above, our
management had concluded that we did not maintain effective internal control
over financial reporting as of December 31, 2008, based on
Internal Control over Financial
Reporting – Guidance for Smaller Public Companies
issued by
COSO.
The following
remediation efforts with respect to the material weaknesses noted above have
been completed as of September 30, 2009: (i) the Company now formally documents
the financial analysis presented to our board of directors, specifically
fluctuation, variance, trend analysis and business performance reviews; (ii) our
board of directors has adopted a formal
delegation
of authority policy, which has been communicated to the Company and implemented;
and (iii) an effective whistleblower program was
established.
As previously
disclosed in our 2008 Form 10-K, we have been in the process of implementing
remediation efforts with respect to the other material weaknesses noted above as
follows:
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We
plan, over the course of this year, to evaluate the composition of our
board of directors and to determine whether to add independent directors
or to replace an inside director with an independent director, in both
cases, in order to have a majority of our board of directors become
independent. We will determine whether any of its current directors is a
financial expert and, if not, will ensure that one of the new directors is
a financial expert.
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Management
intends to continue to provide SEC and US GAAP training for employees and
retain external consultants with appropriate SEC and US GAAP expertise to
assist in financial statement review, account analysis review, review and
filing of SEC reports, policy and procedure compilation assistance, and
other related advisory services.
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We
intend on developing an internal control over financial reporting evidence
policy and procedures which contemplates, among other items, a listing of
all identified key internal controls over financial reporting, assignment
of responsibility to process owners within the Company, communication of
such listing to all applicable personnel, and specific policies and
procedures around the nature and retention of evidence of the operation of
controls.
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We
intend on undertaking a restricted access review to analyze all financial
modules and the list of persons authorized to have edit access to each. We
will remove or add authorized personnel as appropriate to mitigate the
risks of management or other
override.
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We
plan to re-assign roles and responsibilities in order to improve
segregation of duties.
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We
believe the foregoing efforts will enable us to improve our internal control
over financial reporting. Management is committed to continuing efforts aimed at
improving the design adequacy and operational effectiveness of its system of
internal controls. The remediation efforts noted above will be subject to our
internal control assessment, testing, and evaluation process. While we
have been in the process of remediating the above deficiencies, not all of
these
material weaknesses were fully remediated as of September 30, 2009.
Based on our
management’s evaluation of our disclosure controls and procedures, including the
continuing unremediated material weaknesses in our internal control over
financial reporting, our Chief Executive Officer and our Chief Accounting
Officer concluded that, as of September 30, 2009, our disclosure controls and
procedures were not effective.
Changes
in Internal Control Over Financial Reporting
The following
changes in our internal control over financial reporting occured during the
three months ended September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting: (i) the Company now formally documents the financial
analysis presented to our board of directors, specifically fluctuation,
variance, trend analysis and business performance reviews; (ii) the Board has
adopted a formal
delegation
of authority policy, which has been communicated to the Company and implemented;
and (iii) an effective whistleblower program was
established.
PART
II - OTHER INFORMATION
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ITEM 1.
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LEGAL
PROCEEDINGS.
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From time
to time we may be named in claims arising in the ordinary course of business.
Currently, no legal proceedings, government actions, administrative actions,
investigations or claims are pending against us or involve us that, in the
opinion of our management, would reasonably be expected to have a material
adverse effect on our business and financial condition.
In
December 2008, Sunrise Equity Partners, L.P. (“Sunrise”) brought an action
against us in the United States District Court in the Southern District of New
York on behalf of itself and all other purchasers of our securities in our 2006
private placement. In the complaint, Sunrise alleged, among other things, that
we breached the representation in the subscription agreement for the 2006
private placement which provided that no purchaser in the private placement had
an agreement or understanding on terms that differed substantially from those of
any other investor. Sunrise claimed that we breached this representation because
entities affiliated with Louis Zehil, who at the time of the private
placement was a partner of our external legal counsel for the transaction,
received certificates without any restrictive legend while all other investors
in the private placement received certificates with such restrictive legends.
Sunrise dismissed this suit without prejudice in February 2009. We have learned
that Sunrise refiled the lawsuit New York state court in August 2009. As of this
date, we have not been served with the complaint, but we believe it is likely
that the nature of the allegations will be similar to those contained in the
December 2008 filing. In the opinion of our management, we do not reasonably
expect this case to have a material adverse effect on our business and financial
condition.
We
face a variety of risks that may affect our financial condition, results of
operations or business, and many of those risks are driven by factors that we
cannot control or predict. The following discussion addresses those risks that
management believes are the most significant, although there may be other risks
that could arise, or may prove to be more significant than expected, that may
affect our financial condition, results of operations or business.
RISKS
RELATED TO OUR COMPANY
We
have a history of operating losses which we expect to continue, and we may not
be able to achieve profitability.
We have a
history of losses and expect to continue to incur operating and net losses for
the foreseeable future. We incurred a net loss of approximately $17.0 million
for the year ended December 31, 2008, a net loss of approximately $16.4 million
for the year ended December 31, 2007 and a net loss of approximately $11.3
million for the nine months ended September 30, 2009. As of September 30, 2009,
our accumulated deficit was approximately $52.4 million. We have not achieved
profitability on a quarterly or on an annual basis. We may not be able to
achieve profitability. Our revenues for the three months ended September 30,
2009 were approximately $1.7 million. If our revenues grow more slowly than
anticipated or if our operating expenses exceed expectations, then we may not be
able to achieve profitability in the near future or at all, which may depress
the price for our common stock.
The
effects of the current global economic crisis may impact our business, operating
results, or financial condition.
The current
global economic crisis has caused significant disruptions and extreme volatility
in global financial markets and increased rates of default and bankruptcy, and
has significantly impacted levels of consumer spending. The current
deterioration in economic conditions has caused and could cause additional
decreases in or delays in advertising spending in general. In addition, many
industry forecasts are predicting negative growth or a decrease in the rate of
growth in certain channels of online advertising in 2009. These developments
could negatively affect our business, operating results, or financial condition
in a number of ways. Current or potential customers such as advertisers may
delay or decrease spending with us or may not pay us or may delay paying us for
previously purchased services. For example, the sales cycle in our industry has
recently shortened significantly. The sales cycle in our business traditionally
ranged from three to nine months due to the general practice for all advertiser
categories to plan at least one quarter in advance. However, as a result of the
current global economic crisis, advertising buys in all mediums have shortened
significantly. In addition, if consumer spending continues to decrease, this may
affect consumer’s behavior on the Internet and online advertising
spending.
A
limited number of advertisers account for a significant percentage of our
revenue, and a loss of one or more of these advertisers could materially
adversely affect our results of operations.
We generate
almost entirely all of our revenues from advertisers on our network. For the
nine months ended September 30, 2009 and the year ended December 31, 2008,
revenues from our five largest advertisers accounted for 35% and 36%,
respectively, of our revenues. For the nine months ended September 30, 2009 and
the year ended December 31, 2008, our largest advertiser accounted for 9% and
12%, respectively, of our revenues. Our advertisers can generally terminate
their contracts with us at any time. The loss of one or more of the advertisers
that represent a significant portion of our revenues could materially adversely
affect our results of operations. In addition, our relationships with publishers
participating in our network require us to bear the risk of non-payment of
advertising fees from advertisers. Accordingly, the non-payment or late payment
of amounts due to us from a significant advertiser could materially adversely
affect our financial condition and results of operations.
A
small number of publishers account for a substantial percentage of our revenues
and our failure to develop and sustain long-term relationships with our
publishers, or the reduction in traffic of a current publisher in our network,
could limit our ability to generate revenues.
For the nine
months ended September 30, 2009 and the year ended December 31, 2008,
advertising revenues connected to our largest publisher accounted for
approximately 53% and 66%, respectively, of our revenues. Until the sales cycle
on the newest sites in our publisher network matures, a small number of
publishers will account for a substantial percentage of our revenues. We cannot
assure you that any of the publishers participating in our network will continue
their relationships with us. Moreover, we may lose publishers to competing
publisher networks that have longer operating histories, the ability to attract
higher ad rates, greater brand recognition, or the ability to generate greater
financial, marketing and other resources. Furthermore, we cannot assure you that
we would be able to replace a departed publisher with another publisher with
comparable traffic patterns and demographics, if at all. Accordingly, our
failure to develop and sustain long-term relationships with publishers or the
reduction in traffic of a current publisher in our network could limit our
ability to generate revenues.
Our
future financial results, including our expected revenues, are unpredictable and
difficult to forecast.
Our revenues,
expenses and operating results fluctuate from quarter to quarter and are
unpredictable which could increase the volatility of the price of our common
stock. We expect that our operating results will continue to fluctuate in the
future due to a number of factors, some of which are beyond our
control.
These factors
include:
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our
ability to attract and incorporate publishers into our
network;
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the
ability of the publishers in our network to attract visitors to their
websites;
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the
amount and timing of costs relating to the expansion of our operations,
including sales and marketing expenditures;
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our
ability to control our gross margins;
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our
ability to generate revenues through third-party advertising and our
ability to be paid fees for advertising on our network;
and
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our
ability to obtain cost-effective advertising throughout our
network.
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Due to all of
these factors, our operating results may fall below the expectations of
investors, which could cause a decline in the price of our common stock. In
addition, since we expect that our operating results will continue to fluctuate
in the future, it is difficult for us to accurately forecast our
revenues.
Our
limited operating history in the operation of an online entertainment and media
network of websites makes evaluation of our business difficult, and our revenues
are currently insufficient to generate positive cash flows from our
operations.
We have
limited historical financial data upon which to base planned operating expenses
or forecast accurately our future operating results. We formally launched our
website in October 2004 and only began building our network during 2007. We
formally launched our network in February 2008 and we rebranded as Betawave
Corporation in January 2009. Our revenues are currently insufficient to generate
positive cash flows from our operations.
We
will likely need to raise additional capital to meet our business requirements
in the future and such capital raising may be costly or difficult to obtain and
could dilute current stockholders’ ownership interests.
We will
likely need to raise additional capital in the future, which may not be
available on reasonable terms or at all, especially in light of the recent
downturn in the economy and dislocations in the credit and capital markets. The
raising of additional capital will likely dilute our current stockholders’
ownership interests. We may need to raise additional funds through public or
private debt or equity financings to meet various objectives including, but not
limited to:
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pursuing
growth opportunities, including more rapid expansion;
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acquiring
complementary businesses
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growing
our network, including the number of publishers and advertisers in our
network;
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hiring
qualified management and key employees;
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responding
to competitive pressures; and
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maintaining
compliance with applicable
laws.
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In addition,
the raising of any additional capital through the sale of equity or
equity-backed securities would dilute our current stockholders’ ownership
percentages and would also result in a decrease in the fair market value of our
equity securities because our assets would be owned by a larger pool of
outstanding equity. The terms of those securities issued by us in future capital
transactions may be more favorable to new investors, and may include
preferences, superior voting rights and the issuance of warrants or other
derivative securities, which may have a further dilutive effect.
If we are
unable to obtain required additional capital, we may have to curtail our growth
plans or cut back on existing business and, further, we may not be able to
continue operating if we do not generate sufficient revenues from operations
needed to stay in business.
We may incur
substantial costs in pursuing future capital financing, including investment
banking fees, legal fees, accounting fees, securities law compliance fees,
printing and distribution expenses and other costs. We may also be required to
recognize non-cash expenses in connection with certain securities we issue, such
as convertible notes and warrants, which may adversely impact our financial
condition.
Our
auditors have indicated that there are a number of factors that raise
substantial doubt about our ability to continue as a going concern.
Our audited
consolidated financial statements for the fiscal year ended December 31, 2008
were prepared on a going concern basis in accordance with U.S. GAAP. The going
concern basis of presentation assumes that we will continue in operation for the
foreseeable future and will be able to realize our assets and discharge our
liabilities and commitments in the normal course of business. However, the
report of our independent registered public accounting firm on our audited
consolidated financial statements for the fiscal year ended December 31, 2008
has indicated that we have incurred net loss since our inception, have
experienced liquidity problems, negative cash flows from operations, and a
working capital deficit at December 31, 2008, that raise substantial doubt about
our ability to continue as a going concern.
If
we acquire or invest in other companies, assets or technologies and we are not
able to integrate them with our business, or we do not realize the anticipated
financial and strategic goals for any of these transactions, our financial
performance may be impaired.
As part of
our growth strategy, we occasionally consider acquiring or making investments in
companies, assets or technologies that we believe are strategic to our business.
We do not have extensive experience in integrating new businesses or
technologies, and if we do succeed in acquiring or investing in a company or
technology, we will be exposed to a number of risks, including:
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we
may find that the acquired company or technology does not further our
business strategy, that we overpaid for the acquired company or technology
or that the economic conditions underlying our acquisition decision have
changed;
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we
may have difficulty integrating the assets, technologies, operations or
personnel of an acquired company, or retaining the key personnel of the
acquired company;
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our
ongoing business and management’s attention may be disrupted or diverted
by transition or integration issues and the complexity of managing
geographically or culturally diverse enterprises;
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we
may encounter difficulty entering and competing in new markets or
increased competition, including price competition or intellectual
property litigation; and
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we
may experience significant problems or liabilities associated with
technology and legal contingencies relating to the acquired business or
technology, such as intellectual property or employment
matters.
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If we were to
proceed with one or more significant acquisitions or investments in which the
consideration included cash, we could be required to use a substantial portion
of our available cash. To the extent we issue shares of capital stock or other
rights to purchase capital stock, including options and warrants, existing
stockholders might be diluted.
Our
recently-announced refined business model and rebranding of our business using
the “Betawave” name carry a number of risks that could adversely affect our
company, business prospects and operating results.
We recently
refined our business model to become an attention-based media company and
launched a campaign to rebrand our business using the “Betawave” name, including
changing the name of our company from GoFish Corporation to Betawave
Corporation. If we are unable to effectively implement our refined business
model and rebranding campaign, it would adversely affect our company, business
prospects and operating results. Our future success will depend in significant
part on our ability to forge contractual relationships with additional
third-party websites (“publishers”) under which we assume responsibility for
selling their inventory of available advertising opportunities, as well as
syndicating video content to them. We are susceptible to the risks of operating
an advertising-supported business. There is no guarantee that we will be able to
enter into contracts with such publishers and, if we are unable to enter into
such contractual relationships, our business and revenues will be adversely
affected. In addition, as a result of our rebranding campaign, we may lose any
brand recognition associated with the “GoFish” name that we previously
established with advertisers, publishers in our network and other partners. We
may not be able to establish, maintain or enhance brand recognition associated
with the “Betawave” name that is comparable to the brand recognition that we may
have previously had associated with the “GoFish” name. If we fail to establish,
maintain and enhance brand recognition associated with the “Betawave” name, it
could affect our ability to attract advertisers, publishers in our network and
other partners, which could adversely affect our ability to generate revenues
and could impede our business plan. Furthermore, in connection with
the development and implementation of our refined business model and rebranding
campaign, we have spent, and continue to expect to spend, additional time and
costs, including those associated with advertising and marketing efforts and
building a network that includes other publishers.
Our
business model is unproven and may not be viable.
Our business
model is new and unproven and reflects our belief that brand advertisers will
alter their advertising strategy in light of the changes in online consumer
behavior and will spend advertising dollars differently than they traditionally
have – with the large Internet portals. In addition, we believe that having few
quality publishers which allows us to execute advertising campaigns efficiently,
is beneficial to having a large number of medium and small publishers. If we are
mistaken in our beliefs, it could adversely affect our ability to generate
revenues.
Our
business depends on enhancing our brand, and any failure to enhance our brand
would hurt our ability to expand our base of advertisers and publishers in our
network.
Enhancing our
brand is critical to expanding our base of advertisers, publishers in our
network, and other partners. We believe that the importance of brand recognition
will increase due to the relatively low barriers to entry in the Internet
market. If we fail to enhance our brand, or if we incur excessive expenses in
this effort, our business, operating results and financial condition will be
materially and adversely affected. Enhancing our brand will depend largely on
our ability to provide high-quality products and services, which we may not do
successfully.
We
intend to expand our operations and increase our expenditures in an effort to
grow our business. If we are unable to achieve or manage significant growth and
expansion, or if our business does not grow as we expect, our operating results
may suffer.
Our business
plan anticipates continued additional expenditure on development and other
growth initiatives. We may not achieve significant growth. If achieved,
significant growth would place increased demands on our management, accounting
systems, network infrastructure and systems of financial and internal controls.
We may be unable to expand associated resources and refine associated systems
fast enough to keep pace with expansion. If we fail to ensure that our
management, control and other systems keep pace with growth, we may experience a
decline in the effectiveness and focus of our management team, problems with
timely or accurate reporting, issues with costs and quality controls and other
problems associated with a failure to manage rapid growth, all of which would
harm our results of operations.
Payments
to certain of our publishers have exceeded the related fees we receive from our
advertisers.
We are
obligated under certain agreements to make non-cancelable guaranteed minimum
revenue share payments to certain of our publishers. In these agreements, we
promise to make these minimum payments to the publisher for a pre-negotiated
period of time. At September 30, 2009, our aggregate outstanding non-cancelable
guaranteed minimum revenue share commitments totaled $4.05 million through 2010.
It is difficult to forecast with certainty the fees that we will earn under
agreements with guarantees, and sometimes the fees we earn fall short of the
guaranteed minimum payment amounts.
Losing
key personnel or failing to attract and retain other highly skilled personnel
could affect our ability to successfully grow our business.
Our future
performance depends substantially on the continued service of our senior
management, sales and other key personnel. We do not currently maintain key
person life insurance. If our senior management were to resign or no longer be
able to serve as our employees, it could impair our revenue growth, business and
future prospects. In addition, the success of our monetization and sales plans
depends on our ability to retain people in direct sales and to hire additional
qualified and experienced individuals into our sales organization.
To meet our
expected growth, we believe that our future success will depend upon our ability
to hire, train and retain other highly skilled personnel. Competition for
quality personnel is intense among technology and Internet-related businesses
such as ours. We cannot be sure that we will be successful in hiring,
assimilating or retaining the necessary personnel, and our failure to do so
could cause our operating results to fall below our projected growth and profit
targets.
Decreased
effectiveness of equity compensation could adversely affect our ability to
attract and retain employees and harm our business.
We have
historically used stock options as a key component of our employee compensation
program in order to align employees’ interests with the interests of our
stockholders, encourage employee retention, and provide competitive compensation
packages. Volatility or lack of positive performance in our stock price may
adversely affect our ability to retain key employees, many of whom have been
granted stock options, or to attract additional highly-qualified personnel. As
of August 10, 2009, a majority of our outstanding employee stock options have
exercise prices in excess of the stock price on that date.
Rules
issued under the Sarbanes-Oxley Act of 2002 may make it difficult for us to
retain or attract qualified officers and directors, which could adversely affect
the management of our business and our ability to retain the trading status of
our common stock on the OTC Bulletin Board.
We may be
unable to attract and retain those qualified officers, directors and members of
board committees required to provide for our effective management because of
rules and regulations that govern publicly held companies, including, but not
limited to, certifications by principal executive officers. The enactment of the
Sarbanes-Oxley Act of 2002 has resulted in the issuance of rules and regulations
and the strengthening of existing rules and regulations by the SEC. The
perceived increased personal risk associated with these recent changes may deter
qualified individuals from accepting roles as directors and executive
officers.
We may have
difficulty attracting and retaining directors with the requisite qualifications.
If we are unable to attract and retain qualified officers and directors, the
management of our business and our ability to retain the quotation of our common
stock on the OTC Bulletin Board or obtain a listing of our common stock on a
stock exchange or NASDAQ could be adversely affected.
Our
management has identified a number of material weaknesses in our internal
control over financial reporting as of December 31, 2008, which, if not
sufficiently remediated, could result in material misstatements in our annual or
interim financial statements in future periods and the ineffectiveness of our
disclosure controls and procedures.
In connection
with our management’s assessment of our internal control over financial
reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, our
management identified a number of material weaknesses in our internal control
over financial reporting as of December 31, 2008. A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis by our internal controls. As a result, our
management concluded that we did not maintain effective internal control over
financial reporting as of December 31, 2008. In addition, based on the
evaluation and the identification of these material weaknesses in our internal
control over financial reporting, our Chief Executive Officer and our Chief
Accounting Officer concluded that, as of September 30, 2009, our disclosure
controls and procedures were not effective.
We are in the
process of implementing remediation efforts with respect to our control
environment and these material weaknesses. However, if these remediation efforts
are insufficient to address these material weaknesses, or if additional material
weaknesses in our internal control over financial reporting are discovered in
the future, we may fail to meet our future reporting obligations, our
consolidated financial statements may contain material misstatements and our
financial condition and results of operations may be adversely impacted. Any
such failure could also adversely affect our results of periodic management
assessment regarding the effectiveness of our internal control over financial
reporting, as required by the SEC’s rules under Section 404 of the
Sarbanes-Oxley Act of 2002. The existence of a material weakness could result in
errors in our consolidated financial statements that could result in a
restatement of financial statements or failure to meet reporting obligations,
which in turn could cause investors to lose confidence in reported financial
information leading to a decline in our stock price.
Although we
believe that these remediation efforts will enable us to improve our internal
control over financial reporting, we cannot assure you that these remediation
efforts will remediate the material weaknesses identified or that any additional
material weaknesses will not arise in the future due to a failure to implement
and maintain adequate internal control over financial reporting. Furthermore,
there are inherent limitations to the effectiveness of controls and procedures,
including the possibility of human error and circumvention or overriding of
controls and procedures.
We
may have undisclosed liabilities that could harm our revenues, business,
prospects, financial condition and results of operations.
Our present
management had no affiliation with Unibio Inc. (which changed its name to GoFish
Corporation on September 14, 2006 and subsequently to Betawave Corporation on
January 20, 2009) prior to the October 27, 2006 mergers, in which we acquired
GoFish Technologies, Inc. as a wholly-owned subsidiary in a reverse merger
transaction and IDT Acquisition Corp., a wholly-owned subsidiary of the Company,
simultaneously merged with and into Internet Television Distribution, Inc. as a
wholly-owned subsidiary. Pursuant to the mergers, the officers and board members
of Betawave Corporation resigned and were replaced by officers of GoFish
Technologies, Inc. along with newly elected board members.
Although the
October 27, 2006 Agreement and Plan of Merger contained customary
representations and warranties regarding our pre-merger operations and customary
due diligence was performed, all of our pre-merger material liabilities may not
have been discovered or disclosed. We do not believe this to be the case but can
offer no assurance as to claims which may be made against us in the future
relating to such pre-merger operations. The Agreement and Plan of Merger and
Reorganization contained a limited, upward, post-closing, adjustment to the
number of shares of common stock issuable to pre-merger GoFish Technologies Inc.
and Internet Television Distribution Inc. shareholders as a means of providing a
remedy for breaches of representations made by us in the Agreement and Plan of
Merger and Reorganization, including representations related to any undisclosed
liabilities, however, there is no comparable protection offered to our other
stockholders. Any such undisclosed pre-merger liabilities could harm our
revenues, business, prospects, financial condition and results of operations
upon our acceptance of responsibility for such liabilities.
Regulatory
requirements may materially adversely affect us.
We are
subject to various regulatory requirements, including the Sarbanes-Oxley Act of
2002. Section 404 of the Sarbanes-Oxley Act of 2002 requires the evaluation and
determination of the effectiveness of a company’s internal control over its
financial reporting. In connection with management’s assessment of our internal
control over financial reporting as required under Section 404 of the
Sarbanes-Oxley Act of 2002, we identified material weaknesses in our internal
control over financial reporting as of December 31, 2008. As a result, we have
incurred additional costs and may suffer adverse publicity and other
consequences of this determination.
We
may be subject to claims relating to certain actions taken by our former
external legal counsel.
In February
2007, we learned that approximately half of the three million shares of our
common stock issued as part of a private placement transaction we consummated in
October 2006 to entities controlled by Louis Zehil, who at the time of the
purchase was a partner of our former external legal counsel for the private
placement transaction, McGuire Woods LLP, may have been improperly traded. We
believe that Mr. Zehil improperly caused our former transfer agent not to place
a required restrictive legend on the certificate for these three million shares
and that Mr. Zehil then caused the entities he controlled to resell certain of
these shares. Mr. Zehil’s conduct was reported to the SEC, and the SEC recently
sued Mr. Zehil in connection with this matter and further alleged that Mr. Zehil
engaged in a similar fraudulent scheme with respect to six additional public
companies represented at the relevant time by McGuire Woods LLP. Mr. Zehil also
is the subject of criminal charges brought by federal prosecutors in connection
with the fraudulent scheme.
In December
2008, Sunrise Equity Partners, L.P. (“Sunrise”) brought an action against us in
the United States District Court in the Southern District of New York on behalf
of itself and all other purchasers of our securities in our 2006 private
placement. In the complaint, Sunrise alleged, among other things, that we
breached the representation in the subscription agreement for the 2006 private
placement which provided that no purchaser in the private placement had an
agreement or understanding on terms that differed substantially from those of
any other investor. Sunrise claimed that we breached this representation because
Mr. Zehil’s entities received certificates without any restrictive legend while
all other investors in the private placement received certificates with such
restrictive legends. In February 2009, the complaint was dismissed without
prejudice. We have learned that Sunrise refiled the lawsuit in New York state
court in August 2009. As of this date, we have not been served with the
complaint, but we believe it is likely that the nature of the allegations will
be similar to those contained in the December 2008 filing. In addition, one or
more other stockholders could also claim that they somehow suffered a loss as a
result of Mr. Zehil’s conduct and attempt to hold us responsible for their
losses. If any such claims are successfully made against us and we are not
adequately indemnified for those claims from available sources of
indemnification, then such claims could have a material adverse effect on our
financial condition. We also may incur significant costs resulting from our
investigation of this matter, defending any litigation against us relating to
this matter, and our cooperation with governmental authorities. We may not be
adequately indemnified for such costs from available sources of
indemnification.
RISKS
RELATED TO OUR BUSINESS
We
may be unable to attract advertisers to our network.
Advertising
revenues comprise, and are expected to continue to comprise, almost entirely all
of our revenues. Most large advertisers have fixed advertising budgets, only a
small portion of which have traditionally been allocated to Internet
advertising. In addition, the overall market for advertising, including Internet
advertising, has been generally characterized in recent periods by softness of
demand, reductions in marketing and advertising budgets, and by delays in
spending of budgeted resources. Advertisers may continue to focus most of their
efforts on traditional media or may decrease their advertising spending. If we
fail to convince advertisers to spend a portion of their advertising budgets
with us, we will be unable to generate revenues from advertising as we
intend.
Even if we
initially attract advertisers to our network, they may decide not to advertise
to our community if their investment does not have the desired result, or if we
do not deliver their advertisements in an appropriate and effective manner. If
we are unable to provide value to our advertisers, advertisers may reduce the
rates they are willing to pay or may not continue to place ads with
us.
We
generate almost entirely all of our revenues from advertising, and the reduction
in spending by, or loss of, advertisers could seriously harm our
business.
We generate
almost entirely all of our revenues from advertisers on our network. Our
advertisers can generally terminate their contracts with us at any time. If we
are unable to remain competitive and provide value to our advertisers, they may
stop placing ads with us, which would negatively affect our 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 reduce our revenues or negatively impact our ability to grow
our revenues. We also may encounter difficulty collecting from our advertisers.
We are a relatively small company and advertisers may choose to pay our bills
after paying debts owed to their larger clients.
If
we fail to compete effectively against other Internet advertising companies, we
could lose customers or advertising inventory and our revenues and results of
operations could decline.
The Internet
advertising markets are characterized by rapidly changing technologies, evolving
industry standards, frequent new product and service introductions, and changing
customer demands. The introduction of new products and services embodying new
technologies and the emergence of new industry standards and practices could
render our existing products and services obsolete and unmarketable or require
unanticipated technology or other investments. Our failure to adapt successfully
to these changes could harm our business, results of operations and financial
condition.
The market
for Internet advertising and related products and services is highly
competitive. We expect this competition to continue to increase, in part because
there are no significant barriers to entry to our industry. Increased
competition may result in price reductions for advertising space, reduced
margins and loss of market share. We compete against well-capitalized
advertising companies as well as smaller companies.
We compete
against self-serve advertising networks such as Google AdSense, Valueclick,
Advertising.com and Tribal Fusion that serve impressions onto a wide variety of
mostly small and medium sites. We compete against behavioral networks, such as
Tacoda and Blue Lithium, which serve the same inventory as general networks, but
add behavioral targeting. We also compete against other full-service advertising
networks that provide a more complete service when selling advertising, such as
Gorilla Nation and Glam.
If existing
or future competitors develop or offer products or services that provide
significant performance, price, creative or other advantages over those offered
by us, our business, results of operations and financial condition could be
negatively affected. Many current and potential competitors enjoy competitive
advantages over us, such as longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical, sales and marketing resources. As a result, we may not be able to
compete successfully. If we fail to compete successfully, we could lose
customers or advertising inventory and our revenues and results of operations
could decline.
We
face competition from websites catering to consumers, as well as traditional
media companies, and we may not be included in the advertising budgets of large
advertisers, which could harm our revenues and results of
operations.
In the online
advertising market, we compete for advertising dollars with all websites
catering to consumers, including portals, search engines and websites belonging
to other advertising networks. We also compete with traditional advertising
media, such as direct mail, television, radio, cable, and print, for a share of
advertisers’ total advertising budgets. Most large advertisers have fixed
advertising budgets, a small portion of which is allocated to Internet
advertising. We expect that large advertisers will continue to focus most of
their advertising efforts on traditional media. If we fail to convince these
companies to spend a portion of their advertising budgets with us, or if our
existing advertisers reduce the amount they spend on our programs, our revenues
and results of operations would be harmed.
We
may be unable to attract and incorporate high quality publishers into our
network.
Or future
revenues and success depend upon, among other things, our ability to attract and
contract with high-quality publishers to participate in our network. We cannot
assure you that publishers will want to participate, or continue to participate,
in our network. If we are unable to successfully attract publishers to our
network, it could adversely affect our ability to generate revenues and could
impede our business plan. Even if we do successfully attract publishers, there
can be no assurance that we will be able to incorporate these publishers into
our network without substantial costs, delays or other problems.
Our
services may fail to maintain the market acceptance they have achieved or to
grow beyond current levels, which would adversely affect our competitive
position.
We have not
conducted any independent studies with regard to the feasibility of our proposed
business plan, present and future business prospects and capital requirements.
Our services may fail to gain market acceptance and our infrastructure to enable
such expansion is still limited. Even if adequate financing is available and our
services are ready for market, we cannot be certain that our services will find
sufficient acceptance in the marketplace to fulfill our long and short-term
goals. Failure of our services to achieve or maintain market acceptance would
have a material adverse effect on our business, financial condition and results
of operations.
We
may fail to select the best publishers for our network.
The number of
websites has increased substantially in recent years. Our publishers’ websites
face numerous competitors both on the Internet, and in the more traditional
broadcasting arena. Some of these companies have substantially longer operating
histories, significantly greater financial, marketing and technical expertise,
and greater resources and name recognition than we do. Moreover, the offerings
on our network may not be sufficiently distinctive or may be copied by others.
If we fail to attain commercial acceptance of our services and to be competitive
with these companies, we may not ever generate meaningful revenues. In addition,
new companies may emerge at any time with services that are superior, or that
the marketplace perceives are superior, to ours.
If
we fail to anticipate, identify and respond to the changing tastes and
preferences of consumers, our business is likely to suffer.
Our business
and results of operations depend upon the appeal of the sites in our network to
consumers. The tastes and preferences of our consumers frequently change, and
our success depends on our ability to anticipate, identify and respond to these
changing tastes and preferences by incorporating appropriate publishers into our
network. If we are unable to successfully anticipate, identify or respond to
changing tastes and preferences of consumers or misjudge the market for our
network, we may not be able to establish relationships with the most popular
publishers, which may cause our revenues to decline.
We
may be subject to market risk and legal liability in connection with the data
collection capabilities of the publishers in our network.
Many
components of websites on our network are interactive Internet applications that
by their very nature require communication between a client and server to
operate. To provide better consumer experiences and to operate effectively, many
of the websites on our network collect certain information from users. The
collection and use of such information may be subject to U.S. state and federal
privacy and data collection laws and regulations, as well as foreign laws such
as the EU Data Protection Directive. Recent growing public concern regarding
privacy and the collection, distribution and use of information about Internet
users has led to increased federal, state and foreign scrutiny and legislative
and regulatory activity concerning data collection and use practices. Any
failure by us to comply with applicable federal, state and foreign laws and the
requirements of regulatory authorities may result in, among other things, in
liability and materially harm our business.
The websites
on our network post privacy policies concerning the collection, use and
disclosure of user data, including that involved in interactions between our
client and server products. Because of the evolving nature of our business and
applicable law, such privacy policies may now or in the future fail to comply
with applicable law. The websites on our network are subject to various federal
and state laws concerning the collection and use of information regarding
individuals. These laws include the Children’s Online Privacy Protection Act,
the Federal Drivers Privacy Protection Act of 1994, the privacy provisions of
the Gramm-Leach-Bliley Act, the Federal CAN-SPAM Act of 2003, as well as other
laws that govern the collection and use of information. We cannot assure you
that the websites on our network are currently in compliance, or will remain in
compliance, with these laws and their own privacy policies. Any failure to
comply with posted privacy policies, any failure to conform privacy policies to
changing aspects of the business or applicable law, or any existing or new
legislation regarding privacy issues could impact the market for our publishers’
websites, technologies and products, and this may adversely affect our
business.
Activities
of advertisers or publishers in our network could damage our reputation or give
rise to legal claims against us.
The promotion
of the products and services by publishers in our network may not comply with
federal, state and local laws, including but not limited to laws and regulations
relating to the Internet. Failure of our publishers to comply with federal,
state or local laws or our policies could damage our reputation and adversely
affect our business, results of operations or financial condition. We cannot
predict whether our role in facilitating our customers’ marketing activities
would expose us to liability under these laws. Any claims made against us could
be costly and time-consuming to defend. If we are exposed to this kind of
liability, we could be required to pay substantial fines or penalties, redesign
our business methods, discontinue some of our services or otherwise expend
resources to avoid liability.
We also may
be held liable to third parties for the content in the advertising we deliver on
behalf of our publishers. We may be held liable to third parties for content in
the advertising we serve if the music, artwork, text or other content involved
violates the copyright, trademark or other intellectual property rights of such
third parties or if the content is defamatory, deceptive or otherwise violates
applicable laws or regulations. Any claims or counterclaims could be time
consuming, result in costly litigation or divert management’s
attention.
We
depend on third-party Internet, telecommunications and technology providers for
key aspects in the provision of our services and any failure or interruption in
the services that third parties provide could disrupt our business.
We depend
heavily on several third-party providers of Internet and related
telecommunication services, including hosting and co-location facilities, as
well as providers of technology solutions, including software developed by third
party vendors, in delivering our services. In addition, we use third party
vendors to assist with product development, campaign deployment, video streaming
for Betawave TV and support services for some of our products and services.
These companies may not continue to provide services or software to us without
disruptions in service, at the current cost or at all.
If the
products and services provided by these third-party vendors are disrupted or not
properly supported, our ability to provide our products and services would be
adversely impacted. In addition, any financial or other difficulties our third
party providers face may have negative effects on our business, the nature and
extent of which we cannot predict. While we believe our business relationships
with our key vendors are good, a material adverse impact on our business would
occur if a supply or license agreement with a key vendor is materially revised,
is not renewed or is terminated, or the supply of products or services were
insufficient or interrupted. The costs associated with any transition to a new
service provider could be substantial, require us to reengineer our computer
systems and telecommunications infrastructure to accommodate a new service
provider and disrupt the services we provide to our customers. This process
could be both expensive and time consuming and could damage our relationships
with customers.
In addition,
failure of our Internet and related telecommunications providers to provide the
data communications capacity in the time frame we require could cause
interruptions in the services we provide. Unanticipated problems affecting our
computer and telecommunications systems in the future could cause interruptions
in the delivery of our services, causing a loss of revenues and potential loss
of customers.
More
individuals are using non-PC devices to access the Internet. We may be unable to
capture market share for advertising on these devices.
The number of
people who access the Internet through devices other than personal computers,
including mobile telephones, smart phones, handheld computers and video game
consoles, has increased dramatically in the past few years. Most of the
publishers in our network originally designed their services for rich, graphical
environments such as those available on desktop and laptop computers. The lower
resolution, functionality and memory associated with alternative devices make
the use of these websites difficult and the publishers in our network developed
for these devices may not be compelling to users of alternative devices. In
addition, the creative advertising solutions that thrive in rich environments
may be less attractive to advertisers on these devises. The use of such creative
advertising is part what makes our services attractive to advertisers and is
what most contributes to our margins. If we are slow to develop services and
technologies that are more compatible with non-PC communications devices or if
we are unable to attract and retain a substantial number of publishers that
focus on alternative device users to our online services, we will fail to
capture a significant share of an increasingly important portion of the market
for online services, which could adversely affect our business.
RISKS
RELATED TO OUR INDUSTRY
Anything
that causes users of websites on our network to spend less time on their
computers, including seasonal factors and national events, may impact our
profitability.
Anything that
diverts users of our network from their customary level of usage could adversely
affect our business. Geopolitical events such as war, the threat of war or
terrorist activity, and natural disasters such as hurricanes or earthquakes all
could adversely affect our profitability. Similarly, our results of operations
historically have varied seasonally because many of our users reduce their
activities on our website with the onset of good weather during the summer
months, and on and around national holidays.
If
the delivery of Internet advertising on the Web is limited or blocked, demand
for our services may decline.
Our business
may be adversely affected by the adoption by computer users of technologies that
harm the performance of our services. For example, computer users may use
software designed to filter or prevent the delivery of Internet advertising;
block, disable or remove cookies used by our ad serving technologies; prevent or
impair the operation of other online tracking technologies; or misrepresent
measurements of ad penetration and effectiveness. We cannot assure you that the
proportion of computer users who employ these or other similar technologies will
not increase, thereby diminishing the efficacy of our products and services. In
the event that one or more of these technologies became more widely adopted by
computer users, demand for our products and services would decline.
Advertisers
may be reluctant to devote a portion of their budgets to marketing technology
and data products and services or online advertising.
Companies
doing business on the Internet, including us, must compete with traditional
advertising media, including television, radio, cable and print, for a share of
advertisers' total marketing budgets. Potential customers may be reluctant to
devote a significant portion of their marketing budget to online advertising or
marketing technology and data products and services if they perceive the
Internet to be a limited or ineffective marketing medium. Any shift in marketing
budgets away from marketing technology and data products or services or online
advertising spending, or our offerings in particular, could materially and
adversely affect our business, results of operations or financial condition. In
addition, online advertising could lose its appeal to those advertisers using
the Internet as a result of its ad performance relative to other
media.
The
lack of appropriate measurement standards or tools may cause us to lose
customers or prevent us from charging a sufficient amount for our products and
services.
Because many
online marketing technology and data products and services remain relatively new
disciplines, there is often no generally accepted methods or tools for measuring
the efficacy of online marketing and advertising as there are for advertising in
television, radio, cable and print. Therefore, many advertisers may be reluctant
to spend sizable portions of their budget on online marketing and advertising
until more widely accepted methods and tools that measure the efficacy of their
campaigns are developed.
We could lose
customers or fail to gain customers if our services do not utilize the measuring
methods and tools that may become generally accepted. Further, new measurement
standards and tools could require us to change our business and the means used
to charge our customers, which could result in a loss of customer revenues and
adversely impact our business, financial condition and results of
operation.
We
may infringe on third-party intellectual property rights and could become
involved in costly intellectual property litigation.
Other parties
claiming infringement by the advertisements or video content on the sites in our
network could sue us. We may be liable to third parties for elements of
advertising campaigns designed by us, which may violate the copyright,
trademark, or other intellectual property rights of such third
parties.
In addition,
any future claims, with or without merit, could impair our business and
financial condition because they could:
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result
in significant litigation costs;
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divert
the attention of management;
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divert
resources;
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require
us to enter into royalty and licensing agreements that may not be
available on terms acceptable to us or at all; or
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require
us to stop using the intellectual property that is the subject of the
claim.
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We
may experience unexpected expenses or delays in service enhancements if we are
unable to license third-party technology on commercially reasonable
terms.
We rely on a
variety of technology that we license from third parties. These third-party
technology licenses might not continue to be available to us on commercially
reasonable terms or at all. If we are unable to obtain or maintain these
licenses on favorable terms, or at all, our ability to efficiently deliver
advertisements at the best rates available might be impaired and this would
adversely impact our business.
It
is not yet clear how laws designed to protect children that use the Internet may
be interpreted and enforced, and whether new similar laws will be enacted in the
future which may apply to our business in ways that may subject us to potential
liability.
The
Children’s Online Privacy Protection Act (“COPPA”) imposes civil penalties for
collecting personal information from children under the age of 13 without
complying with the requirements of COPPA. Publishers in our network may violate
COPPA on their websites. Although COPPA is a relatively new law, the Federal
Trade Commission (the “FTC”) has recently been more active in enforcing
violations with COPPA. In the last two years, the FTC has brought a number of
actions against website operators for failure to comply with COPPA requirements,
and has imposed fines of up to $3 million. Future legislation similar to these
Acts could subject us to potential liability if we were deemed to be
noncompliant with such rules and regulations.
Increasing
governmental regulation of the Internet could harm our business.
The
publishers in our network are subject to the same federal, state and local laws
as other companies conducting business on the Internet. Today there are
relatively few laws specifically directed towards conducting business on the
Internet. However, due to the increasing popularity and use of the Internet,
many laws and regulations relating to the Internet are being debated at the
state and federal levels. These laws and regulations could cover issues such as
user privacy, freedom of expression, pricing, fraud, quality of products and
services, advertising, intellectual property rights and information security.
Furthermore, the growth and development of Internet commerce may prompt calls
for more stringent consumer protection laws that may impose additional burdens
on companies conducting business over the Internet.
Applicability
to the Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, libel, obscenity and personal
privacy could also harm our business. The majority of these laws were adopted
before the advent of the Internet, and do not contemplate or address the unique
issues raised by the Internet. The courts are only beginning to interpret those
laws that do reference the Internet, such as the Digital Millennium Copyright
Act and COPPA, and their applicability and reach are therefore uncertain. These
current and future laws and regulations could harm our business, results of
operation and financial condition.
In addition,
several telecommunications carriers have requested that the Federal
Communications Commission regulate telecommunications over the Internet. Due to
the increasing use of the Internet and the burden it has placed on the current
telecommunications infrastructure, telephone carriers have requested the FCC to
regulate Internet service providers and impose access fees on those providers.
If the FCC imposes access fees, the costs of using the Internet could increase
dramatically which could result in the reduced use of the Internet as a medium
for commerce and have a material adverse effect on our Internet business
operations.
We
depend on the growth of the Internet and Internet infrastructure for our future
growth, and any decrease or less than anticipated growth in Internet usage could
adversely affect our business prospects.
Our future
revenues and profits, if any, depend upon the continued widespread use of the
Internet as an effective commercial and business medium. Factors which could
reduce the widespread use of the Internet include:
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possible
disruptions or other damage to the Internet or telecommunications
infrastructure;
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failure
of the individual networking infrastructures of our merchant advertisers
and distribution partners to alleviate potential overloading and delayed
response times;
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a
decision by merchant advertisers to spend more of their marketing dollars
in offline areas;
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increased
governmental regulation and taxation; and
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actual
or perceived lack of security or privacy
protection.
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In addition,
websites have experienced interruptions in their service as a result of outages
and other delays occurring throughout the Internet network infrastructure, and
as a result of sabotage, such as electronic attacks designed to interrupt
service on many websites. The Internet could lose its viability as a commercial
medium due to reasons including increased governmental regulation or delays in
the development or adoption of new technologies required to accommodate
increased levels of Internet activity. If use of the Internet does not continue
to grow, or if the Internet infrastructure does not effectively support our
growth, our revenues and results of operations could be materially and adversely
affected.
RISKS
RELATED TO OUR COMMON STOCK
You
may have difficulty trading our common stock as there is a limited public market
for shares of our common stock.
Our common
stock is currently quoted on the NASD’s OTC Bulletin Board under the symbol
“BWAV.OB.” Our common stock is not actively traded and there is a limited public
market for our common stock. As a result, a stockholder may find it difficult to
dispose of, or to obtain accurate quotations of the price of, our common stock.
This severely limits the liquidity of our common stock, and would likely have a
material adverse effect on the market price for our common stock and on our
ability to raise additional capital. An active public market for shares of our
common stock may not develop, or if one should develop, it may not be
sustained.
Applicable
SEC rules governing the trading of “penny stocks” may limit the trading and
liquidity of our common stock which may affect the trading price of our common
stock.
Our common
stock is currently quoted on the NASD’s OTC Bulletin Board. On November 13,
2009, the closing bid price of our common stock was $0.04 per share. Stocks such
as ours which trade below $5.00 per share are generally considered “penny
stocks” and subject to SEC rules and regulations which impose limitations upon
the manner in which such shares may be publicly traded. These regulations
require the delivery, prior to any transaction involving a penny stock, of a
disclosure schedule explaining the penny stock market and the associated risks.
Under these regulations, certain brokers who recommend such securities to
persons other than established customers or certain accredited investors must
make a special written suitability determination regarding such a purchaser and
receive such purchaser’s written agreement to a transaction prior to sale. These
regulations have the effect of limiting the trading activity of our common stock
and reducing the liquidity of an investment in our common stock.
There
is a limited public market for shares of our common stock, which may make it
difficult for investors to sell their shares.
There is a
limited public market for shares of our common stock. An active public market
for shares of our common stock may not develop, or if one should develop, it may
not be sustained. Therefore, investors may not be able to find purchasers for
their shares of our common stock.
The
price of our common stock has been and is likely to continue to be highly
volatile, which could lead to losses by investors and costly securities
litigation.
The trading
price of our common stock has been and is likely to continue to be highly
volatile and could fluctuate in response to factors such as:
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actual
or anticipated variations in our operating results;
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actual
or anticipated variations in our operating results;
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announcements
of technological innovations by us or our competitors;
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announcements
by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
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adoption
of new accounting standards affecting our industry;
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additions
or departures of key personnel ;
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introduction
of new services by us or our competitors;
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sales
of our common stock or other securities in the open
market;
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conditions
or trends in the Internet and online commerce industries;
and
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other
events or factors, many of which are beyond our
control.
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The stock market has
experienced significant price and volume fluctuations, and the market prices of
stock in technology companies have been highly volatile. In the past, following
periods of volatility in the market price of a company’s securities, securities
class action litigation has often been initiated against the Company. Litigation
initiated against us, whether or not successful, could result in substantial
costs and diversion of our management’s attention and resources, which could
harm our business and financial condition.
We
do not anticipate dividends to be paid on our common stock, and stockholders may
lose the entire amount of their investment.
A dividend
has never been declared or paid in cash on our common stock, and we do not
anticipate such a declaration or payment for the foreseeable future. We expect
to use future earnings, if any, to fund business growth. Therefore, stockholders
will not receive any funds absent a sale of their shares. We cannot assure
stockholders of a positive return on their investment when they sell their
shares, nor can we assure that stockholders will not lose the entire amount of
their investment.
Securities
analysts may not initiate coverage or continue to cover our common stock, and
this may have a negative impact on our market price.
The trading
market for our common stock will depend, in part, on the research and reports
that securities analysts publish about us and our business. We do not have any
control over these analysts. There is no guarantee that securities analysts will
cover our common stock. If securities analysts do not cover our common stock,
the lack of research coverage may adversely affect its market price. If we are
covered by securities analysts, and our stock is downgraded, our stock price
would likely decline. If one or more of these analysts ceases to cover us or
fails to publish regular reports on us, we could lose visibility in the
financial markets, which could cause our stock price or trading volume to
decline.
You
may experience dilution of your ownership interests because of the future
issuance of additional shares of our common stock and our preferred
stock.
In the
future, we may issue our authorized but previously unissued equity securities,
resulting in the dilution of the ownership interests of our present
stockholders. We are currently authorized to issue an aggregate of 410,000,000
shares of capital stock consisting of 400,000,000 shares of common stock, par
value $0.001 per share, and 10,000,000 shares of "blank check" preferred stock,
par value $0.001 per share, of which we have designated 8,003,000 of such shares
of Series A preferred stock. As of November 13, 2009, there were: (i) 29,229,284
shares of common stock outstanding; (ii) 7,065,293 shares of Series A preferred
stock outstanding; (iii) 102,658,397 shares reserved for issuance upon the
exercise of options granted or available for grant under our 2004 stock plan,
our 2006 equity incentive plan, our 2007 non-qualified stock option plan and our
2008 stock incentive plan; and (iv) 67,351,020 shares reserved for issuance upon
the exercise of outstanding warrants.
We may also
issue additional shares of our common stock or other securities that are
convertible into or exercisable for common stock in connection with hiring or
retaining employees or consultants, future acquisitions, future sales of our
securities for capital raising purposes, or for other business purposes. The
future issuance of any such additional shares of our common stock or other
securities may create downward pressure on the trading price of our common
stock. There can be no assurance that we will not be required to issue
additional shares, warrants or other convertible securities in the future in
conjunction with hiring or retaining employees or consultants, future
acquisitions, future sales of our securities for capital raising purposes or for
other business purposes, including at a price (or exercise prices) below the
price at which shares of our common stock are currently quoted on the OTC
Bulletin Board.
Even
though we are not a California corporation, our common stock could still be
subject to a number of key provisions of the California General Corporation
Law.
Under Section
2115 of the California General Corporation Law (the “CGCL”), corporations not
organized under California law may still be subject to a number of key
provisions of the CGCL. This determination is based on whether the corporation
has significant business contacts with California and if more than 50% of its
voting securities are held of record by persons having addresses in California.
In the immediate future, we will continue the business and operations of GoFish
Technologies Inc. and a majority of our business operations, revenues and
payroll will be conducted in, derived from, and paid to residents of California.
Therefore, depending on our ownership, we could be subject to certain provisions
of the CGCL. Among the more important provisions are those relating to the
election and removal of directors, cumulative voting, standards of liability and
indemnification of directors, distributions, dividends and repurchases of
shares, shareholder meetings, approval of certain corporate transactions,
dissenters’ and appraisal rights, and inspection of corporate
records.
Panorama
Capital, L.P., Rembrandt Venture Partners Fund Two, L.P., Rembrandt Venture
Partners Fund Two-A, L.P. and Rustic Canyon Ventures III, L.P., whose interests
may not be aligned with yours, collectively control approximately 66% of our
company, which could result in actions of which you or other stockholders do not
approve.
In two
closings that occurred on December 3, 2008 and December 12, 2008, we completed a
$22.5 million preferred stock financing pursuant to the terms of a securities
purchase agreement dated December 3, 2008 that we entered into with Panorama
Capital, L.P. (“Panorama”), Rembrandt Venture Partners Fund Two, L.P.
(“Rembrandt Fund Two”), Rembrandt Venture Partners Fund Two-A, L.P. (“Rembrandt
Fund Two-A” and, together with Rembrandt Fund Two, “Rembrandt”) and Rustic
Canyon Ventures III, L.P. (“Rustic” and, together with Panorama and Rembrandt,
the “Lead Investors”). The Lead Investors currently own, collectively,
approximately 66% of our outstanding shares of common stock, assuming the
conversion of Series A preferred stock. Prior to the December 2008 financing,
the Lead Investors did not own any shares of our common stock.
In addition,
pursuant to the investors’ rights agreement we entered into with the Lead
Investors in connection with the December 2008 financing, we granted the
following rights: (i) Panorama has the right to designate one board member for
so long as Panorama shall own not less than 16,666,667 shares of common stock
issued or issuable upon conversion of Series A preferred stock, (ii) Rustic has
the right to designate one board member for so long as Rustic shall own not less
than 12,500,000 shares of common stock issued or issuable upon conversion of
Series A preferred stock, (iii) Rembrandt has the right to designate one board
member for so long as Rembrandt shall own not less than 8,333,333 shares of
common stock issued or issuable upon conversion of Series A preferred stock and
(iv) Internet Television Distribution, Inc. and its affiliates have the right to
appoint one board member for so long as Internet Television Distribution, Inc.
shall own not less than 3,088,240 shares of common stock issued or issuable upon
conversion of Series A preferred stock. The investors’ rights agreement also
provides that each investor party to the investors’ rights agreement shall take
all actions necessary within its control so that for as long as Panorama owns at
least 16,666,667 shares of common stock issued or issuable upon conversion of
Series A preferred stock, (i) the compensation committee of the board of
directors shall consist of three members, at least two of which shall be
directors appointed by the Lead Investors as stated above, and (ii) each
committee of the board of directors shall include, at the option of Panorama,
the member of the board of directors designated by Panorama.
As a result
of the foregoing, and provided that the Lead Investors do vote their shares
together, they will be able to determine a significant part of the composition
of our board of directors, will hold significant voting power with respect to
matters requiring stockholder approval and will be able to exercise significant
influence over our operations. The interests of the Lead Investors may be
different than the interests of other stockholders on these and other matters.
This concentration of ownership also could have the effect of delaying or
preventing a change in our control or otherwise discouraging a potential
acquirer from attempting to obtain control of us, which could reduce the price
of our common stock.
|
ITEM 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
|
During the
period July 1, 2009 through September 30, 2009, we issued an aggregate of
562,500 stock options under our 2007 Non-Qualified Stock Plan to two
individuals. The options have exercise prices between $0.08 and $0.20. The
issuance of the options was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof and Regulation D promulgated
thereunder. None of the securities were sold through an underwriter and
accordingly, there were no underwriting discounts or commissions involved in the
sale of the Series A Preferred and the Related Warrants.
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES.
|
None.
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
|
On
September 17, 2009, we held our 2009 Annual Meeting of Stockholders (the “2009
Annual Meeting”). The results of the proposals voted on at the 2009
Annual Meeting were as follows:
1.
Each of
the following director nominees was re-elected to our board of directors to
serve until his respective successor is duly elected and qualified:
|
|
Nominee
|
|
For
|
|
Withheld
|
|
|
John
Durham
|
|
|
133,098,855
|
|
|
|
1,616,471
|
|
|
|
Matt
Freeman
|
|
|
134,254,953
|
|
|
|
460,373
|
|
|
|
Michael
Jung
|
|
|
133,098,855
|
|
|
|
1,616,471
|
|
|
|
Richard
Ling
|
|
|
|
|
|
|
|
|
|
|
Mark
Menell
|
|
|
133,118,855
|
|
|
|
1,596,471
|
|
|
|
James
Moloshok
|
|
|
134,264,953
|
|
|
|
450,373
|
|
|
|
Riaz
Valani
|
|
|
134,254,953
|
|
|
|
460,373
|
|
|
|
Tabreez
Verjee
|
|
|
134,254,953
|
|
|
|
460,373
|
|
2.
Our
stockholders ratified the selection of Rowbotham & Company LLP as our
independent registered public accounting firm for the fiscal year ending
December 31, 2009 (with 133,356,666 shares voting for, 1,188,660 shares voting
against and 170,000 shares abstaining).
3.
Our
stockholders approved the reincorporation of the Company from the State of
Nevada to the State of Delaware (including the form of the plan of conversion to
accomplish such reincorporation, together with the exhibits thereto, and the
transactions contemplated thereby) (with 134,529,295 shares voting for, 188,031
shares voting against and 1,000 shares abstaining).
|
ITEM
5.
|
OTHER
INFORMATION.
|
On November
16, 2009, we issued a press release regarding our results for the quarter ended
September 30, 2009. The text of this press release is attached hereto as Exhibit
99.1. The information in this Item 5 and Exhibit 99.1 to this Quarterly Report
on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the
Exchange Act, or otherwise subject to the liabilities of that Section, nor shall
it be deemed incorporated by reference in any filing under the Securities Act or
the Exchange Act, regardless of any general incorporation language in such
filing.
The exhibits
filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit
Index immediately preceding such exhibits, which Exhibit Index is incorporated
herein by reference into this Item 6.
Pursuant to
the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
|
BETAWAVE
CORPORATION
|
|
|
|
|
Date:
November 16, 2009
|
By:
/s/ Matt
Freeman
|
|
|
Name:
Matt Freeman
|
|
|
Title:
Chief Executive Officer
|
|
|
|
|
Date:
November 16, 2009
|
By:
/s/ Lennox L.
Vernon
|
|
|
Name:
Lennox L. Vernon
|
|
|
Title:
Chief Accounting Officer and Director of
Operations
|
|
Exhibit
No.
|
|
Description
|
|
Filed
Herewith or Incorporated by Reference
|
|
2.1
|
|
Plan
of Conversion dated as of September 18, 2009
|
|
Incorporated
herein by reference to Exhibit 2.1 to the registrant’s Current Report on
Form 8-K, filed with the SEC on September 23, 2009
|
|
|
|
|
|
|
|
3.1
|
|
Nevada
Articles of Conversion filed with the Secretary of State of Nevada on
September 21, 2009
|
|
Incorporated
herein by reference to Exhibit 3.1 to the registrant’s Current Report on
Form 8-K, filed with the SEC on September 23, 2009
|
|
|
|
|
|
|
|
3.2
|
|
Delaware
Certificate of Conversion filed with the Secretary of State of Delaware on
September 21, 2009
|
|
Incorporated
herein by reference to Exhibit 3.2 to the registrant’s Current Report on
Form 8-K, filed with the SEC on September 23, 2009
|
|
|
|
|
|
|
|
3.3
|
|
Delaware
Certificate of Incorporation filed with the Secretary of State of Delaware
on September 21, 2009
|
|
Incorporated
herein by reference to Exhibit 3.3 to the registrant’s Current Report on
Form 8-K, filed with the SEC on September 23, 2009
|
|
|
|
|
|
|
|
3.4
|
|
Delaware
Certificate of Designation filed with the Secretary of State of Delaware
on September 22, 2009
|
|
Incorporated
herein by reference to Exhibit 3.4 to the registrant’s Current Report on
Form 8-K, filed with the SEC on September 23, 2009
|
|
|
|
|
|
|
|
3.5
|
|
Delaware
Bylaws adopted on September 18, 2009
|
|
Incorporated
herein by reference to Exhibit 3.5 to the registrant’s Current Report on
Form 8-K, filed with the SEC on September 23, 2009
|
|
|
|
|
|
|
|
10.1
|
|
First
Amendment to Loan and Security Agreement, dated as of July 13, 2009,
between Silicon Valley Bank and Betawave Corporation
|
|
Filed
herewith.
|
|
|
|
|
|
|
|
10.2
|
|
Second
Amendment to Loan and Security Agreement, dated as of August 14, 2009,
between Silicon Valley Bank and Betawave Corporation
|
|
Filed
herewith.
|
|
|
|
|
|
|
|
10.3
|
|
Form
of Indemnification Agreement between the registrant and each of its
directors and executive officers.
|
|
Filed
herewith.
|
|
|
|
|
|
|
|
31.1
|
|
Certification
of the Principal Executive Officer pursuant to Rules 13a-14(a) and
15d-14(a)
|
|
Filed
herewith.
|
|
|
|
|
|
|
|
31.2
|
|
Certification
of the Principal Financial Officer pursuant to Rules 13a-14(a) and
15d-14(a)
|
|
Filed
herewith.
|
|
|
|
|
|
|
|
32.1
|
|
Certification
of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
Filed
herewith.
|
|
|
|
|
|
|
|
32.2
|
|
Certification
of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
Filed
herewith.
|
|
|
|
|
|
|
|
99.1
|
|
Press
release issued by Betawave Corporation on November 16,
2009
|
|
Filed
herewith.
|
41
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