UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K/A
AMENDMENT
NO. 2 TO
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date
of
Report (Date of earliest event reported): February 12, 2008
BroadWebAsia,
Inc.
(F/K/A:
World of Tea Inc.)
(Exact
Name of Registrant as Specified in Charter)
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Delaware
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333-145953
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20-8383706
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(State
or other jurisdiction
of
incorporation)
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(Commission
File Number)
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(IRS
Employer
Identification
No.)
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9255
Sunset Boulevard
Suite
1010
West
Hollywood, California
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90069
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code:
(310) 492-2255
c/o
Israel Morgenstern
111
Castlewood Rd N16 6DJ
UK
(Former
name or former address, if changed since last report)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
£
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
£
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 DFR
240.14a-12)
£
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
£
Pre-commencement
communications pursuant to Rule 13e-4 (c) under the Exchange Act (17 CFR
240.13e-4(c))
AMENDMENT
NO. 2 TO
CURRENT
REPORT ON FORM 8-K /A
BroadWebAsia,
Inc.
(F/K/A:
World of Tea Inc.)
EXPLANATORY
NOTES
This
Amendment No. 2 on Form 8-K/A to the Current Report on Form 8-K originally
filed
with the Securities and Exchange Commission on February 12, 2008 by
BroadWebAsia, Inc. (f/k/a World of Tea Inc.) as amended by Amendment No. 1
on
Form 8-K/A, filed on February 29, 2008 by BroadWebAsia, Inc., amends and
restates the Current Report in only certain respects. This Amendment No. 2
amends the portion of Item 2.01, set forth under the caption “Management’s
Discussion and Analysis or Plan of Operation” in its entirety to reflect year
end results, adds a new section to Item 2.01, under the caption “Controls and
Procedures” and updates Item 9.01, Financial Statements and Exhibits to add
certain financial information as of the fiscal year end, with respect to the
business acquired in the Reverse Acquisition. In addition, this Amendment No.
2
corrects the each of the following matters in the Current Report:
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The
Current Report previously stated that our websites engaged in online
video
and other entertainment, when, in fact, the BroadWebAsia Network’s
entertainment offerings do not include
video;
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The
Current Report previously stated that the BroadWebAsia Network reaches
over 13 million unique visitors per month, when, in fact, it reaches
over
30 million;
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The
disclosure under the Risk Factor captioned “We may need additional capital
and may not be able to obtain. .
.”;
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The
disclosure under the Risk Factor captioned “If BBMAO fails to obtain a
license for using search results from websites. .
.”;
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The
information regarding Mr. Yacabucci set forth in the Current Report
under
“Executive Officers and Directors - Biographies” did not correctly report
all of his historical officer positions with Xtiva;
and
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The
list of transactions with related persons in the Current Report
under
“Certain Relationships and Related Transactions” is amended to reflect the
principal amount of the Grid Note (as defined herein), as of
December 31,
2007, and to delete a reference to the background of one $25,000
component
of the advances under such Grid
Note.
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TABLE
OF CONTENTS
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Page
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Item
2.01
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Completion
of Acquisition or Disposition of Assets
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1
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Share
Exchange
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1
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Description
of Our Company
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4
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Description
of Our Business
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7
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Management's
Discussion and Analysis or Plan of Operation
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19
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Risk
Factors
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28
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Security
Ownership of Certain Beneficial Owners and Management
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60
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Executive
Officers and Directors
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61
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Executive
Compensation
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64
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Certain
Relationships and Related Transactions
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67
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Controls
and Procedures
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69
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Item
2.03
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Creation
of a Direct Financial Obligation or an Obligation Under an Off-Balance
Sheet Arrangement of a Registrant
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70
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Item
3.02
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Unregistered
Sales of Equity Securities
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70
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Item
5.01
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Changes
in Control of Registrant
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76
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Item
5.02
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Departure
of Directors or Certain Officers; Election of Directors; Appointment
of
Certain Officers; Compensatory Arrangements of Certain
Officers
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76
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Item
5.06
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Change
in Shell Company Status
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76
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Item
8.01
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Other
Events
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76
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Item
9.01
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Financial
Statements and Exhibits
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78
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Item
2.01
Completion
of Acquisition or Disposition of Assets
Share
Exchange
The
Share Exchange.
On
February 12, 2008, World of Tea Inc. ("Holdings") entered into a Share Exchange
Agreement (the "Exchange Agreement") by and among Holdings, BroadWebAsia, Inc.,
a British Virgin Islands company ("BroadWebAsia"), and shareholders holding
all
of the outstanding capital stock of BroadWebAsia (the "Shareholders").
Upon closing of the transaction contemplated under the Exchange Agreement
(the "Share Exchange"), on February 12, 2008, the shareholders of BroadWebAsia
agreed to transfer all of the shares of the capital stock of BroadWebAsia held
by them, constituting all of the issued and outstanding stock of BroadWebAsia,
to Holdings in exchange for 83,000,000 newly issued shares of common stock
of
Holdings. Such share exchange caused BroadWebAsia to become a wholly owned
subsidiary of Holdings.
Unless
the context requires otherwise, references to “we” or “us” for periods prior to
the closing of the Share Exchange refer to BroadWebAsia, and such references
subsequent to the closing of the Share Exchange refer to Holdings, together
with
consolidated subsidiaries, including BroadWebAsia.
Pursuant
to the terms and conditions of the Exchange Agreement:
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At
the closing of the Share Exchange, each ordinary share of BroadWebAsia
issued and outstanding immediately prior to the closing of the Share
Exchange was converted into the right to receive 7.22053066550674
shares
of
Holdings' common stock, and each option and warrant to purchase
BroadWebAsia's common stock was exchanged on the same basis into,
respectively, an option or warrant to purchase Holdings' common stock.
An aggregate of 83,000,000 shares of Holdings' common stock were
issued to the former holders of BroadWebAsia's common stock, and
an
aggregate of 7,596,292 shares of Holdings' common stock were reserved
for
issuance upon exercise of options issued in the Share Exchange,
respectively. In addition, Holdings exchanged warrants to purchase
Holdings' common stock for warrants to purchase ordinary shares of
BroadWebAsia. Several of such warrants are exercisable to purchase
a
number of shares equal to $850,000 divided by 75% of the per share
price
received in the next financing or series of related financings in
which
Holdings sells shares of common stock or securities convertible into
common stock for an aggregate sale price of not less than $1,000,000
(the
"Triggering Financing"), for an aggregate exercise price of $850,000.
The other warrant is exercisable to purchase a number of shares
equal to $300,000 divided by 100% of the per share price received
in the
Triggering Financing, for an aggregate exercise price of
$300,000.
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Upon
the closing of the Share Exchange, the size of Holdings' Board of
Directors was increased from two to three directors, Israel Morgenstern
and Svetlana Pojasnikova resigned as officers and directors of Holdings,
and Brad Greenspan, Peter Schloss and James Yacabucci were appointed
to
Holdings' Board of Directors. Simultaneously with the Share
Exchange, Holdings appointed the previous officers of BroadWebAsia
as the
new officers of Holdings.
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Immediately
following the Share Exchange, under the terms of an Agreement of
Conveyance, Transfer and Assignment of Assets and Assumption of
Obligations, Holdings transferred all of its pre-Share Exchange assets
and
liabilities to its wholly owned subsidiary, WOT Holdings, Inc., a
Delaware
corporation ("SplitCo"). Thereafter, pursuant to a stock purchase
agreement, Holdings transferred all of the outstanding capital stock
of
SplitCo to Israel Morgenstern and Svetlana Pojasnikova, the former
officers and directors of Holdings, in exchange for cancellation
of an
aggregate of 2,000,000 shares of Holdings' common stock held by such
persons (the "Split-Off").
The
other stockholders of Holdings prior to the Share Exchange continued
to
hold 1,800,000 shares of the Company after the Split-Off.
These
1,800,000 shares constituted Holdings' "public float" prior to the
Share
Exchange that will continue to represent the shares of Holdings'
common
stock eligible for resale without further registration by the holders
thereof, until such time as the applicability of Rule 144 or other
exemption from registration under the Securities Act of 1933, as
amended
(the "Securities Act"), or the effectiveness of a further registration
statement under the Securities Act, permits additional sales of issued
shares.
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The
foregoing description of the Exchange Agreement does not purport to be complete
and is qualified in its entirety by reference to the complete text of the
Exchange Agreement, which is filed as Exhibit 2.1 hereto and incorporated herein
by reference.
Following
the closing of the Share Exchange and Holdings' cancellation of 2,000,000 shares
in the Split-Off, there were 84,825,000 shares of Holdings' common stock issued
and outstanding. Approximately 97.8% of such shares were held by the
former shareholders of BroadWebAsia.
As
a
condition to the Share Exchange, stockholders of Holdings prior to the Share
Exchange who held an aggregate of at least 800,000 shares of Holdings' common
stock were required to enter into Lock-up Agreements with us, pursuant to which
their disposal of beneficial ownership of such shares of our common stock is
subject to certain restrictions for a period of 120 days following the date
of
the Share Exchange.
In
connection with the Share Exchange, each holder of options and warrants to
purchase ordinary shares of BroadWebAsia exchanged such BroadWebAsia options
and
warrants for options and warrants to purchase shares of common stock of
Holdings. Specifically, at the time of the Share Exchange, BroadWebAsia had
outstanding stock options to purchase an aggregate of approximately 1,052,039
of
its ordinary shares, warrants to purchase a number of ordinary shares equal
to
$850,000 divided by 75% of the per share price received in the Triggering
Financing and a warrant to purchase a number of ordinary shares equal to
$300,000 divided by 100% of the per share price received in the Triggering
Financing. All such outstanding options and warrants were exchanged for
stock options to purchase an aggregate of 7,596,292 shares of Holdings' common
stock, warrants to purchase a number of shares of Holdings' common stock equal
to $850,000 divided by 75% of the per share price received in the Triggering
Financing and warrants to purchase a number of shares of Holdings' common stock
equal to $300,000 divided by 100% of the per share price received in the
Triggering Financing. The terms of the Holdings stock options and warrants
issued in the Share Exchange were substantially similar to the terms of the
BroadWebAsia stock options and warrants outstanding prior to such Share
Exchange, except that exercise price and number of shares issuable upon
exercise thereof were proportionally adjusted to reflect the exchange ratio
in
the Share Exchange.
Holdings
has adopted, and its stockholders have approved, an equity incentive plan and
reserved 12,723,750 shares of its common stock for issuance as incentive awards
to officers, directors, employees and other qualified persons in the future.
Holdings has not yet granted any awards under such plan.
The
shares of Holdings' common stock issued to former holders of BroadWebAsia's
ordinary shares in connection with the Share Exchange, the Holdings options
and
warrants issued to former holders of BroadWebAsia options and warrants in the
Share Exchange, and the shares of Holdings' common stock issuable upon exercise
of such options and warrants, were not registered under the Securities Act
of
1933, as amended (the "Securities Act"), in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act and Regulation
D
promulgated under that section, which exempts transactions by an issuer not
involving any public offering. These securities may not be offered or sold
in
the United States absent registration or an applicable exemption from the
registration requirements. Certificates representing these shares contain a
legend stating the restrictions applicable to such shares.
Changes
Resulting from the Share Exchange.
Holdings
intends to carry on BroadWebAsia's business as its sole line of business.
Holdings has relocated its executive offices to 9255 Sunset Boulevard, Suite
1010, West Hollywood, California 90069 and its telephone number is (310)
492-2255.
Changes
to the Board of Directors and Executive Officers.
Upon
the
closing of the Share Exchange, the size of Holdings' Board of Directors was
increased from two to three directors, Israel Morgenstern and Svetlana
Pojasnikova resigned as officers and directors of Holdings, and Brad Greenspan,
Peter Schloss and James Yacabucci were appointed to Holdings' Board of
Directors. Simultaneously with the Share Exchange, Holdings appointed the
previous officers of BroadWebAsia as the new officers of Holdings.
All
directors hold office for one-year terms until the election and qualification
of
their successors. Officers are elected by the board of directors and serve
at the discretion of the board.
Accounting
Treatment.
The
Share
Exchange is being accounted for as a reverse acquisition and recapitalization.
BroadWebAsia is the acquiror for accounting purposes and Holdings is the
acquired company. Accordingly, BroadWebAsia's historical financial statements
for periods prior to the acquisition become those of the registrant (Holdings)
retroactively restated for, and giving effect to, the number of shares received
in the Share Exchange. The accumulated deficit of BroadWebAsia is carried
forward after the acquisition. Operations reported for periods prior to the
Share Exchange are those of BroadWebAsia. Earnings per share for the periods
prior to the Share Exchange are restated to reflect the equivalent number of
shares outstanding.
Tax
Treatment.
The
Share
Exchange is intended to constitute a reorganization within the meaning of
Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended (the
"Code"), or such other tax free reorganization exemptions that may be available
under the Code.
The
Split-Off will result in taxable income to Holdings in an amount equal to the
difference between the fair market value of the assets transferred and Holdings'
tax basis in the assets. Any gain recognized will be subject to federal
income tax at regular corporate income tax rates.
Description
of Our Company
Holdings
was incorporated on February 2, 2007 in the state of Nevada for the purpose
of
developing various teas and herbal blends. From its inception to date, it
has not generated any revenues, and Holdings' operations have been limited
to
organizational, start-up, and capital formation activities. Immediately
following the Share Exchange, the existing assets and liabilities of Holdings
were disposed of pursuant to the Split-Off.
BroadWebAsia
was formed in the British Virgin Islands on November 22, 2005 to operate various
Chinese language websites engaged in online entertainment, social networking
and
search services.
After
the
Share Exchange, Holdings succeeded to the business of BroadWebAsia as its sole
line of business. As used in this Current Report on Form 8-K, all
references to the "Company," "we," "our" and "us" for periods prior to the
closing of the Share Exchange refer to BroadWebAsia and its direct and indirect
subsidiaries, and for periods subsequent to the closing of the Share
Exchange refer to Holdings and its direct and indirect subsidiaries (including
BroadWebAsia).
BroadWebAsia
currently has the following subsidiaries:
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BWA
Management Consulting (Shanghai) Co., Ltd., a PRC company ("BWA
Shanghai");
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BBMAO,
Inc., a BVI company ("BBMAO BVI");
and
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Accumo
HK Limited,
a
Hong Kong company ("BBMAO HK").
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We
also
currently have an equity joint venture Shandong Yinguang Internet Technology
Co., Ltd., a PRC company ("9E3 JV"). BWA Shanghai, which is wholly owned
by BroadWebAsia, was formed on March 20, 2007 for the purpose of entering into
various commercial arrangements with Chinese companies that provide Internet
services in China. BBMAO BVI, which is 65% owned by BroadWebAsia, and
BBMAO HK, which is a wholly owned subsidiary of BBMAO BVI, were formed in August
2005 to serve as holding companies. 9E3 JV was formed on pursuant to a
joint venture contract with 9E3 and its founders (the "9E3 JV Contract") which
was executed on December 4, 2006 and became effective for accounting purposes
on
November 14, 2007.
BBMAO
BVI Acquisition and BWA Shanghai Commercial Arrangement
On
August
16, 2006, we completed the acquisition from Palisades Technology, Inc., a
company owned and controlled by one of our shareholders, Brad Greenspan, of
stock representing 65% of the issued and outstanding capital stock of BBMAO
BVI,
and of its wholly owned subsidiary BBMAO HK, for a nominal amount of $1.00.
BBMAO BVI was incorporated in the BVI on August 8, 2005 for the purpose of
being a holding company. BBMAO HK was incorporated in Hong Kong on August
23, 2005 and operated through its Local Enterprise BBMAO, an internet search
network that intelligently consolidates the results of other Chinese search
engines.
On
November 13, 2007, BBMAO entered into a series of commercial arrangements with
our wholly owned PRC subsidiary, BWA Shanghai, to provide internet services
in
China. Pursuant to a Management Services Agreement, dated November 13,
2007 (the "BBMAO MSA"), BWA Shanghai will provide to BBMAO executive and
financial management personnel in exchange for thirty-five percent (35%) of
the
net profits of BBMAO. The net profits of BBMAO will be paid to BWA
Shanghai, and the net losses of BBMAO will be reimbursed by BWA Shanghai, no
later than the last day of the month following the end of each calendar quarter,
commencing on January 1, 2008. BWA Shanghai may also advance to BBMAO, at
its sole discretion, amounts to be credited against BWA Shanghai's future
obligations to reimburse net losses to BBMAO. Interest for the delaying of
payment due under the BBMAO MSA will accumulate on such amounts at the rate
of
four percent (4%) per annum until paid. During the term of the BBMAO MSA,
the shareholders of BBMAO may not take any material action without the advance
written consent of BWA Shanghai, and BWA Shanghai will have participation rights
in the event that any shareholder proposes to transfer its shares to any other
person. In addition, without the effect of terminating or adversely
affecting any license, permit or regulatory status of BBMAO, BWA Shanghai may
transfer from BBMAO to BWA Shanghai any part or all of the business, personnel,
assets and operations of BBMAO which may be lawfully conducted, employed, owned
or operated by BWA Shanghai. If BBMAO or any of the BBMAO shareholders
materially breaches the BBMAO MSA and fails to remedy the breach within 60
days'
notice from BWA Shanghai of such breach, they will be jointly and severally
obligated to pay to BWA Shanghai liquidated damages in an amount equal to the
higher of (a) eight times the annualized revenues of BWA Shanghai for the last
completed fiscal quarter, or (b) $50 million.
Concurrent
with the BBMAO MSA, each of the shareholders of BBMAO delivered a pledge
agreement, pursuant to which they agreed that in the event BBMAO breaches the
BBMAO MSA and fails to fully pay the liquidated damages specified in the BBMAO
MSA, in addition to any rights and remedies available to BWA Shanghai under
applicable laws, BWA Shanghai or its designee may at its election take control
of, transfer, auction or otherwise dispose of 100% of the equity interests
in
BBMAO without prior consent of any party, subject to the restriction or
prohibition under any applicable laws, in order to satisfy any outstanding
obligations.
In
connection with the BBMAO MSA, BWA Shanghai also entered into an immediately
exercisable purchase option agreement ("Option Agreement") with BBMAO and its
shareholders, pursuant to which the BBMAO shareholders granted BWA Shanghai
or
its designee(s) an exclusive, irrevocable option to purchase, from time to
time,
all or a part of BBMAO's shares or BBMAO's assets from the BBMAO shareholders
for RMB 1 or the lowest price permitted by then effective PRC law. The
option may not be exercised if the exercise would violate any applicable laws
and regulations in China or cause any license or permit held by, and necessary
for the operation of BBMAO, to be cancelled or invalidated.
BWA
Shanghai also entered an exclusive technology consulting agreement with BBMAO,
pursuant to which BWA Shanghai is acting as the exclusive technology consultant
and related services provider to BBMAO to, among other things, train technical
personnel, maintain the server(s) and develop and update its internet
applications, develop and update application software for internet users and
customers, and provide technical support for e-commerce and related applications
and for development and implementation of advertising plans, software designs,
website programming, in exchange for thirty percent (30%) of the net profits of
BBMAO. Moreover, all intellectual property created by BWA Shanghai in the
course of providing the services will be the sole property of BWA Shanghai
and
BBMAO will have no right to any ownership or use of such intellectual property
except under separate written agreement with BWA Shanghai.
9E3
Equity Joint Venture
On
November 14, 2006, BroadWebAsia entered into a joint venture contract with
9E3,
a PRC internet content provider, and its founders, pursuant to which the parties
agreed to form a new equity joint venture entity, owned 50% by BroadWebAsia
and
50% by 9E3. A business license for this entity, 9E3 JV, was issued on
December 4, 2006 and an application was filed by our PRC counsel seeking an
ICP
License for 9E3 JV. The registered capital of 9E3 JV is $1,200,000,
of which each of BroadWebAsia and 9E3 was required to contribute $600,000.
Both BroadWebAsia and 9E3 have contributed their full amount to 9E3 JV.
The transaction was finalized for accounting purposes on November 14,
2007.
Description
of Our Business
As
used in this Current Report on Form 8-K, all references to the "Company," "we,"
"our" and "us" for periods prior to the closing of the Share Exchange refer
to
BroadWebAsia and its direct and indirect subsidiaries, and for periods
subsequent to the closing of the Share Exchange refer to Holdings and its direct
and indirect subsidiaries (including BroadWebAsia).
Overview
Holdings
is a holding company whose primary business operations are conducted through
its
direct and indirect subsidiaries, BroadWebAsia, BWA Shanghai, BBMAO BVI and
BBMAO HK, and our equity joint venture 9E3 JV. Through our subsidiaries
and our commercial agreements with Chinese companies that provide Internet
services in China, we operate Chinese language websites engaged in online social
networking and search services (collectively referred to throughout this
report as the "BroadWebAsia Network").
The
BroadWebAsia Network targets an audience of young Chinese Internet users who
are
in the desirable15-30 year old demographic. The BroadWebAsia Network is
comprised of 9e3.com, a social networking website similar to myspace.com in
the
United States, and bbmao.com, a website focused on delivering meta search
results.
The
BroadWebAsia Network reaches over 30 million unique visitors generating over
85
million page views per month. Our network is a powerful ecosystem that we
believe accelerates growth of user traffic and advertising opportunities in
the
Web 2.0 sector. Web 2.0 is the term used to describe the second generation
of web-based communities and hosted services, such as social-networking sites,
which aim to facilitate creativity, community, collaboration and sharing between
users. Although the term suggests a new version of the World Wide Web, it
does not refer to an update to any technical specifications, but to changes
in
the ways software developers and end-users use the internet. We believe
that the diversity of our websites and product offerings provides us with
competitive advantages over individual websites in the Web 2.0 sector. We
plan to grow our business organically and through acquisitions with other
internet companies in the PRC that compliment our existing network of
websites.
Our
Industry
According
to estimates by eMarketer and CNNIC, China had approximately 133 million
internet users at the end of 2006 and is expected to have 156 million internet
users at the end of 2007. China's internet user base is expected to grow
to 206 million by 2009 and 227 million in 2010. This would make China the
largest internet market in the world in 2010. Approximately 55 million
households, or approximately 15% of total households in China will have
broadband internet access by the end of 2007 according to eMarketer. Also,
according to eMarketer, more than 75% of China's broadband users visit social
networking sites to keep in touch with people or meet new friends.
eMarketer estimates that there are more than 88 million social networking
users in China in 2007 and that this number will grow to more than 111 million
in 2008. Online advertising expenditures in China for 2007, excluding
revenues from paid searches, are estimated by eMarketer to be approximately
$1
billion. This represents an approximate 100% increase over the past two
years.
Our
properties are well positioned to deliver online advertising and other internet
services as more Chinese people gain access to the Internet and begin utilizing
online services such as those offered by the BroadWebAsia Network.
Market
Trends
With
internet usage reaching maturity in the United States, much of current and
future Internet user growth is coming from populous and developing countries
such as China, India, Brazil, Russia and Indonesia. According to
eMarketer, Inc., the number of online users in China should eclipse the number
of U.S. by early 2010 to create the world's largest internet
market.
The
number of online users in China is also being driven by greater access to
computers and mobile phones connected to the Internet. In the online
entertainment space, innovative proprietary and user generated content and
the
lack of entertainment alternatives increase user stickiness, i.e., the chances
that users will return more frequently to the website, which in turn increases
opportunities to show advertisements. In the social networking space, lack
of
entertainment alternatives in China plus the natural community that is created
on social networking websites also creates user stickiness, thereby increasing
opportunities to show advertisements on these websites.
Our
Competitive Strengths
We
believe that the following competitive strengths enable us to compete
effectively:
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Proven
Management Team.
Our
management team has a proven track record of successful management
of both
publicly listed and privately held Internet, new media and technology
companies inside and outside of China. The executives that lead our
primary operating segments have extensive operating experience in
the
China Internet industry with both domestic and international companies.
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Cross-Marketing,
Cross-Promotion and Cross-Sales.
Because
of the cross-marketing, cross-promotional and cross-sales opportunities
that exist across all of our websites, our websites are able to leverage
their user traffic to reduce their sales and marketing expenses and
user
acquisition costs. This reduces expenses and improves both gross and
operating margins.
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Scaleable
Business Model.
We
have a scaleable business model that enables us to increase our operating
margins as we leverage the various economies of scales our business
model
encompass.
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Our
Growth Strategy
Our
objective is to be a leading provider of online entertainment and social
networking in China. The key elements of our strategy are as
follows:
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Develop
our advertiser base.
We
plan to develop our advertiser base through advertising partnerships,
acquisitions and development of our internal direct sales force.
We
will target both domestic as well as international
advertisers.
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Increase
the traffic of existing properties.
We
plan to continue to attract users to our websites by offering interesting
and innovative content that is either proprietary or user generated.
We intend for each of our websites to be well known brands in their
respective categories of entertainment offerings to increase user
traffic
to these websites and the opportunity to sell advertising on these
websites.
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Integrate
new high traffic properties into the BroadWebAsia
Network.
We
plan to build partnerships with other high traffic properties and
to
integrate these properties into the BroadWebAsia Network through
revenue
sharing arrangements, joint ventures or other strategic relationships.
Recently, we have implemented the use of technologies such as
application program interfaces, or API's, to broaden the reach and
traffic
of our websites and we expect this to
continue.
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|
·
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Partnerships
with traditional media companies.
Through
partnerships, joint ventures or other relationships with traditional
media
companies such as magazine publishers, outdoor advertisers, wireless
value
added services providers and television stations, we will market
the
brands of our websites, ensure access to proprietary and innovative
content and enhance our distribution channels and diversity of revenue
streams.
|
We
expect
to execute these key elements of our growth strategy through a combination
of
investment in internal initiatives and in targeted acquisitions. Internal
initiatives will focus typically on expanding capacity and enhancing our
technology and services capabilities. Through acquisition efforts, we
intend to enhance our organization with businesses and technologies that will
deepen our vertical market penetration, expand our market opportunity and
broaden our customer base.
The
BroadWebAsia Network
The
BroadWebAsia Network targets an audience of young Chinese Internet users who
are
in the desirable15-30 year old demographic. The BroadWebAsia Network is
comprised of 9e3.com, a social networking website similar to myspace.com in
the
United States, and bbmao.com, a website focused on delivering meta search
results.
The
BroadWebAsia Network reaches over 30 million unique visitors generating over
85
million page views per month. Our network is a powerful ecosystem that we
believe accelerates growth of user traffic and advertising opportunities in
the
Web 2.0 sector. Web 2.0 is the term used to describe the second generation
of web-based communities and hosted services, such as social-networking sites,
which aim to facilitate creativity, community, collaboration and sharing between
users. Although the term suggests a new version of the World Wide Web, it
does not refer to an update to any technical specifications, but to changes
in
the ways software developers and end-users use the internet. Because of
its diversity of websites and product offerings, the BroadWebAsia Network
possesses significant competitive advantages over individual websites in the
Web
2.0 sector. We plan to grow our business organically and through
acquisitions with other internet companies in the PRC that compliment our
existing network of websites.
Social
Networking
Our
social networking website, 9e3.com, similar to myspace.com in the United States,
is a popular Chinese social networking website with 12 million unique visitors
and 100 million page views per month. Its users access multiple community
oriented services including entertainment content, beauty and health, blogs,
anime and social networking profiles for storing and sharing 9e3.com's
intelligent content submission process has resulted in a large and diverse
library of high quality user-generated content. Consequently, it attracts
a high number of viewers, many of whom become content creators. This
organic growth strategy has enabled 9e3.com to attract and sustain high levels
of loyal visitors. Each sub-community is built around social networking
functionality, which helps friendships and business networks to form and grow.
Search
Website
Our
search website, bbmao.com, intelligently consolidates the results from other
Chinese search engines. We believe that bbmao.com is the first meta-search
website dedicated to Chinese language meta search. It has won multiple
industry awards for innovation, including the prestigious Red Herring 100 "Most
Promising Companies in all of Asia," and ZDNet's "Top 10 Asian Techno
Visionaries." BBMAO is actively building on its search platform by
developing contextual and social search technologies, which are scheduled for
release at the end of 2007. bbmao.com's social bookmarks are a unique way
for users to save their searches and then share them with friends.
Our
Competition
The
digital media market is characterized by intense competition. We compete
with various domestic and international providers, some of which have
substantially greater financial and other resources than ours. We believe
that our future success will depend upon our ability to develop diverse, rich
content and service offerings that satisfy customer tastes with respect to
style, design and substance. It will also depend on our ability to market a
broad offering of network products in each category at competitive
prices.
Social
Networking
Our
primary competitors in the social network market include myspacechina.com,
51.com, tudou.com, and mop.com. Of these, we believe that 51.com is our
strongest competitor in this segment. We believe that we distinguish
ourselves from MySpace by utilizing sites that were founded by and for Chinese
users instead of constructing new independent sites.
Search
Website
Our
Search network intelligently consolidates the results from other Chinese search
engines. Our primary competitors in the search network market include
Google and Baidu. Of these, Baidu is our strongest competitor in this
segment. According to Google's Blog News Channel, Baidu holds a market
share of 58% of the search query market share in China over Google's 22.8%.
Google's recent acquisition of Chinese internet portal tianya.cn is an
effort to close this gap.
Intellectual
Property
The
domain name bbmao.com is registered in the name of BBMAO HK and is valid until
February 17, 2010. The domain name 9e3.com was registered in the name of
BroadWebAsia on February 1, 2007 and is valid until January 18,
2010.
Our
Properties and Facilities
Our
corporate headquarters are located at 9255 Sunset Blvd., Suite 1010, West
Hollywood, CA 90069. We sublet this space from an entity controlled by
Brad Greenspan, our Chairman and controlling shareholder. This space
consists of 1,000 square feet and includes 2 offices and the use of common
facilities, including conference rooms. We are currently paying $5,000 per
month for the use of this space.
All
land
in China is owned by the State or collectives. Individuals and companies
are permitted to acquire rights to use land or land use rights for specific
purposes. In the case of land used in industrial purposes, the land use
rights are granted for a period of 50 years. This period may be renewed at
the expiration of the initial and any subsequent terms according to the relevant
Chinese laws. Granted land use rights are transferable and may be used as
security for borrowings and other obligations.
Our
executive offices in China are located at room 1201, No.93 Huai Hai Zhong Lu,
Lu
Wan District, Shanghai, PRC. We rent this space under a lease arrangement at
RMB
30,400 (approximately $4,225 as of February 11, 2008) per month from September
25, 2006 to September 24, 2009 with Shanghai Long Xing Real Assets
Development Limited. This space consists of 117.86 square meters
(approximately 1,268 square feet) and includes 1 office.
We
believe our current facilities are adequate for our immediate and near-term
needs. Additional space may be required as we expand our activities. We do
not
currently foresee any significant difficulties in obtaining any required
additional facilities. We believe that each of our properties is covered
by reasonably appropriate insurance.
Regulation
General
The
telecommunications industry, including computer information and Internet access
services, is highly regulated by the PRC government. Regulations issued or
implemented by the State Council, the Ministry of Information Industry (the
"MII"), and other relevant government authorities, cover virtually every aspect
of telecommunications network operations, including entry into the
telecommunications industry, the scope of permissible business activities,
interconnection and transmission line arrangements, tariff policy and foreign
investment.
In
March
1998, the National People's Congress of the PRC approved a government
restructuring plan that directed the MII to assume, among other things, the
regulatory, administrative and other responsibilities of, and rights previously
exercised by, the former Ministry of Post and Telecommunications. The MII,
under the leadership of the State Council, is responsible for, among other
things:
|
·
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formulating
and enforcing telecommunications industry policy, standards and
regulations;
|
|
·
|
granting
licenses to provide telecommunications and Internet
services;
|
|
·
|
formulating
tariff and service charge policies for telecommunications and Internet
services;
|
|
·
|
supervising
the operations of telecommunications and Internet service providers;
and
|
|
·
|
maintaining
fair and orderly market competition among
operators.
|
In
September 2000, the PRC State Council promulgated the Telecommunications
Regulations (the "Telecom Regulations"). The Telecom Regulations categorize
all
telecommunications businesses in China as either infrastructure
telecommunications businesses or value-added telecommunications businesses,
with
wireless value-added services classified as value-added telecommunications
businesses. The Telecom Regulations also set forth extensive guidelines with
respect to different aspects of telecommunications operations in
China.
In
December 2001, in order to comply with China's commitments with respect to
its
entry into the World Trade Organization (the "WTO"), the State Council
promulgated the Administrative Rules for Foreign Investments in
Telecommunications Enterprises (the "Telecom FIE Rules\"). The Telecom FIE
Rules set forth detailed requirements with respect to capitalization, investor
qualifications and application procedures in connection with the establishment
of a foreign invested telecommunications enterprise. Pursuant to the
Telecom FIE Rules, the ultimate capital contribution ratio of the foreign
investor(s) in a foreign-funded telecommunications enterprise that provides
value-added telecommunications services shall not exceed 50%. In addition,
all principal investors in such an enterprise must be themselves
telecommunications operators. Pursuant to the Foreign Investment Industrial
Guidance Catalogue, as of December 11, 2003, the permitted foreign investment
ratio of value-added telecommunications services is no more than 50%.
However, uncertainty exists as to how these regulations will be
implemented. The PRC government authorities are still in the process of
drafting detailed rules with respect to the procedures for the application
for
and approval of establishing a foreign-invested value-added telecommunications
services enterprise. To comply with these PRC regulations, we conduct
substantially all of our operations through companies which are wholly owned
by
PRC citizens and incorporated in the PRC (referred to throughout the report
as
"Local Enterprises"). We do not have any equity interests in these Local
Enterprises, but instead enjoy the economic benefits of the Local Enterprises
through a series of commercial arrangements, which we and our subsidiaries
and
their respective shareholders have entered into. In the opinion of
Grandall Legal Group, our PRC legal counsel, the ownership structures of, and
our commercial arrangements with, these Local Enterprises comply with all
existing PRC laws and regulations, including the Telecom FIE Rules.
In
addition to the regulations promulgated by the central PRC government, some
local governments have also promulgated local rules applicable to Internet
or
other value-added telecommunications companies operating within their respective
jurisdictions. In Beijing, the Municipal Administrative Bureau of Industry
and
Commerce (the "Beijing AIC"), has promulgated a number of Internet-related
rules. In 2002, the Beijing AIC invalidated a previously issued circular and
adopted a new set of rules requiring owners of the domain names of commercial
websites located within Beijing to register their website names and commercial
websites with the Beijing AIC.
Regulation
of Internet Content Services
Subsequent
to the State Council's promulgation of the Telecom Regulations and the Internet
Information Services Administrative Measures (the "Internet Information
Measures"), in September 2000, the MII and other regulatory authorities
formulated and implemented a number of Internet-related regulations, including
but not limited to the Internet Electronic Bulletin Board Service Administrative
Measures (the "BBS Measures"). The Internet Information Measures require
that commercial Internet content providers must obtain an Internet information
license from the appropriate telecommunications authorities in order to carry
on
any commercial Internet content operations within China. Internet content
operators must display their operating license numbers in a conspicuous location
on their home page. Internet content operators are obliged to police their
web sites in order to remove categories of harmful content that are broadly
defined. This obligation reiterates Internet content restrictions that have
been
promulgated by other ministries over the past few years. In addition, the
Internet Information Measures also provide that Internet content operators
which
operate in sensitive and strategic sectors, including news, publishing,
education, health care, medicine and medical devices, must obtain additional
approvals from the relevant authorities in charge of those sectors as well.
The BBS Measures provide that any Internet content operator engaged in
providing online BBS is subject to a special approval and filing process with
the relevant governmental telecommunications authorities. Of particular
note to foreign investors, the Internet Information Measures stipulate that
Internet content operators must obtain the consent of the MII prior to
establishing an equity or cooperative joint venture with a foreign
partner.
Certain
local governments have promulgated local rules applicable to Internet companies
operating within their respective jurisdictions. In Beijing, the Beijing AIC,
has promulgated a number of Internet-related rules. In 2002, the Beijing AIC
invalidated a previously issued circular and adopted a new set of rules
requiring owners of the domain names of commercial websites located within
Beijing to register their website names and commercial websites with the Beijing
AIC.
Regulation
of Wireless Value-Added Services
Pursuant
to the Telecom Regulations, a commercial operator of Internet content services
must obtain an operating license. Other than this requirement, PRC legislation
on wireless telecommunications is generally aimed at regulating equipment and
infrastructure rather than applications and value-added service
providers.
The
Administrative Measures for Telecommunications Business Operating Licenses
(the
"Telecom License Measures"), were promulgated by the MII on December 26, 2001.
The Telecom License Measures confirm that there are two types of
telecommunications operations licenses for operators in China (including
foreign-invested telecommunications enterprises), namely, licenses for
infrastructure services and licenses for value-added services, for which a
distinction is made as to whether a license is granted for intra-provincial
or
trans-regional, or inter-provincial, activities. An appendix to the
license details the permitted activities of the enterprise to which it was
granted. An approved telecommunications service operator must conduct its
business, for both infrastructure and value-added services types of businesses,
according to the specifications recorded on its Telecom Business Operating
License. The MII is the competent approval authority for foreign-invested
telecommunications enterprises and for granting trans-regional licenses to
value-added telecommunications enterprises.
9E3
is in
cooperation with another company to provide "music SMS". The users may click
the
links on 9e3.com's website to eventually access the cooperator's website, which
operates the wireless value-added service. bbmao.com permits users access
to their websites through WAP mobiles. We have informally consulted with
competent local authorities and were informed that such cooperation and services
do not require approval for wireless value-added services. However, due to
the uncertainty of the interpretation and application of regulations concerning
Wireless value-added service, there is a possibility that the competent local
authorities will determine that our business arrangements are illegal.
Regulation
of Internet Culture Activities
On
May
10, 2003, the Ministry of Culture of the PRC promulgated the Internet Culture
Administration Tentative Measures (the "Internet Culture Measures"), which
became effective as of July 1, 2003. The Internet Culture Measures require
Internet content providers which engage in Internet culture activities to obtain
an Internet culture business operations license from the Ministry of Culture
in
accordance with the Internet Culture Measures. The term "Internet culture
activities" includes, among other things, acts of online dissemination of
Internet cultural products, such as audio-visual products, game products,
performances of plays or programs, works of art and cartoons, and the
production, reproduction, importation, sale (wholesale or retail), leasing
and
broadcasting of Internet cultural products.
9E3
is in
the process of applying for an Internet culture business operations license
with
the Ministry of Culture.
Regulation
of Information Security and Censorship
PRC
legislation concerning information security and censorship specifically
prohibits the use of Internet infrastructure where it results in a breach of
public security, the provision of socially destabilizing content or the
divulgence of State secrets. "A breach of public security" includes a
breach of national security or disclosure of state secrets; infringement on
state, social or collective interests or the legal rights and interests of
citizens; or illegal or criminal activities. "Socially destabilizing
content" includes any action that incites defiance or violation of PRC laws;
incites subversion of state power and the overturning of the socialist system;
fabricates or distorts the truth, spreads rumors or disrupts social order;
advocates cult activities; or spreads feudal superstition, involves obscenities,
pornography, gambling, violence, murder, or horrific acts or instigates criminal
acts. "State secrets" are defined as "matters that affect the security and
interest of the State." The term covers such broad areas as national defense,
diplomatic affairs, policy decisions on State affairs national economic and
social development, political parties and "other State secrets that the State
Secrecy Bureau has determined should be safeguarded."
According
to the aforementioned legislation, it is mandatory for Internet companies in
China to complete security filing procedures with the local public security
bureau and for them to update their filings regularly with the local public
security bureau regarding information security and censorship systems for their
websites. In this regard, the Detailed Implementing Rules for the Measures
for
the Administration of Commercial Web Site Filings for the Record, promulgated
in
July 2002 by the Beijing AIC, state that websites must comply with the following
requirements:
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they
must file with the Beijing AIC and obtain electronic registration
marks;
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they
must place the registration marks on their websites' homepages;
and
|
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they
must register their website names with the Beijing
AIC.
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We
have
successfully filed and registered our websites and website names with the
Beijing AIC and have obtained an electronic registration mark.
Regulation
of Advertisements
The
principle legislation governing advertisements in China is the Advertising
Law
(1996) and the Administrative Regulations of Advertisements (1987), pursuant
to
which an entity conducting advertising activities must obtain a permit from
the
local Administration of Industry and Commerce (the "AIC"). The State
Administration of Industry and Commerce (the "SAIC") is the government agency
responsible for regulating advertising activities in China. In February
2000, the SAIC issued a circular requiring any Internet content operator
engaging in advertising activities to obtain an advertising license.
9E3 has obtained the Advertising Business Permit.
Regulation
of Online Publications
The
State
News and Publications Administration (the "SNPA"), is the government agency
responsible for regulating publishing activities in China. On June 27, 2002,
MII
and SNPA jointly promulgated the Tentative Internet Publishing Administrative
Measures (the "Internet Publishing Measures"), which took effect on August
1,
2002. The Internet Publishing Measures require Internet publishers to
secure approval from SNPA. The term "Internet publishing" is defined as an
act of online dissemination whereby Internet information service providers
select, edit and process works created by themselves or others (including
content from books, newspapers, periodicals, audio and video products,
electronic publications, and other sources that have already been formally
published or works that have been made public in other media) and subsequently
post the same on the Internet or transmit the same to users via the Internet
for
browsing, use or downloading by the public.
Based
on
our informal consultation with competent authorities, the content published
on
the websites in our project are not likely deemed as the "online publications"
which needs to be approved before publication. On the other hand, we are
not aware that any ICP company has been required by the government to obtain
an
"Online Publication License" as described under the Regulation for providing
ICP
services. However, we can not assure you the competent authority will not
determine that our business shall be subject to "online publication" at some
time in future, since the competent authority has a wide discretion in this
aspect.
Regulation
of Online Audio and Video Services
According
to press reports, China's State Administration of Radio, Film and Television
(the "SARFT") and MII have co-published new regulations for Online Audio and
Video Services, which will take effect from January 31, 2008. The regulations
cover the production, editing, and aggregation of audio and video content and
provision to the public through both Internet and mobile networks. The new
regulation defines the SARFT as the authority to administer, monitor, and
regulate the industry's development, while the MII, with authority over the
Internet and mobile telecommunications industry, will have related monitoring
responsibilities and will provide a set of service guidelines. According to
the
regulations, all online audio and video service providers will be required
to
apply for an "Online Audio-Visual Broadcasting License", the key qualifications
for which include being majority state-owned or state-controlled and possessing
a comprehensive program censoring system, legal program resources, legal funding
sources, and "standardized technology."
Currency
Regulations
The
principal regulations governing foreign exchange in China are the Foreign
Exchange Control Regulations (1996) and the Administration of Settlement, Sale
and Payment of Foreign Exchange Regulations (1996) (the "Exchange
Regulations"). Under the Exchange Regulations, the Renminbi is freely
convertible into foreign exchange for current account items, including the
distribution of dividends. Conversion of Renminbi for capital account items,
such as direct investment, loans, security investment and repatriation of
investment, however, is still subject to the approval of the State
Administration of Foreign Exchange ("SAFE"). Under the Exchange
Regulations, foreign-invested enterprises are required to open and maintain
separate foreign exchange accounts for capital account items (but not for other
items). In addition, foreign-invested enterprises may only buy, sell
and/or remit foreign currencies at those banks authorized to conduct foreign
exchange business after providing valid commercial documents and, in the case
of
capital account item transactions, obtaining approval from SAFE. Capital
investments by foreign-invested enterprises outside of China (excluding Hong
Kong, Macau and Taiwan) are also subject to limitations, which include approvals
by the Ministry of Commerce, SAFE and the State Reform and Development
Commission.
Other
Regulations
Under
current PRC laws and regulations, foreign investment entities ("FIEs") may
pay
dividends only out of their accumulated after-tax profits, if any, determined
in
accordance with PRC accounting standards and regulations. In addition,
FIEs in China are required to set aside at least 10% of their after-tax profit
based on PRC accounting standards each year to its general reserves until the
cumulative amount of such reserves reaches 50% of its registered capital. These
reserves are not distributable as cash dividends. The board of directors of
an
FIE has the discretion to allocate a portion of its after-tax profits to staff
welfare and bonus funds, which may not be distributed to equity owners except
in
the event of liquidation.
Our
Employees
As
of
December 31, 2007, we employed 46 full-time employees. The following table
sets forth the number of our full-time employees by function:
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|
|
As
of
December
31, 2007
|
|
|
Technical
support
|
|
|
17
|
|
|
Sales
and marketing
|
|
|
1
|
|
|
General
and administration
|
|
|
15
|
|
|
Executive
Officers
|
|
|
5
|
|
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Research
and Development
|
|
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8
|
|
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TOTAL
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46
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We
believe that our relationship with our employees is good. The remuneration
payable to employees includes basic salaries and allowances. We also
provide training for our staff from time to time to enhance their technical
knowledge. We have not experienced any significant problems or disruption
to our operations due to labor disputes, nor have we experienced any
difficulties in recruitment and retention of experienced staff.
As
required by applicable PRC law, we have entered into employment contracts with
most of our officers, managers and employees. We are working towards
entering employment contracts with those employees who do not currently have
employment contracts with us. We believe that we maintain a satisfactory working
relationship with our employees and we have not experienced any significant
labor disputes or any difficulty in recruiting staff for our operations.
Our
employees in China participate in a state pension scheme organized by Chinese
municipal and provincial governments. We are currently required to
contribute to the scheme a certain percentage of the average monthly salary,
depending upon locale. In addition, we are required by PRC law to cover
employees in China with various types of social insurance and believe that
we
are in material compliance with the relevant PRC laws. The compensation
expenses related to this scheme was $15,074 and nil, respectively, for the
years
ended December 31, 2007. In addition, we are required by Chinese law to
cover employees in China with various types of social insurance. We have
purchased social insurance for all of our employees. The contributions to
these various schemes in total approximate 20% of the average monthly
salary.
Insurance
We
do not
maintain property insurance for our premises located in West Hollywood,
California 90069 where our executive offices are located, and we are not a
named
insured on our sublessor's insurance policy. We also maintain liability
insurance for our directors and officers. We do not maintain business
interruption insurance or key-man life insurance. We believe our insurance
coverage is customary and standard of companies of comparable size in comparable
industries in China.
Legal
Proceedings
There
is
no currently pending legal proceeding and, as far as we are aware, no
governmental authority is contemplating any proceeding to which we are a party
or to which any of our properties is subject.
Forward-Looking
Statements
This
Current Report on Form 8-K and other written reports and oral statements made
from time to time by the Company may contain so-called "forward-looking
statements," all of which are subject to risks and uncertainties.
Forward-looking statements can be identified by the use of words such as
"expects," "plans," "will," "forecasts," "projects," "intends," "estimates,"
and
other words of similar meaning. One can identify them by the fact that
they do not relate strictly to historical or current facts. These
statements are likely to address the Company's growth strategy, financial
results and product and development programs. One must carefully consider
any such statement and should understand that many factors could cause actual
results to differ from the Company's forward looking statements. Such
risks and uncertainties include but are not limited to those outlined in the
section entitled "Risk Factors" and other risks detailed from time to time
in
our filings with the SEC or otherwise. These factors may include
inaccurate assumptions and a broad variety of other risks and uncertainties,
including some that are known and some that are not. No forward looking
statement can be guaranteed and actual future results may vary
materially.
Information
regarding market and industry statistics contained in this Report is included
based on information available to us that we believe is accurate. It is
generally based on industry and other publications that are not produced for
purposes of securities offerings or economic analysis. We have not
reviewed or included data from all sources, and cannot assure investors of
the
accuracy or completeness of the data included in this Report. Forecasts
and other forward-looking information obtained from these sources are subject
to
the same qualifications and the additional uncertainties accompanying any
estimates of future market size, revenue and market acceptance of products
and
services. We do not assume any obligation to update any forward-looking
statement. As a result, investors should not place undue reliance on these
forward-looking statements.
Management's
Discussion and Analysis or Plan of Operation
This
discussion should be read in conjunction with the other sections of this Report,
including "Risk Factors," "Description of Business" and the Financial Statements
attached hereto as Item 9.01 and the related exhibits. The various
sections of this discussion contain a number of forward-looking statements,
all
of which are based on our current expectations and could be affected by the
uncertainties and risk factors described throughout this Report. See
"Forward-Looking Statements." Our actual results may differ
materially.
Overview
of Our Business
Through
BroadWebAsia's Chinese subsidiaries and our commercial arrangements with Local
Enterprises, we operate Chinese language websites engaged in social and
community entertainment and search services. The BroadWebAsia
Websites target an audience of young Chinese Internet users between the ages
of
13-30 years old. This demographic is highly desirable for advertisers. The
BroadWebAsia Websites are comprised of 9e3.com, a social and community media
website focused on the 13-30 year old demographic in China, and bbmao.com,
a
website focused on delivering Meta and social search results to Chinese internet
users.
The
BroadWebAsia Websites reach over 30 million unique visitors per month and
generates over 100 million page views per month. The BroadWebAsia Websites
are focused on growing user traffic and exploiting opportunities that Web 2.0
applications and services offer. Web 2.0 is the term used to describe the second
generation of web-based communities and hosted services, such as
social-networking sites, which aim to facilitate creativity, community,
collaboration and sharing between users. Although the term suggests a new
version of the World Wide Web, it does not refer to an update to any technical
specifications, but to changes in the ways software developers and end-users
use
the internet. We plan to grow our business organically and through acquisitions
with other internet companies in the PRC that compliment our existing
websites.
Going
Concern
The
consolidated financial statements filed with this Current Report are prepared
on
a going concern basis, which considers the realization of assets and
satisfaction of liabilities in the normal course of business. As of December
31,
2007, we had cash and cash equivalents of $42,444, a working capital deficit
of
$7,194,581, and a shareholders’ deficit of $5,717,245. The report of our
Independent Registered Public Accounting Firm on our financial statements
as of
and for the year ended December 31, 2007 includes a "going concern" explanatory
paragraph which means that the accounting firm expressed substantial doubt
about
our ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments relating to the
recoverability or classification of assets or the amounts and classification
of
liabilities that may result should we be unable to continue as a going concern.
Management’s
plans with regard to these conditions include financing our existing and
future
operations through issuances of common stock and/or advances from the
stockholders, as well as the exploration of profitable business opportunities.
In April 2008, we secured additional financing of $1,455,202 from our majority
stockholder, the proceeds from which were used to repay Short-term loans.
There
can be no assurance that funds required during the next twelve months or
thereafter will be generated from operations or that those funds will be
available from external sources such as debt or equity financings or other
potential sources. The lack of additional capital resulting from the inability
to generate cash flow from operations or to raise capital from external sources
would force us to substantially curtail or cease operations and would,
therefore, have a material adverse effect on our business. Further, there
can be
no assurance that any such required funds, if available, will be available
on
attractive terms or that they will not have a significantly dilutive effect
on
our existing shareholders.
Principal
Factors Affecting our Financial Performance
We
believe that the following factors affect our financial
performance:
Growth
of Internet Usage in China
According
to estimates by eMarketer and CNNIC, China had approximately 133 million
internet users at the end of 2006 and more than 170 million internet users
at
the end of 2007. China's internet user base is expected to grow to 206
million by 2009 and 227 million in 2010. This would make China the largest
internet market in the world in 2010. Approximately 55 million households,
or approximately 15% of total households in China had broadband internet access
at the end of 2007 according to eMarketer. Also, according to eMarketer,
more than 75% of China's broadband users visit social or community entertainment
focused websites to keep in touch with people or meet new friends.
eMarketer estimates that there are more than 88 million social networking
users in China in 2007 and that this number will grow to more than 111 million
in 2008. Online advertising expenditures in China for 2007, excluding
revenues from paid searches, are estimated by eMarketer to be approximately
$1
billion. This represents an approximate 100% increase over the past two
years.
PRC
Regulations Promoting Use of the Internet
The
Internet industry in China is highly regulated by the PRC government. Various
regulatory authorities of the central PRC government, such as the State Council,
the MII, the SAIC, the Ministry of Culture, the State Press and Publication
Administration, and the Ministry of Public Security, are empowered to issue
and
implement regulations governing various aspects of the Internet and online
games
industries. For details regarding these regulations see "Our
Business—Regulations."
Results
of Operations
The
following table sets forth key components of our results of operations for
the
periods indicated, in dollars and key components of our revenue for the period
indicated in dollars.
|
|
|
Year
Ended December 31
|
|
|
|
|
2006
|
|
2007
|
|
|
Sales
revenue
|
|
$
|
491
|
|
$
|
1,333
|
|
|
Cost
of sales
|
|
|
(25
|
)
|
|
-
|
|
|
Gross
profit
|
|
|
466
|
|
|
1,333
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Administrative
expenses
|
|
|
591,936
|
|
|
1,992,636
|
|
|
Selling
expenses
|
|
|
13,354
|
|
|
29,491
|
|
|
Research
and Development expenses
|
|
|
-
|
|
|
3,288,000
|
|
|
Impairment
on Goodwill
|
|
|
-
|
|
|
140,072
|
|
|
Total
expenses
|
|
|
605,290
|
|
|
5,450,199
|
|
|
Operating
loss
|
|
|
(604,824
|
)
|
|
(5,448,866
|
)
|
|
Investment
loss
|
|
|
(28,103
|
)
|
|
(60,292
|
)
|
|
Interest
income
|
|
|
1,313
|
|
|
322
|
|
|
Interest
expense
|
|
|
-
|
|
|
(367,656
|
)
|
|
Minority
interests
|
|
|
86,197
|
|
|
4,852
|
|
|
Net
loss
|
|
|
(545,417
|
)
|
|
(5,871,640
|
)
|
Comparison
of Years Ended December 31, 2007 and December 31, 2006
Sales
Revenue.
Our
sales revenue is generated from sales of display advertisements, banner
advertisements and pop-up advertisements on our websites directly to our
advertising clients or via advertising agencies by our internal advertising
sales force and other advertising revenues from the sale of keyword search
results, however it was negligible during the periods presented. Sales
revenue increased $842, to $1,333 for the fiscal year ended December 31, 2007
compared to $491 for fiscal year 2006.
Cost
of Sales.
Cost
of Sales includes bandwidth costs and certain other costs directly associated
with the operation of our websites.
Gross
Profit.
Our
gross profit is equal to the difference between our sales revenue and our cost
of sales. Our gross profit increased $867, to $1,333 for the fiscal year
ended December 31, 2007 from $466 for fiscal year 2006. Gross margin
increased 5%, to 100% for the fiscal year ended December 31, 2007 from 95%
for
fiscal year 2006.
Administrative
Expenses.
Administrative
expenses consist of the costs associated with staff and support personnel who
manage our business activities and professional fees paid to third parties.
Our administrative expenses increased $1,407,148, or 240.34%, to
$1,992,636, including amortization and depreciation for the fiscal year ended
December 31, 2007 from approximately $585,488 for fiscal year 2006. This
increase was primarily attributable to increased personnel salaries, business
plan development, developing a corporate structure, and expenses incurred toward
establishing operations. We are now working to improve our internal
control system to ensure compliance with Section 404 of the Sarbanes-Oxley
Act
of 2002, or SOX 404. As a result, we expect that our administrative
expenses will continue to increase until we have fully implemented our new
accounting system and our SOX 404 evaluation is completed.
Selling
Expenses.
Selling
expenses include advertising costs and promotional materials, traveling expenses
for marketing activities and other sales related costs. Our selling
expenses increased $16,137 to $29,491 for the fiscal year ended December 31,
2007 from $13,354 for fiscal year 2006. As a percentage of sales revenue,
our selling expenses are not meaningful due to our minimal operations during
the
periods presented.
Research
& Development Expenses
.
Research and development expenses include amounts relating costs under
arrangements in the form of notes we have entered into with potential
acquisition targets, for funding the development of certain products and
applications such as the creation of Chinese language widgets, user-manipulated
start-pages, interactive guides and other web 2.0 applications. We have expensed
these notes receivable following the accounting prescribed by Statement of
Financial Accounting Standards No. 68,
Research
and Development Arrangements
.
Our
research and development expenses increased $3,288,000 for the fiscal year
ended
December 31, 2007 from nil for the 2006 fiscal year. As a percentage of sales
revenue, our research and development expenses are not meaningful due to our
minimal operations during the periods presented.
Impairment
of Goodwill.
We
assess the carrying value of our goodwill on an annual basis when factors are
present that indicate impairment may have occurred. We recorded $140,072 in
goodwill impairment at December 31, 2007 primarily due to slower than
anticipated growth and performance of our subsidiary, BBMao Network Technology
Co, Ltd.
Total
Expenses.
Our
total expenses increased $4,844,909, or 800.43%, to $5,450,199for the fiscal
year ended December 31, 2007 from $605,290 for fiscal year 2006. The
majority of this increase relates to the expansion of the business, business
plan development, developing a corporate structure and establishing operations.
Total expenses as a percent of revenue is not meaningful due to our
minimal operations during the periods presented.
Operating
loss.
Loss
from operations before taxes increased $4,844,042, or 800.90%, to $5,448,866
during the fiscal year ended December 31, 2007 from $604,824 during fiscal
year
2006. Income from operations before taxes as a percentage of sales is not
meaningful due to the factors described above.
Net
loss.
Our
net loss increased $5,326,223, or 976.54%, to $5,871,640 during the fiscal
year
ended December 31, 2007 from $545,417 during fiscal year 2006, as a result
of
the factors described above.
Liquidity
and Capital Resources
As
of
December 31, 2007, we had cash and cash equivalents of $42,444. The
following table provides detailed information about our net cash flow for all
financial statements periods presented in this Current Report.
Cash
Flow
(All
amounts are in thousands of U.S. dollars)
|
|
|
Year
Ended December 31,
|
|
|
|
|
2006
|
|
2007
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
(182
|
)
|
|
(4,166
|
)
|
|
Net
cash provided by (used in) investing activities
|
|
|
(608
|
)
|
|
(741
|
)
|
|
Net
cash provided by (used in) financing activities
|
|
|
953
|
|
|
4,798
|
|
|
Effect
of foreign currency translation on cash and cash
equivalents
|
|
|
2
|
|
|
(13
|
)
|
|
Net
cash Flow
|
|
|
165
|
|
|
(122
|
)
|
Operating
Activities
Net
cash
used in operating activities was $4,166,487 for year ended December 31, 2007,
which is an increase of $3,984,670 from the $181,817 net cash used in operating
activities for the same period in 2006. The increase of net cash used in
operating activities was mainly due to increase in the business plan
development, developing a corporate structure, and expenses incurred toward
establishing operations, offset by decreases in amounts due to related
companies.
Investing
Activities
Our
main
uses of cash for investing activities have been investments in joint venture
entity and issuance of convertible notes.
Net
cash
used in investing activities in the year ended December 31, 2007 was $741,147
which is an increase of $132,923 from net cash used in investing activities
of
$608,224 in the same period of 2006. The increase was due to expansion of
business, including investments in joint venture entity and issuance of
convertible notes.
Financing
Activities
Net
cash
provided by financing activities in the year ended December 31, 2007 totaled
$4,798,330, which is an increase of $3,845,876 from net cash used in financing
activities of $952,454 in the same period of 2006. The increase in net
cash is attributable to related party loans from our principal shareholder.
Our debt to equity ratio was 1.35:1 as of December 31, 2007 and is not
indicative of our financing plans under our business plan.
Our
current liquidity resources are insufficient, and we require additional capital
to execute our business plan. To the extent that we are unable to obtain
sufficient financing, we may be required to substantially reduce our planned
acquisitions and/or operations.
Loan
Facilities:
The
following table illustrates our credit facilities, providing the name of the
lender, the amount of the facility, the date of issuance and the maturity
date.
|
Lender
|
Date
of Loan
|
Maturity
Date
|
Duration
|
Interest
Rate
|
Principal
Amount
|
|
Ron
Greenspan
|
September
14, 2007
|
September
13, 2008
|
1
year
|
18%
|
$
50,000
|
|
J.
M. Mallick Revocable Trust
|
September
19, 2007
|
September
1, 2008
|
1
year
|
18%
|
$
50,000
|
|
Various
Lenders under a Note Purchase Agreement
|
February
12, 2008
|
August
12, 2008
|
6
months
|
10%
to 18%
|
$300,000
|
|
Brad
Greenspan: Grid Note
|
December
7, 2008
|
Undetermined
|
60
days after written notice by Brad Greenspan
|
Federal
short-term interest rate or “blended” rate
|
$5,955,935
as of May 19, 2008
|
|
Brad
Greenspan: Convertible Note
|
December
7, 2008
|
Undetermined
|
60
days after written notice by Brad Greenspan
|
Federal
short-term interest rate or “blended” rate
|
$
1,150,000
|
|
Total
|
|
|
|
|
$7,505,935
as of May 19, 2008
|
We
expect
that we will repay the foregoing loans upon maturity out of operating cash
flows
or through a refinancing of the debt by having a new financing. The Bridge
Notes (as defined below) mature on the earlier of August 13, 2008 and the next
transaction (or series of related transactions) in which we or our successor
sell shares of our capital stock or securities convertible into shares of our
capital stock for aggregate gross proceeds of not less than $4,000,000
(including any amounts received upon conversion or cancellation of
indebtedness). We believe that our currently available working capital is
insufficient to sustain our operations at our current levels through at least
the next twelve months and to repay the credit facilities referred to above.
We will need to raise capital in order to execute our business
plan.
Below
is
a brief summary of the payment obligations under material contacts to which
we
are a party:
|
·
|
On
September 14, 2007, BroadWebAsia entered into an agreement with Ron
Greenspan, the father of Brad Greenspan, our Chairman and controlling
stockholder, for a secured note (the "Greenspan Note") in the principal
amount of $50,000. The interest on the aggregate outstanding principal
amount of the Greenspan Note accrues at a rate of 18% per annum,
payable
every two months in arrears, beginning on November 14, 2007 and the
loan
has a maturity date of September 13, 2008. However, in an event of
default the principal and unpaid interest on the Greenspan Note will
bear
interest of 25% or the maximum rate authorized by applicable law.
In
connection with advance of funds under the Greenspan Note, we delivered
to
Ron Greenspan, among other things, a five-year warrant, dated September
19, 2007, for the purchase of such number of BroadWebAsia shares
that are
equal to $50,000 divided by an amount equal to 75% of the per share
price
received in
the
next financing or series of related financings in which we sells
shares of
our common stock or securities convertible into common stock for
an
aggregate sale price of not less than $1,000,000 (the "Triggering
Financing"). The warrants issued in connection with the loan are
accounted
for as a discount on the loan with the discount being authorized
and
recognized as interest expense over the term of the loan
.
|
|
·
|
On
September 19, 2007, BroadWebAsia entered into an agreement with J.
M.
Mallick Revocable Trust, or Mallick, for a secured note, or the Mallick
Note, in the principal amount of $50,000. The interest on the aggregate
outstanding principal amount of the Lakewood Note accrues at a rate
of 18%
per annum, payable every two months in arrears beginning on November
1,
2007, and the loan has a maturity date of September 1, 2008. In
connection with advance of funds under the Mallick Note, we delivered
to
Mallick, among other things, a five-year warrant for the purchase
of such
number of BroadWebAsia shares that are equal to $50,000 divided by
an
amount equal to 75% of the per share price received in the Triggering
Financing.
|
|
·
|
Following
the Share Exchange and the Split-Off, on February 15, 2008, we sold
an
aggregate of $300,000 principal amount of promissory notes ("Bridge
Notes") to several purchasers in a private placement transaction
pursuant
to a Note Purchase Agreement, dated as of February 15, 2008, among
us and
the Lenders named therein. The Bridge Notes are due on the earlier
of
August 13, 2008 and the next transaction (or series of related
transactions) in which we or our successor sell shares of our capital
stock or securities convertible into shares of our capital stock
for
aggregate gross proceeds of not less than $4,000,000 (including any
amounts received upon conversion or cancellation of indebtedness).
Interest on the Bridge Notes accrues at a rate of 10% per annum for
the
first month they are outstanding and at a rate of 18% per annum
thereafter. We may prepay the Bridge Notes at any time, in whole
or in
part, without penalty or premium. If we default in the payment of
interest
and/or principal on any Bridge Note, the holder thereof may at his
option
elect to convert all or a portion of the outstanding principal and
unpaid
accrued interest thereon into shares of our common stock at a conversion
price equal to 50% of the closing sale price of our common stock
on the
date immediately prior to such
conversion.
|
|
·
|
From
time to time Brad Greenspan, our Chairman and controlling stockholder,
has
advanced us various amounts of funds for our working capital. At
September 30, 2007, we owed Mr. Greenspan approximately $3,000,000.
On December 7, 2007, BroadWebAsia issued to Mr. Greenspan a
convertible note (the "Convertible Note") in the principal amount
of
$1,150,000 and a "grid" promissory note (the "Grid Note") in the
principal
amount of $3,000,000. The Grid Note and Convertible Note were assumed
by
the Company at the time of the reverse acquisition with BroadWebAsia
in
accordance with the provisions of the Share Exchange Agreement. The
notes bear interest at the federal short-term rate in effect during
the
periods in which any amount owed pursuant to the terms of the notes
remain
outstanding, or for any entire calendar year that the note remained
outstanding, the note bears interest at the "blended annual rate"
which is
published annually by the Internal Revenue Service. Principal and
accrued interest on the note is payable within sixty (60) days following
Mr. Greenspan's written demand for payment, but the Company has the
right
at any time to prepay, in whole or in part, the principal and accrued
interest without penalty upon fifteen (15) days prior written notice
to
Mr. Greenspan. The Convertible Note is convertible into shares of
our common stock, at the per share price received in the first
financing.
|
|
·
|
On
April 2, 2008, Mr. Brad Greenspan, as guarantor under our senior
secured
note, dated September 12, 2007, in the principal amount of $750,000,
paid
the lender thereunder $810,985 as payment in full of the principal,
interest, and associated fees with respect to such note. We have
agreed to
enter into a convertible promissory note agreement with Mr. Greenspan
for
this amount; however, final terms for this agreement have not yet
been
reached.
|
|
·
|
On
April 10, 2008, Mr. Brad Greenspan, as guarantor under our junior
secured
promissory note, dated December 5, 2007, in the principal amount
of
$600,000, paid the lender thereunder $634,216 as payment in full
of the
principal, interest, and associated fees with respect to such note.
We
have agreed to enter into a convertible promissory note agreement
with Mr.
Greenspan for this amount; however, final terms for this agreement
have
not yet been reached.
|
|
·
|
On
April 15, 2008, Mr. Brad Greenspan advanced an additional $1,300,000
to us
to provide to HupoTV for registered capital. We have agreed to enter
into
a convertible promissory note agreement with Mr. Greenspan for this
amount; however, final terms for this agreement have not yet been
reached.
|
In
future
periods while the purchase warrants remain outstanding, we generally expect
to
report a gain on derivative liability as our stock price declines, and a loss
on
derivative liability as our stock price increases (assuming other assumptions
used to estimate fair value remain constant). The non-cash gain or loss reported
upon re-measurement of our embedded derivative liability may not be indicative
of the operating results of our core business activities, but could
significantly affect our future reported basic earnings or loss per share
depending on numerous factors including the volatility of our stock
price.
Seasonality
Our
user
traffic tends to be seasonal. For example, we generally experience more user
traffic during public holidays in China and our advertisers usually spend more
to reach them. In addition, advertising spending in China has historically
been cyclical, reflecting overall economic conditions as well as budgeting
and
buying patterns. Our rapid growth has lessened the impact of the cyclicality
and
seasonality of our business.
Inflation
Inflation
does not materially affect our business or the results of our
operations.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported in the
financial statements, including the notes thereto, and related disclosures
of
commitments and contingencies, if any. We consider our critical accounting
policies to be those that require the more significant judgments and estimates
in the preparation of financial statements, including the
following:
|
·
|
Derivatives:
The Company follows the provisions of SFAS No. 133 “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS No. 133”) along with
related interpretation EITF No. 00-19 “Accounting for Derivative Financial
Instruments to, and Potentially Settled in, a Company’s Own Stock” (“EITF
00-19). SFAS No. 133 requires every derivative instrument (including
certain derivative instruments embedded in other contracts) to be
recorded
in the balance sheet as either an asset or liability measured at
its fair
value, with changes in the derivatives fair value recognized currently
in
earnings unless specific hedge accounting criteria are met. The Company
values these derivative securities under the fair value method at
the end
of each reporting period (quarter), and their value is marked to
market at
the end of each reporting period with the gain or loss recognition
recorded against earnings. The Company continues to revalue these
instruments each quarter to reflect their current value in light
of the
current market price of our common stock. The Company utilizes the
Black-Schloes option pricing model to estimate fair value. Key assumptions
of the Black-Scholes option-pricing model include applicable volatility
rates, risk-free rates and the instrument’s expected remaining life. These
assumptions require significant management
judgment.
|
|
·
|
Development
Type Agreement:
We
explore and investigate various business and acquisition opportunities
in
order to develop and grow our operations. We have advanced funds
to
various entities in connection with potential investment and acquisition
opportunities. We eneter into formal note agreements, which also
allow us
to acquire an equity interest in these entities. These entities
generally
use the funds advanced by us for development activities. The ultimate
repayment of the notes receivable is dependent upon the results
of these
development activities having future economic benefit. In accordance
with
Statement of Financial Accounting Standards (“SFAS”) No. 68,
Research
and Development Agreements
,
we have charged the advances to research and development expenses.
Additionally, since the payment of any interest income related
to the
notes receivable is dependent on the results of the development
activities, we recognize interest income on the notes receivable
generally
only when cash is received. We recorded $3,288,000 in research
and
development expenses relating to these notes receivable during
the year
ended December 31, 2007. Included in the $3,288,000 is $300,000
that
should have been recorded as a period cost in 2006. Management
evaluated
this matter in context of SEC Staff Accounting Bulleting (“SAB”) No. 99,
Materially
,
and determined that the error was not material to previously issued
financial statements.
|
|
·
|
Revenue
Recognition:
Our
revenues are derived principally from the provision of online social
and
community entertainment and search services via our websites, and
the sale
of online display advertising and key word search services. We
recognize
revenue only when the price is fixed or determinable, persuasive
evidence
of an arrangement exists, the service is performed and the collectability
of the resulting receivable is reasonably assured. We assess whether
an
amount due from a customer is fixed or determinable based on the
terms of
the agreement with the customer, including, but are not limited
to, the
payment terms associated with
transaction.
|
|
·
|
Consolidation
of Variable Interest Entities:
PRC
law currently limits foreign ownership of companies that provide
Internet
content and advertising services. To comply with these foreign
ownership restrictions, we operate our websites in China through
our
indirect subsidiaries BWA Shanghai and 9E3 JV. We have commercial
arrangements with Local Enterprises and their shareholders pursuant
to
which we provide technology consulting services and license certain
software products and registered domain names and trademarks. Through
these commercial arrangements, we also have the ability to substantially
influence the Local Enterprises' daily operations and financial affairs,
appoint their senior executives and approve all matters requiring
shareholder approval. As a result of these commercial arrangements,
which enable us to control the Local Enterprises, we are considered
the
primary beneficiary of the Local Enterprises. Accordingly, we regard
each Local Enterprise as a Variable Interest Entity under FASB
Interpretation No. 46R, "Consolidation of Variable Interest Entities,
an
Interpretation of ARB No. 51," or FIN 46R, and consolidate its results,
assets and liabilities in our financial
statements.
|
|
·
|
Intangible
Assets:
We
carry intangible assets at cost less accumulated amortization. We
compute
amortization using the straight-line method over the estimated 5.5-year
economic life. We review and adjust the carrying value of the intangible
assets if the facts and circumstances indicate that the intangible
assets
may be impaired. The impairment test is applied by comparing the
undiscounted cash flow against the carrying value of the assets.
If the
undiscounted cash flow is less than the carrying value, an impairment
loss
is recognized as the difference between the carrying value and the
fair
value of the intangible assets.
|
Off-Balance
Sheet Arrangements
We
do not
have any off-balance arrangements.
Risk
Factors
There
are numerous and varied risks, known and unknown, that may prevent us from
achieving our goals. If any of these risks actually occur, our business,
financial condition or results of operation may be materially adversely
affected. In such case, the trading price of our common stock could
decline and investors could lose all or part of their
investment.
RISKS
RELATED TO OUR INDUSTRY
The
Internet industry is highly regulated by the PRC government. If we fail to
obtain or maintain all pertinent permits and approvals, our business operations
may be materially adversely affected.
The
Internet industry is highly regulated by the PRC government. Regulations issued
or implemented by the State Council, the MII, and other relevant regulatory
authorities regulate many aspects of the Internet industry, including the
provision of value-added telecommunications services, foreign investment in
the
telecommunications industry, and the scope of permissible online business
activities. In September 2000, PRC's State Council promulgated the
Telecommunications Regulations, which categorized all telecommunications
businesses as either infrastructure telecommunications businesses or value-added
telecommunications businesses, with various Internet-related services and
activities classified as value-added telecommunications businesses. According
to
the Telecommunications Regulations, a commercial operator of any of the
telecommunications services must obtain the requisite operating licenses.
Since
the
publication of the Telecommunications Regulations, various administrative
measures have been introduced or amended to govern various aspects of the
Internet services, such as Internet information services, online news services,
Internet publishing, Internet medical, health and drug information services,
online advertising services, Internet access services and international
connections for computer information networks. We are required to obtain
applicable permits or approvals from different PRC regulatory authorities in
order to provide those services. For example, an Internet content provider
("ICP") must obtain a Value-Added Telecommunications Business Operations Permit
("ICP License"), in order to engage in any commercial ICP operations within
China. In addition, an ICP which provides content involving news,
publishing, education, health care, medicine and medical devices is required
to
obtain additional approvals for each area from the relevant authorities.
According
to press reports, the SARFT and MII have co-published new regulations for Online
Audio and Video Services, which will take effect from January 31, 2008. The
regulations cover the production, editing, and aggregation of audio and video
content and provision to the public through both Internet and mobile networks.
The new regulation defines the SARFT as the authority to administer, monitor,
and regulate the industry's development, while the MII, with authority over
the
Internet and mobile telecommunications industry, will have related monitoring
responsibilities and will provide a set of service guidelines. According to
the
regulations, all online audio and video service providers will be required
to
apply for an "Online Audio-Visual Broadcasting License", the key qualifications
for which include being majority state-owned or state-controlled and possessing
a comprehensive program censoring system, legal program resources, legal funding
sources, and "standardized technology".
If
we
fail to obtain or maintain any of the required permits or approvals, we may
be
subject to various penalties, such as fines or suspension or a shut down of
operations, which could severely disrupt our business operations. These
regulations could also increase our costs of doing business and prevent us
from
more efficiently developing our business. These new regulations may also
stop or slow down the expansion of our customers and user base and limit the
access to our websites. As a result, our financial condition and results of
operations may be materially adversely affected.
Regulation
and censorship of information distribution over the Internet in China may
adversely affect our business, and we may be liable for information displayed
on, retrieved from, or linked to our Internet portal.
In
recent
years, the PRC government has adopted certain regulations governing Internet
access and the distribution of news and other information over the Internet.
Under those regulations, ICPs and Internet publishers are prohibited from
posting or displaying over the Internet content that opposes the fundamental
principles in PRC's Constitution; compromises state security, divulges state
secrets, subverts state power or damages national unity; harms the dignity
or
interests of the state; incites ethnic hatred or racial discrimination or
damages inter-ethnic unity; sabotages PRC's religious policy or propagates
heretical teachings or feudal superstitions; disseminates rumors, disturbs
social order or disrupts social stability; propagates obscenity, pornography,
gambling, violence, murder or fear or incites the commission of crimes; insults
or slanders a third party or infringes upon the lawful rights and interests
of a
third party; or includes other content prohibited by laws or administrative
regulations. Failure to comply with those requirements may result in the
revocation of ICP Licenses and the closing down of the concerned websites.
In
the past, failures to comply with those requirements have resulted in the
closing down of certain concerned websites. The website operator may also be
held liable for such censored information displayed on, retrieved from or linked
to such website.
In
addition, the MII has published regulations that subject website operators
to
potential liability for content included on their websites and the actions
of
users and others using their systems, including liability for violations of
PRC
laws prohibiting the distribution of content deemed to be socially
destabilizing. PRC's Ministry of Public Security has the authority to order
any
local Internet service provider, or ISP, to block any Internet website
maintained outside China at its sole discretion. Periodically, the Ministry
of
Public Security has stopped the distribution over the Internet of information
which it believes to be socially destabilizing. PRC's State Secrecy Bureau,
which is directly responsible for the protection of State secrets of the PRC
government, is authorized to block any website it deems to be leaking State
secrets or failing to meet the relevant regulations relating to the protection
of State secrets in the distribution of online information.
As
these
regulations are relatively new and subject to interpretation by the relevant
authorities, it may not be possible for us to determine in all cases the type
of
content that could result in liability for us as a website operator. In
addition, we may not be able to control or restrict the content of other ICPs
that are linked to or accessible through our websites, or content generated
or
placed on our websites by our users, despite our attempt to monitor such
content. To the extent that regulatory authorities find any portion of our
content to be objectionable, they may require us to limit or eliminate the
distribution of such information or otherwise curtail the nature of such content
on our websites, which may reduce our user traffic and have a material adverse
effect on our financial condition and results of operations. In addition, we
may
be subject to significant penalties for violations of those regulations arising
from information displayed on, retrieved from or linked to, our websites,
including a suspension or shutdown of our operations.
The
laws and regulations governing the Internet industry in China are developing
and
subject to future changes, and substantial uncertainties exist as to the
interpretation and implementation of those laws and regulations.
In
recent
years, the PRC government has begun to enact laws and regulations applicable
to
Internet-related services and activities, many of which are relatively new
and
untested and subject to future changes. In addition, various regulatory
authorities of the central PRC government, such as the State Council, the MII,
the SAIC, the SNPA, and the Ministry of Public Security, are empowered to issue
and implement regulations to regulate certain aspects of Internet-related
services and activities. Furthermore, some local governments have also
promulgated local rules applicable to Internet companies operating within their
respective jurisdictions. Since various new regulations were enacted in
the past few years, the interpretation and enforcement of these new regulations
requires certain time to be tested. China has a civil law system, where decided
legal cases have little precedential value. All of these increase the
uncertainty of how the current regulations will impact on our
business.
As
the
Internet industry itself is at an early stage of development in China, there
will likely be more new laws and regulations adopted in the future to address
issues that arise from time to time. As a result of the foregoing,
substantial uncertainties exist regarding the interpretation and implementation
of future PRC Internet laws and regulations. Accordingly, it is possible that
the competent Chinese authorities could, any time, assert part of our business
violates current or future Chinese laws and regulations. It is also possible
that new laws and regulations adopted in the future will prohibit or restrict
any or part of our operations.
The
Internet infrastructure in China, which is not as well developed as in the
United States or certain other countries, may limit our growth.
The
Internet infrastructure in China is not as well developed as in the United
States or certain other countries. In particular, we depend significantly
on the PRC government and fixed line telecommunications operators in China
to
establish and maintain a reliable Internet infrastructure to reach a growing
base of Internet users in China. We cannot assure you that the Internet
infrastructure in China will support the demands associated with the continued
growth of the Internet industry, and in particular the development and growth
of
services that may require higher bandwidth, such as online video sharing
services, in China. If the necessary infrastructure standards or
protocols, or complementary products, services or facilities are not developed
in China on a timely basis or at all by these enterprises, our business,
financial condition and results of operations could be materially adversely
affected.
The
relatively high cost of Internet access in China may limit the growth of the
Internet industry in China and impede our growth.
While
the
cost of Internet access in China has decreased dramatically in recent years
due
to the decrease in the cost of personal computers and laptops and the
introduction and expansion of broadband access in China, it remains relatively
high in comparison to the average income in China, which may make it less
attractive for users to access, and transact business, over the Internet.
Any fee or tariff increase could further decrease our user traffic and our
ability to derive revenues from transactions over the Internet, which could
have
a material adverse effect on our business, financial condition and results
of
operations.
We
depend largely on the infrastructure of the telecommunications operators in
China, and any interruption of their network infrastructure may result in severe
disruptions to our business.
Although
private Internet service providers exist in China, substantially all access
to
the Internet in China is maintained through the telecommunications operators,
under the administrative control and regulatory supervision of the MII. In
addition, local networks connect to the Internet through a government-owned
international gateway. This international gateway is the only channel through
which a domestic Chinese user can connect to the international Internet network.
We rely on this infrastructure and to a lesser extent, certain other Internet
data centers in China, to provide data communications capacity primarily through
local telecommunications lines. In the event of a large-scale
infrastructure disruption or failure, we may not have access to alternative
networks and services on a timely basis or at all.
We
may
not be able to lease additional bandwidth from the telecommunications operators
in China on acceptable terms, on a timely basis or at all. In addition, we
may
not have means of getting access to alternative networks and services on a
timely basis or at all in the event of any disruption or failure of the network.
Interruption
or failure of our information technology and communications systems could impair
our ability to effectively provide our products and services, which could damage
our reputation and harm our operating results.
The
uninterrupted availability of our websites and the performance and reliability
of our network infrastructure are important to our reputation and our ability
to
attract and retain users, advertisers and merchants. Any system failure or
performance inadequacy that causes an interruption in the availability of our
websites or increases the response time of our services could reduce our
attractiveness to users, advertisers and merchants. Factors that could
disrupt our operations include: failure of our system; failure of the systems
of
our Internet data center backbone; system failures and outages caused by natural
disasters such as fire, flood, typhoon or earthquakes; and computer viruses
and
other unauthorized tampering with our system. We have limited backup
systems and have previously experienced system failures, which have disrupted
our operations. In addition, we have not purchased business interruption
insurance. Interruptions in the availability of our services may adversely
affect our business, financial condition and results of operations.
Our
ability to provide our products and services depends on the continuing operation
of our information technology and communications systems. Any damage to or
failure of our systems could interrupt our service. Service interruptions could
reduce our revenues and profits, and damage our brand if our system is perceived
to be unreliable. Our systems are vulnerable to damage or interruption as a
result of terrorist attacks, war, earthquakes, floods, fires, power loss,
telecommunications failures, computer viruses, interruptions in access to our
websites through the use of "denial of service" or similar attacks, hacking
or
other attempts to harm our systems, and similar events. Our servers, which
are
hosted at third-party Internet data centers, are also vulnerable to break-ins,
sabotage and vandalism. Some of our systems are not fully redundant, and our
disaster recovery planning does not account for all possible scenarios. The
occurrence of a natural disaster or a closure of an Internet data center by
a
third-party provider without adequate notice could result in lengthy service
interruptions.
If
the Internet and, in particular, online advertising are not broadly adopted
in
China, our ability to increase revenue and sustain profitability could be
materially and adversely affected.
The
use
of the Internet as a marketing channel is at an early stage in China.
Internet and broadband penetration rates in China are both relatively low
compared to those in most developed countries. Many of our current and
potential customers have limited experience with the Internet as a marketing
channel, and have not historically devoted a significant portion of their
marketing budgets to online advertising and promotion. As a result, they
may not consider the Internet effective in promoting their products and services
as compared to traditional print and broadcast media. Our ability to
generate revenues may be negatively impacted by a number of factors, many of
which are beyond our control, including:
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difficulties
associated with developing a larger user base with demographic
characteristics attractive to
customers;
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increased
competition and potential downward pressure on online advertising
prices;
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higher
customer acquisition costs due in part to small to medium enterprises'
limited experience with the Internet as a marketing
channel;
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failure
to develop an independent and reliable means of verifying online
traffic;
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ineffectiveness
of our online advertising delivery, tracking and reporting systems;
and
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lack
of increase in Internet usage in
China.
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If
we fail to provide innovative content and provide relevant products and
services, we may not be able to generate sufficient user traffic levels to
remain competitive.
Our
success depends on providing innovative content, and relevant products and
services that people use for a high-quality Internet experience. Our
competitors are constantly developing innovations in Internet entertainment,
social networking, search and online advertising as well as enhancing users'
online experience. As a result, we must invest significant resources in
research and development to enhance our Internet technologies and our existing
products and services and introduce additional high quality products and
services to attract and retain users. If we are unable to anticipate user
preferences or industry changes, or if we are unable to modify our products
and
services on a timely basis, we may lose users and customers. Our operating
results would also suffer if our innovations do not respond to the needs of
our
users and customers, are not appropriately timed with market opportunities
or
are not effectively brought to market. As internet technology continues to
develop, our competitors may be able to offer internet entertainment, social
networking and search services that are, or that are perceived to be,
substantially similar to or better than those generated by our services. This
may force us to expend significant resources in order to remain
competitive.
If
we are not able to respond successfully to technological or industry
developments, our future success may be materially adversely affected.
The
telecommunications market is characterized by rapid advancements in technology,
evolving industry standards and changes in customer needs. New services or
technologies may render our existing services or technologies less competitive
or obsolete. Our future success will depend on our ability to respond to
rapidly changing technologies, adapt our services to evolving industry standards
and improve the performance and reliability of our services. Our failure to
adapt to such changes could harm our business.
New
marketing media could also adversely affect us. For example, the number of
people accessing the Internet through devices other than personal computers,
including mobile telephones and hand-held devices, has increased in recent
years. If we are slow to develop products and technologies that are more
compatible with non-PC communication devices, we may not be successful in
capturing a significant share of this increasingly important market for media
and other services. In addition, the widespread adoption of new Internet,
networking or telecommunications technologies or other technological changes
could require substantial expenditures to modify or adapt our products, services
or infrastructure. If we fail to keep up with rapid technological changes to
remain competitive in our rapidly evolving industry, our future success may
be
adversely affected.
If
we fail to detect click-through fraud, we could lose the confidence of our
customers and our revenues could decline.
We
are
exposed to the risk of click-through fraud on our paid search results for our
search websites. Click-through fraud occurs when a person clicks paid
search results to generate the revenues we receive from our customers rather
than to view the content of search results. If we find evidence of past
fraudulent clicks, we may have to issue refunds to our customers. If we
fail to detect fraudulent clicks or otherwise are unable to prevent this
fraudulent activity, the affected customers may experience a reduced return
on
their investment in our online advertising services and lose confidence in
the
integrity of our systems. If this happens, we may be unable to retain
existing customers and attract new customers for our online advertising services
and our online advertising revenues could decline.
Our
inability to adequately protect the personal information of our registered
users
could lead to a loss of customers and expose us to a risk of litigation and
other potential liabilities which would have a material adverse effect our
business.
Our
business depends on our ability to collect, store, use, disclose and transmit
personal information from our registered users over the Internet. Many of
our registered users are college students of both genders who use our websites
to conduct various online activities, including social networking. Our
social networking site requires new users to submit their real names, birth
dates, and home towns. Some users even display their telephone numbers and
instant messaging information. As such, any security breaches could expose
us to
a risk of loss or litigation and potential liabilities. We cannot assure you
that contractual provisions attempting to limit our liability in these areas
will be successful or enforceable.
While
we
believe that we are in compliance with current law, we cannot ensure that we
will not be subject to lawsuits or investigations for violations of law.
While we have implemented and intend to implement additional programs
designed to enhance the protection of the privacy of our users, these programs
may not conform to all or any of these laws or regulations and we may
consequently incur civil or criminal liability for failing to conform. Moreover,
our current practices regarding the collection, storage and use of users'
personal information may not be in compliance with pending legislative and
regulatory proposals intended to limit the collection and use of user
information. As a result, we may be forced to change our current practices
relating to the collection, storage and use of user information. Our failure
to
comply with laws and regulations could also lead to adverse publicity and a
loss
of consumer confidence if it were known that we did not take adequate measures
to assure the confidentiality of the personally identifiable information that
our users had given to us. This could result in a loss of customers and
revenue and materially impact the success of our business.
RISKS
RELATED TO OUR BUSINESS
PRC
laws and regulations restrict foreign investment in China's telecommunications
services industry, and substantial uncertainties regarding the interpretation
and application of current or future PRC laws and regulations
exist.
In
December 2001, in order to comply with China's commitments with respect to
its
entry into the WTO, the State Council promulgated the Telecom FIE Rules.
The Telecom FIE Rules set forth detailed requirements with respect to
capitalization, investor qualifications and application procedures in connection
with the establishment of a foreign invested telecommunications enterprise.
Pursuant to the Telecom FIE Rules, the ultimate ownership interest of a foreign
investor in a foreign-funded telecommunications enterprise that provides
value-added telecommunications services shall not exceed 50%. The interpretation
and application of existing Chinese laws and regulations, the stated positions
of the MII and the possible new laws and regulations have created substantial
uncertainties regarding the legality of existing and future investment in
value-added telecommunication services.
We
and
our subsidiaries are considered as foreign persons or foreign funded enterprises
under PRC laws. PRC laws and regulations restrict foreign ownership of
companies that provide value-added telecommunications services and Internet
content services in China. To comply with the laws and regulations, we
operate our Internet value-added services in China through our commercial
arrangements with Local Enterprises which are wholly owned by certain PRC
citizens. We conduct business and gain profits through these commercial
arrangements.
In
the
opinion of Grandall Legal Group, our PRC legal counsel, except as disclosed
elsewhere in these "Risk Factors," our current ownership structure and our
commercial arrangements among our wholly owned subsidiaries and Local
Enterprises and their shareholders do not violate existing PRC laws, rules
and
regulations. There are, however, substantial uncertainties regarding the
interpretation and application of current or future PRC laws and regulations,
including but not limited to the laws and regulations governing the enforcement
and performance of our commercial arrangements in the event of imposition of
statutory liens, death, bankruptcy and criminal proceedings. Accordingly, we
cannot assure you that PRC regulatory authorities will not take a view contrary
to the opinion of our PRC legal counsel.
PRC
laws and regulations governing our businesses and the validity of certain of
our
contractual arrangements are uncertain. If we are found to be in violation,
we
could be subject to sanctions. In addition, changes in such PRC laws and
regulations may materially and adversely affect our
business.
There
are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business, or the enforcement and performance of our contractual
arrangements with our affiliated Chinese entities and their shareholders.
We are considered foreign persons or foreign invested enterprises under
PRC law. As a result, we are subject to PRC law limitations on foreign
ownership of Internet and advertising companies. These laws and
regulations are relatively new and may be subject to change, and their official
interpretation and enforcement may involve substantial uncertainty. The
effectiveness of newly enacted laws, regulations or amendments may be delayed,
resulting in detrimental reliance by foreign investors. New laws and
regulations that affect existing and proposed future businesses may also be
applied retroactively.
PRC
laws currently provide limited guidance as to whether an Internet company like
ours is required to obtain an approval from the State Council News Office.
PRC laws also do not provide clear guidance as to whether an Internet
company like ours is required to obtain an Internet culture permit from the
Ministry of Culture or a license for broadcasting audio/video programs from
the
State Administration of Radio, Film and Television. If the interpretation
of existing laws and regulations changes or new regulations come into effect
requiring us to obtain any such licenses, permits or approvals. We cannot
assure you that we may successfully obtain them, and we may need to remove
links
to news and audio/video products until we obtain the requisite licenses, permits
and approvals.
The
PRC government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new PRC laws or regulations on our businesses
and
we cannot assure you that our current ownership and operating structure would
not be found in violation of any current or future PRC laws or regulations.
As a result, we may be subject to sanctions, including fines, and could be
required to restructure our operations or cease to provide certain services.
Any
of these or similar actions could significantly disrupt our business operations
or restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.
Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
As
our
operating history is limited, the revenue and income potential of our business
and markets are unproven. We have not previously operated as a separate,
stand-alone company, and we rely on our parent company for support in certain
aspects of our operations. In addition, we face numerous risks,
uncertainties, expenses and difficulties frequently encountered by companies
at
an early stage of development. Some of these risks and uncertainties relate
to
our ability to:
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maintain
our current, and develop new, commercial arrangements upon which
our
business depends;
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increase
the number of our website page views of our target Internet user
base by
expanding the type, scope and technical sophistication of the content
and
services we offer and successfully convert these Internet users to
fee-paying wireless value-added services users;
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respond
effectively to competitive pressures;
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increase
awareness of our brand and continue to build user loyalty;
and
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attract
and retain qualified management and
employees.
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We
cannot
predict whether we will meet internal or external expectations of our future
performance. If we are not successful in addressing these risks and
uncertainties, our business, financial condition and results of operations
may
be materially adversely affected.
We
may need additional capital and may not be able to obtain additional capital
on
acceptable terms.
Capital
requirements are difficult to plan in our rapidly changing industry. We
currently expect that we will need additional capital to fund the expansion
of
our websites and our business in general, including acquisitions of
complementary assets, technologies or businesses, the expansion of our content
and products as well as the expansion of our sales and marketing activities.
Our
ability to obtain additional capital on acceptable terms is subject to a variety
of uncertainties, including:
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investors'
perceptions of, and demand for, securities of Internet companies;
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conditions
of the U.S. and other capital markets in which we may seek to raise
funds;
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our
future results of operations, financial condition and cash flows;
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PRC
governmental regulation of foreign investment in Internet companies;
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economic,
political and other conditions in China; and
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PRC
governmental policies relating to foreign currency borrowings.
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We
have a history of losses and may need additional financing to continue our
operations, and such financing may not be available upon favorable terms, if
at
all.
We
have
incurred net losses of and have an accumulated deficit of $1,459,426, as of
September 30, 2007. Our current liquidity resources are insufficient, and
we will require additional financing in order to execute our business plan.
There can be no assurance that additional financing will be available now
or in the future on terms that are acceptable to us. If adequate funds are
not available or are not available on acceptable terms, we may be unable to
develop or enhance our services, take advantage of future opportunities or
respond to competitive pressures, all of which could have a material adverse
effect on our business, financial condition or operating results. There
can be no assurance that sources of funding will be available on affordable
terms, in a timely manner, or at all.
The
dividends and other distributions we may receive from our local partners are
subject to restrictions under PRC law or agreements that it may enter into
with
third parties.
We
are a
holding company. Our PRC subsidiaries have entered into commercial
arrangements with Local Enterprises, through which we conduct our value-added
activities and receive substantially all of our revenues in the form of service
fees. We rely on dividends and other distributions on equity paid by our
subsidiaries and service fees from Local Enterprises for our cash requirements
in excess of any cash raised from investors and retained by us. If our
subsidiaries incur debt in the future, the instruments governing the debt may
restrict their ability to pay dividends or make other distributions to us.
In addition, PRC law requires that payment of dividends by our PRC
subsidiaries can only be made out of their net income, if any, determined in
accordance with PRC accounting standards and regulations. Under PRC law,
our PRC subsidiaries are also required to set aside no less than 10% of their
after-tax net income each year to fund certain reserve funds unless such reserve
funds have reached 50% of the registered capital of our PRC subsidiaries, and
these reserves are not distributable as dividends. Any limitation on the
payment of dividends by our subsidiaries could materially adversely affect
our
ability to grow, fund investments, make acquisitions, pay dividends, and
otherwise fund and conduct our business.
We
face significant competition and may suffer from a loss of users and customers
as a result.
We
face
significant competition in almost every aspect of our business, particularly
from other companies that seek to provide Internet social networking and search
services to users. Our main competitors include U.S.-based Internet social
networking and search providers such as myspace.com, as well as Chinese websites
such as myspacechina.com, tudou.com, mop.com, and baidu.com. We compete
with these entities for both users and customers on the basis of user traffic,
ease of use of products and services, the number of customers, distribution
channels and the number of associated third-party websites. In addition,
we may face greater competition from our U.S. competitors as a result of, among
other things, a relaxation on the foreign ownership restrictions of PRC Internet
content and advertising companies, improvements in online payment systems and
Internet infrastructure in China and our U.S. competitors' increased business
activities in China.
Many
of
these competitors have significantly greater financial resources than we do.
They also have longer operating histories and more experience in
attracting and retaining users and managing customers than we do. They may
use their experience and resources to compete with us in a variety of ways,
including by competing more heavily for users, customers, distributors and
networks of third-party websites, investing more heavily in research and
development and making acquisitions. If any of our competitors provides
comparable or better Chinese language social networking and search experiences,
our user traffic could decline significantly. Any such decline in traffic could
weaken our brand, result in loss of customers and users and have a material
adverse effect on our results of operations.
We
also face competition from traditional advertising media, such as newspapers,
magazines, yellow pages, billboards and other forms of outdoor media, television
and radio. Most large companies in China allocate, and will likely
continue to allocate, most of their marketing budgets to traditional advertising
media and only a small portion of their budgets to online advertising. If
these companies do not devote a larger portion of their marketing budgets to
online advertising services provided by us, or if our existing customers reduce
the amount they spend on online advertising, our results of operations and
future growth prospects could be adversely affected.
Our
business depends on strong brands, and if we are not able to maintain and
enhance our brands, our business and operating results may be
harmed.
Our
portfolio of companies includes the following brands: 9e3.com; and bbmao.com.
We believe that recognition of our brands will contribute significantly to
the success of our business. We also believe that enhancing our brands is
critical to expanding our base of users and customers. As our market
becomes increasingly competitive, maintaining and enhancing our brands will
depend largely on our ability to become an Internet entertainment, social
networking and search leader in China, which will be very difficult and
expensive to achieve.
If
we fail to retain existing customers or attract new customers for our online
advertising services, our business and growth prospects could be seriously
harmed.
We
expect
to generate a significant portion of our total revenues from online advertising
sales and services. Our online advertising customers will not continue to
do business with us if their investment does not generate sales leads and
ultimately consumers, or if we do not deliver advertising to our web pages
or
the web pages of others in an appropriate and effective manner. Our
customers may discontinue their business with us at any time and for any reason
as they are not subject to fixed-term contracts. Failure to retain our
existing online advertising customers or attract new customers for our online
advertising services could seriously harm our business and growth prospects.
We
may face intellectual property infringement claims and other related claims,
particularly in light of the recent Grokster decision, that could be
time-consuming and costly to defend and may result in our inability to continue
providing certain of our existing services.
Internet,
technology and media companies are frequently involved in litigation based
on
allegations of infringement of intellectual property rights, unfair competition,
invasion of privacy, defamation and other violations of third-party rights.
The
validity, enforceability and scope of protection of intellectual property in
Internet-related industries, particularly in China, are uncertain and still
evolving. In addition, many parties are actively developing and seeking
protection for Internet-related technologies, including seeking patent
protection. There may be patents issued or pending that are held by others
that
cover significant aspects of our technologies, products, business methods or
services. As we face increasing competition and as litigation becomes more
common in China in resolving commercial disputes, we face a higher risk of
being
the subject of intellectual property infringement claims.
Our
products and services link to materials in which third parties may claim
ownership of trademarks, copyrights or other rights. From time to time, we
may
be subject to trademark or copyright infringement or related claims, in China
and/or internationally. For example, we provide search engine facilities capable
of finding and accessing links to downloadable MP3 music, movies, images and
other multimedia files and/or other items hosted on third-party websites, which
may be protected by copyright, including search facilities enabling our users
to
search for MP3 music files in various ways such as by artist, title, or via
lists of most-searched-for titles and artists. In the United States, the legal
standards for determining indirect liability for copyright infringement have
recently been strengthened by the United States Supreme Court in the decision
Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., No. 04-480, 2005 WL 1499402
(June 27, 2005) ("Grokster"). The implications of the Grokster decision for
search engine services such as our MP3 search service are uncertain and may
increase the risk of legal liability. While we conduct our business operations
outside the United States, we cannot assure you that we would not be subject
to
U.S. copyright laws, including the legal standards established by Grokster.
Moreover, we cannot assure you that Grokster will not influence the legal
standards for determining indirect copyright infringement in other
jurisdictions, including China. In light of Grokster and the associated
publicity, copyright owners may monitor their copyrighted materials more closely
worldwide and may seek to enforce their rights under theories of indirect
liability or otherwise. In addition, China has enacted new regulations
concerning protection of copyrights recently. As a result, we face
increasing risks of being subject to copyright infringement claims relating
to
our service. Furthermore, intellectual property litigation is expensive
and time consuming and could divert resources and management attention from
the
operations of our business. If there is a successful claim of infringement,
we
may be required to pay substantial fines and damages or enter into royalty
or
license agreements that may not be available on commercially acceptable terms,
if at all. Any intellectual property litigation could have a material
adverse effect on our business, financial condition or results of operations.
We
may not be able to prevent others from unauthorized use of our intellectual
property, which could harm our business and competitive position.
We
rely
on a combination of copyright, trademark and trade secret laws, as well as
nondisclosure agreements and other methods to protect our intellectual property
rights. The protection of intellectual property rights in China may not be
as
effective as those in the United States or other countries. The steps we have
taken may be inadequate to prevent the misappropriation of our technology.
Reverse engineering, unauthorized copying or other misappropriation of our
technologies could enable third parties to benefit from our technologies without
paying us. From time to time, we may have to enforce our intellectual property
rights through litigation. Such litigation may result in substantial costs
and
could divert resources and management attention from the operations of our
business.
Our
strategy of acquiring complementary businesses, assets and technologies involve
numerous risks and uncertainties and may ultimately
fail.
As
part
of our business strategy, we have pursued, and intend to continue pursuit of
selective strategic acquisitions of businesses, assets and technologies that
complement our existing business. For example, since May 2006, we have
acquired a majority interest in BBMAO BVI and have entered into commercial
arrangements with Local Enterprises owning the 9e3.com and bbmao.com brands.
We may make other acquisitions in the future if suitable opportunities
arise. Acquisitions involve uncertainties and risks, including:
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potential
ongoing financial obligations and unforeseen or hidden
liabilities;
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failure
to achieve the intended objectives, benefits or revenue-enhancing
opportunities;
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costs
and difficulties of integrating acquired businesses and managing
a larger
business; and
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diversion
of resources and management
attention.
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Our
failure to address these risks successfully may have a material adverse effect
on our financial condition and results of operations. Any such acquisition
may
require a significant amount of capital investment, which would decrease the
amount of cash available for working capital or capital expenditures. In
addition, if we use our equity securities to pay for acquisitions, we may dilute
the value of your stock. If we borrow funds to finance acquisitions, such
debt instruments may contain restrictive covenants that could, among other
things, restrict us from distributing dividends. Such acquisitions may
also generate significant amortization expenses related to intangible
assets.
We
may not be able to manage our expanding operations
effectively.
We
commenced operations in November 2006 and have expanded our operations rapidly.
We anticipate significant continued expansion of our business as we
address growth in our user and customer base and market opportunities. To
manage the potential growth of our operations and personnel, we will be required
to improve operational and financial systems, procedures and controls, and
expand, train and manage our growing employee base. Furthermore, our
management will be required to maintain and expand our relationships with other
websites, Internet companies and other third parties. We cannot assure you
that
our current and planned personnel, systems, procedures and controls will be
adequate to support our future operations.
Our
operating results may fluctuate, which makes our results difficult to predict
and could cause our results to fall short of
expectations.
Our
operating results may fluctuate as a result of a number of factors, many of
which are outside of our control. For these reasons, comparing our operating
results on a period-to-period basis may not be meaningful, and you should not
rely on our past results as an indication of our future performance. Our
quarterly and annual revenues and costs and expenses as a percentage of our
revenues may be significantly different from our historical or projected rates.
Our operating results in future quarters may fall below expectations. Any of
these events could cause the price of our shares to fall. Any of the risk
factors listed in this "Risk Factors" section, and in particular, the following
risk factors, could cause our operating results to fluctuate from quarter to
quarter:
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general
economic conditions in China and economic conditions specific to
the
Internet;
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our
ability to continue to attract users to our
websites;
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our
ability to attract customers and increase spending per
customer;
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the
announcement or introduction of new or enhanced products and services
by
us or our competitors;
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the
amount and timing of operating costs and capital expenditures related
to
the maintenance and expansion of our businesses, operations and
infrastructure;
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the
results of our acquisitions of, or investments in, other businesses
or
assets;
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PRC
regulations or actions pertaining to activities on the Internet;
and
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geopolitical
events or natural disasters such as war, threat of war, Severe Acute
Respiratory Syndrome ("SARS"), or other
epidemics.
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Because
of our limited operating history and our rapidly growing business, our
historical operating results may not be useful to you in predicting our future
operating results. Our user traffic tends to be seasonal. For example, we
generally experience more user traffic during public holidays in China and
our
advertisers usually spend more to reach them. In addition, advertising
spending in China has historically been cyclical, reflecting overall economic
conditions as well as budgeting and buying patterns. Our rapid growth has
lessened the impact of the cyclicality and seasonality of our business. As
we
continue to grow, we expect that the cyclicality and seasonality in our business
may cause our operating results to fluctuate.
Our
business may be adversely affected by third-party software applications that
interfere with our receipt of information from, and provision of information
to,
our users, which may impair our users' experience.
Our
business may be adversely affected by third-party malicious or unintentional
software applications that make changes to our users' computers and interfere
with our products and services. These software applications may change our
users' Internet experience by altering or otherwise affecting the delivery
of
the content of our websites or otherwise interfering with our ability to connect
with our users. The interference often occurs without disclosure to or consent
from users, resulting in a negative experience that users may associate with
our
websites. These software applications may be difficult or impossible to
remove or disable, may reinstall themselves and may circumvent other
applications' efforts to block or remove them. The ability to provide a
superior user experience is critical to our success. If our efforts to combat
these software applications are unsuccessful, our reputation may be harmed.
This
could result in a decline in user traffic and, consequently, our
revenues.
The
successful operation of our business depends upon the performance and
reliability of the Internet infrastructure and fixed telecommunications networks
in China.
Our
business depends on the performance and reliability of the Internet
infrastructure in China. Almost all access to the Internet is maintained through
state-owned telecommunication operators under the administrative control and
regulatory supervision of the MII of China. In addition, the national networks
in China are connected to the Internet through international gateways controlled
by the PRC government. These international gateways are the only channels
through which a domestic user can connect to the Internet. We cannot assure
you
that a more sophisticated Internet infrastructure will be developed in China.
We
may not have access to alternative networks in the event of disruptions,
failures or other problems with China's Internet infrastructure. In addition,
the Internet infrastructure in China may not support the demands associated
with
continued growth in Internet usage.
We
also rely on China Telecommunications Corporation ("China Telecom") and China
Netcom Corporation Ltd. ("China Netcom") to provide us with data communications
capacity primarily through local telecommunications lines and Internet data
centers to host our servers. We do not have access to alternative services
in
the event of disruptions, failures or other problems with the fixed
telecommunications networks of China Telecom and China Netcom, or if China
Telecom or China Netcom otherwise fail to provide such services. Any unscheduled
service interruption could damage our reputation and result in a decrease in
our
revenues. Furthermore, we have no control over the costs of the services
provided by China Telecom and China Netcom. If the prices that we pay for
telecommunications and Internet services rise significantly, our gross margins
could be adversely affected. In addition, if Internet access fees or other
charges to Internet users increase, our user traffic may decrease, which in
turn
may harm our revenues.
Our
success depends on the continuing efforts of our senior management team and
other key personnel and our business may be harmed if we lose their
services.
Our
future success depends heavily upon the continuing services of the members
of
our senior management team, in particular our Chairman, Brad Greenspan, our
chief executive officer and chief financial officer, Peter Schloss and our
chief
operating officer James Yacabucci. If one or more of our senior executives
or other key personnel are unable or unwilling to continue in their present
positions, we may not be able to replace them easily or at all, and our business
may be disrupted and our financial condition and results of operations may
be
materially and adversely affected. Competition for senior management and key
personnel is intense, the pool of qualified candidates is very limited, and
we
may not be able to retain the services of our senior executives or key
personnel, or attract and retain high-quality senior executives or key personnel
in the future.
In
addition, if any member of our senior management team or any of our other key
personnel joins a competitor or forms a competing company, we may lose
customers, distributors, know-how and key professionals and staff members.
Each of our executive officers and key employees has entered into an
employment agreement with us, which contains confidentiality and non-competition
provisions. If any disputes arise between any of our senior executives or
key personnel and us, we cannot assure you the extent to which any of these
agreements may be enforced.
We
rely on highly skilled personnel and, if we are unable to retain or motivate
key
personnel or hire qualified personnel, we may not be able to grow
effectively.
Our
performance and future success depends on the talents and efforts of highly
skilled individuals. We will need to continue to identify, hire, develop,
motivate and retain highly skilled personnel for all areas of our organization.
Competition in our industry for qualified employees is intense. Our continued
ability to compete effectively depends on our ability to attract new employees
and to retain and motivate our existing employees.
As
competition in our industry intensifies, it may be more difficult for us to
hire, motivate and retain highly skilled personnel. If we do not succeed in
attracting additional highly skilled personnel or retaining or motivating our
existing personnel, we may be unable to grow effectively.
If
we are unable to adapt or expand our existing technology infrastructure to
accommodate greater traffic or additional user requirements, our business may
be
harmed.
Our
websites regularly serve large numbers of users and deliver a large amount
of
content. Our technology infrastructure is highly complex and may not
provide satisfactory service in the future. We may be required to upgrade
our technology infrastructure to keep up with the increasing traffic on our
websites, such as increasing the capacity of our hardware servers and the
sophistication of our software. If we fail to adapt our technology
infrastructure to accommodate greater traffic or advertiser requirements, our
users and advertisers may become dissatisfied with our services and switch
to
our competitors' websites, which could harm our business.
Our
business could be adversely affected if our software contains bugs.
Our
online systems, including our websites, our social networking and entertainment
platforms and our enterprise search software and other software applications
and
products, could contain undetected errors or "bugs" that could adversely affect
their performance. We regularly update and enhance our website and our other
online systems and introduce new versions of our software products and
applications. The occurrence of errors in any of these may cause us to lose
market share, damage our reputation and brand name, and materially and adversely
affect our business.
We
have limited business insurance coverage.
The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. We do not have
any
business liability or disruption insurance coverage for our operations in China.
Any business disruption, litigation or natural disaster may result in our
incurring substantial costs and the diversion of our resources.
If
BBMAO fails to obtain a license for using search results from websites operated
by Baidu, Google and others our business and operations would be materially
and
adversely affected.
Our
subsidiary BBMAO uses search results from Baidu.com, Google.com and others
as a
part of its business operations. However, BBMAO does not currently have a
license to use such search results. BBMAO may seek to negotiate licensing
agreements with some or all of these companies in order to continue using the
search results from these websites. However, BBMAO does not believe that they
will be able to successfully pursue such negotiations unless and until BBMAO
attains greater volume. If BBMAO fails to reach agreement with such
entities, and they take action to stop BBMAO's use of their search results,
then
BBMAO's search results would have to be severely curtailed and its business
and
operations could be materially and adversely affected.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Substantially
all of our assets are located in China and substantially all of our revenue
is
derived from our operations in China. Accordingly, our results of operations
and
prospects are subject, to a significant extent, to the economic, political
and
legal developments in China.
The
PRC's
economic, political and social conditions, as well as government policies,
could
affect our business. The PRC economy differs from the economies of most
developed countries in many respects. According to Global Insight, since
1978, China has been one of the world's fastest-growing economies in terms
of
gross domestic product, or GDP, growth. We cannot assure you, however, that
such
growth will be sustained in the future. Moreover, the recent slowdown in the
economies of the United States, the European Union and certain Asian countries
may adversely affect economic growth in China.
The
PRC's
economic growth has been uneven, both geographically and among various sectors
of the economy. The PRC government has implemented various measures to encourage
economic growth and guide the allocation of resources. Some of these measures
benefit the overall PRC economy, but may also have a negative effect on us.
For
example, our financial condition and results of operations may be adversely
affected by government control over capital investments or changes in tax
regulations that are applicable to us.
The
PRC
economy has been transitioning from a planned economy to a more market-oriented
economy. Although in recent years the PRC government has implemented measures
emphasizing the use of market forces for economic reform, the reduction of
state
ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of productive assets
in China is still owned by the PRC government. In addition, the PRC government
continues to play a significant role in regulating industry development by
imposing industrial policies. It also exercises significant control over PRC
economic growth through the allocation of resources, controlling payment of
foreign currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. We cannot assure
you that China's economic, political or legal systems will not develop in a
way
that is detrimental to our business, results of operations and
prospects.
If
the PRC government finds that the agreements that establish the structure for
operating our China business do not comply with PRC government restrictions
on
foreign investment in the online games industry, we could be subject to severe
penalties and business loss.
PRC
regulations currently limit foreign ownership of companies that provide
commercial Internet content services to 50%. In addition, foreign and foreign
invested enterprises are currently not able to apply for the licenses required
to operate commercial Internet content service in China. We and our subsidiaries
and equity joint ventures in China, namely BWA Shanghai and 9E3 JV, are
considered foreign enterprises according to Chinese Law. To comply with Chinese
regulations, our business is conducted through commercial arrangements and
Local
Enterprises where we have no equity interest. We gain profits from these
commercial arrangements.
In
the
opinion of Grandall Legal Group, our PRC legal counsel, these commercial
arrangements are legal and valid, and are not prohibited by Chinese laws and
regulations, and so far there are no precedents where these types of agreements
are found to be illegal or invalid. However, China's Internet industry is
undergoing rapid development. We expect that new laws and regulations
regarding foreign investment and other aspects in Internet industry will be
enacted, which will have impact on our business. Furthermore, the interpretation
and application of current or future PRC laws and regulations will also result
in material uncertainty. Accordingly, we cannot assure you that the PRC
regulatory authorities at some time in the future, will not ultimately take
a
view that these commercial arrangements are invalid or violate Chinese laws
and
regulations.
If
we are
found to be in violation of any existing or future PRC laws or regulations,
the
relevant regulatory authorities would have broad discretion in dealing with
such
violations, including:
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discontinuing
or restricting our operations;
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imposing
conditions or requirements with which we may not be able to
comply;
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requiring
us, to restructure the relevant ownership structure or operations;
or
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taking
other regulatory or enforcement actions, including levying fines,
that
could be harmful to our business.
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Our
commercial arrangements may not be as effective in providing operational control
as direct ownership. In addition, these arrangements may be difficult to
enforce, create a double layer of taxation and may be subject to scrutiny by
the
PRC tax authorities.
We
conduct substantially our operations, and generate substantially most of our
revenues, through commercial arrangements with Local Enterprises that provide
us
with the substantial ability to control our business in China. Although we
have
been advised by Grandall Legal Group, our PRC legal counsel, that these
commercial arrangements are valid, binding and enforceable under current PRC
laws and regulations, these commercial arrangements may not be as effective
in
providing us with control over the business operation owned by certain Chinese
people as direct ownership. For example, the Local Enterprises party to these
commercial arrangements could refuse to pay the service fees due under the
commercial arrangements or otherwise breach the commercial
arrangements.
These
commercial arrangements are governed by PRC law and provide for the resolution
of disputes through either arbitration or litigation in the PRC. Accordingly,
these contracts would be interpreted in accordance with PRC law and any disputes
would be resolved in accordance with PRC legal procedures. If the companies
fail
to perform its obligations under these commercial arrangements, we may have
to
rely on legal remedies under PRC law, including seeking specific performance
or
injunctive relief, and claiming damages, which we cannot be sure would be
effective. The legal environment in the PRC is not, however, as developed as
in
some other jurisdictions, such as the United States. As a result, uncertainties
in the PRC legal system could limit our ability to enforce these commercial
arrangements.
The
PRC
legal system is a civil law system based on written statutes. Unlike common
law
systems, it is a system in which decided legal cases have little precedential
value. Although legislation in China over the past 20 years has significantly
improved the protection afforded to various forms of foreign investment and
contractual arrangements in China, these laws, regulations and legal
requirements are relatively new and their interpretation and enforcement involve
uncertainties, which could limit the legal protection available to us. In
addition, the PRC government may propose new laws or amend current laws that
may
be detrimental to our current commercial arrangements, which may in turn have
a
material adverse effect on our business operations. Furthermore, as the Local
Enterprises party to the commercial arrangements, their shareholders and their
assets are located in China, it may not be possible to effect services of
processes within the United States or elsewhere outside of China upon these
entities or assets or enforce judgments of courts in jurisdictions outside
of
China against these entities or assets.
The
laws and regulations governing the Internet industry and related businesses
in
China are developing and subject to future changes. If we or the Local
Enterprises party to the commercial arrangements fail to obtain or maintain
all
applicable permits and approvals, our business and operations would be
materially and adversely affected.
The
Internet industry in China is highly regulated by the PRC government. Various
regulatory authorities of the central PRC government, such as the State Council,
the MII, the SAIC, the Ministry of Culture, the State Press and Publication
Administration, and the Ministry of Public Security, are empowered to issue
and
implement regulations governing various aspects of the Internet and online
games
industries.
Our
business is required to obtain applicable permits or approvals from different
regulatory authorities in order to provide our services. For example, an ICP
must obtain an ICP License from the MII in order to engage in any commercial
ICP
operations within China. In addition, an ICP must also obtain a license from
the
Ministry of Culture in order to circulate audio-video program on the Internet.
The licenses and permits to operate commercial Internet content include,
but are not limited to, ICP License, IP Address Registration, Domain Name
Ownership, Internet Culture License, Internet Audio/Visual Program Transmission
License, Advertising Business Permit, a BBS Permit and Circular 75 Registration
which may be not all required for an ICP. If we fail to obtain or maintain
any of the required permits or approvals, we may be subject to various
penalties, including fines and the discontinuation or restriction of our
operations. The Local Enterprises party to the commercial arrangements
conducting the commercial Internet content service, face the problem of
acquiring certain licenses or permits.
9E3
does
not have the IP address Registration or BBS Permit, but based on our recent
informal consultation with competent local government authorities, such
registration and permit are currently not required to be approved by the
government. However, these informal answers from the local government
authorities are not always consistent with what the laws and regulations
stipulate, and may be challenged by them in the future. If successfully
challenged, we may be subject to penalties including winding-up of the website
for a period not exceeding 6 months, a fine equal to three or five times any
income and shutting down of the website.
Government
control of currency conversion may adversely affect our financial condition
and
results of operations.
We
receive substantially all of our revenues in RMB, which currently is not a
freely convertible currency. A portion of these revenues must be converted
into
other currencies to meet our foreign currency obligations including, among
others, payment of dividends declared, if any, in respect of our ordinary
shares.
Under
China's existing foreign exchange regulations, our PRC subsidiaries are able
to
pay dividends in foreign currencies, without prior approval from the State
Administration of Foreign Exchange, or SAFE by complying with certain procedural
requirements. However, we cannot assure you that the PRC government will not
take measures in the future to restrict access to foreign currencies for current
account transactions.
Foreign
exchange transactions under the capital accounts of PRC subsidiaries continue
to
be subject to significant foreign exchange controls and require the approval
of
PRC governmental authorities, including the SAFE. In particular, if our
subsidiaries, BWA Shanghai or 9E3 JV borrow foreign currency loans from us
or
other foreign lenders, these loans must be registered with SAFE, and if we
finance these subsidiaries by means of additional capital contributions, these
capital contributions must be approved by certain government authorities
including the Ministry of Commerce or its local counterparts. In addition,
if we
finance the Local Enterprises by loans, we must obtain approval from SAFE.
These
limitations could affect the ability of BWA Shanghai, 9E3 JV and the Local
Enterprises to obtain foreign exchange through debt or equity
financing.
Fluctuations
in exchange rates could adversely affect our business and the value of our
securities.
The
value
of our common stock will be indirectly affected by the foreign exchange rate
between U.S. dollars and RMB and between those currencies and other currencies
in which our sales may be denominated. Because substantially all of our earnings
are denominated in RMB and our cash assets are denominated in U.S. dollars,
fluctuations in the exchange rate between the U.S. dollar and the RMB will
affect the relative purchasing power of our cash assets, our balance sheet
and
our earnings per share in U.S. dollars. In addition, appreciation or
depreciation in the value of the RMB relative to the U.S. dollar would affect
our financial results reported in U.S. dollar terms without giving effect to
any
underlying change in our business or results of operations. Fluctuations in
the
exchange rate will also affect the relative value of any dividend we issue
that
will be exchanged into U.S. dollars and earnings from, and the value of, any
U.S. dollar-denominated investments we make in the future.
Since
July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the
People's Bank of China regularly intervenes in the foreign exchange market
to
prevent significant short-term fluctuations in the exchange rate, the RMB may
appreciate or depreciate significantly in value against the U.S. dollar in
the
medium to long term. Moreover, it is possible that in the future PRC authorities
may lift restrictions on fluctuations in the RMB exchange rate and lessen
intervention in the foreign exchange market.
Very
limited hedging transactions are available in China to reduce our exposure
to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange
risk. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we
may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign currencies.
Failure
to comply with PRC regulations relating to the establishment of offshore special
purpose companies by PRC residents may subject our PRC resident stockholders
to
personal liability, limit our ability to acquire PRC companies or to inject
capital into our PRC subsidiaries, limit our PRC subsidiaries' ability to
distribute profits to us or otherwise materially adversely affect us.
In
October 2005, SAFE issued the Notice on Relevant Issues in the Foreign Exchange
Control over Financing and Return Investment Through Special Purpose Companies
by Residents Inside China, generally referred to as Circular 75, which required
PRC residents to register with the competent local SAFE branch before
establishing or acquiring control over an offshore special purpose company
("SPV") for the purpose of engaging in an equity financing outside of China
on
the strength of domestic PRC assets originally held by those residents. Internal
implementing guidelines issued by SAFE, which became public in June 2007 (known
as Notice 106), expanded the reach of Circular 75 by (1) purporting to
cover the establishment or acquisition of control by PRC residents of offshore
entities which merely acquire "control" over domestic companies or assets,
even
in the absence of legal ownership; (2) adding requirements relating to the
source of the PRC resident's funds used to establish or acquire the offshore
entity; (3) covering the use of existing offshore entities for offshore
financings; (4) purporting to cover situations in which an offshore SPV
establishes a new subsidiary in China or acquires an unrelated company or
unrelated assets in China; and (5) making the domestic affiliate of the SPV
responsible for the accuracy of certain documents which must be filed in
connection with any such registration, notably, the business plan which
describes the overseas financing and the use of proceeds. Amendments to
registrations made under Circular 75 are required in connection with any
increase or decrease of capital, transfer of shares, mergers and acquisitions,
equity investment or creation of any security interest in any assets located
in
China to guarantee offshore obligations, and Notice 106 makes the offshore
SPV
jointly responsible for these filings. In the case of an SPV which was
established, and which acquired a related domestic company or assets, before
the
implementation date of Circular 75, a retroactive SAFE registration was required
to have been completed before March 31, 2006; this date was subsequently
extended indefinitely by Notice 106, which also required that the registrant
establish that all foreign exchange transactions undertaken by the SPV and
its
affiliates were in compliance with applicable laws and regulations. Failure
to
comply with the requirements of Circular 75, as applied by SAFE in accordance
with Notice 106, may result in fines and other penalties under PRC laws for
evasion of applicable foreign exchange restrictions. Any such failure could
also
result in the SPV's affiliates being impeded or prevented from distributing
their profits and the proceeds from any reduction in capital, share transfer
or
liquidation to the SPV, or from engaging in other transfers of funds into or
out
of China.
We
believe our stockholders who are PRC residents as defined in Circular 75 have
met the requirements of their local branch of SAFE, as currently required,
in
connection with their equity interests in us and our acquisitions of equity
interests in our PRC subsidiaries. However, we cannot provide any
assurances that their existing registrations have fully complied with, and
they
have made all necessary amendments to their registration to fully comply with,
all applicable registrations or approvals required by Circular 75.
Moreover, because of uncertainty over how Circular 75 will be interpreted
and implemented, and how or whether SAFE will apply it to us, we cannot predict
how it will affect our business operations or future strategies. For
example, our present and prospective PRC subsidiaries' ability to conduct
foreign exchange activities, such as the remittance of dividends and foreign
currency-denominated borrowings, may be subject to compliance with Circular
75
by our PRC resident beneficial holders. In addition, such PRC residents
may not always be able to complete the necessary registration procedures
required by Circular 75. We also have little control over either our
present or prospective direct or indirect stockholders or the outcome of such
registration procedures. A failure by our PRC resident beneficial holders
or future PRC resident stockholders to comply with Circular 75, if SAFE requires
it, could subject these PRC resident beneficial holders to fines or legal
sanctions, restrict our overseas or cross-border investment activities, limit
our subsidiaries' ability to make distributions or pay dividends or affect
our
ownership structure, which could adversely affect our business and
prospects.
Regulation
and censorship of information disseminated over the Internet in China may
adversely affect our business and subject us to liability for information linked
to our website.
The
PRC government has adopted regulations governing Internet access and the
distribution of news and other information over the Internet. Under these
regulations, Internet content providers and Internet publishers are prohibited
from posting or displaying over the Internet content that, among other things,
violates PRC laws and regulations, impairs the national dignity of China, or
is
reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply
with these requirements may result in the revocation of licenses to provide
Internet content and other licenses and the closure of the concerned websites.
In the past, failure to comply with such requirements has resulted in the
closure of certain websites. The website operator may also be held liable for
such censored information displayed on or linked to the website.
In
addition, the MII has published regulations that subject website operators
to
potential liability for content displayed on their websites and the actions
of
users and others using their systems, including liability for violations of
PRC
laws prohibiting the dissemination of content deemed to be socially
destabilizing. The Ministry of Public Security has the authority to order any
local Internet service provider to block any Internet website at its sole
discretion. From time to time, the Ministry of Public Security has stopped
the
dissemination over the Internet of information which it believes to be socially
destabilizing. The State Secrecy Bureau is also authorized to block any website
it deems to be leaking State secrets or failing to meet the relevant regulations
relating to the protection of State secrets in the dissemination of online
information.
PRC
government authorities may deem certain third-party websites unlawful and could
require us to remove links to such websites, which may reduce our user traffic
and have a material adverse effect on our business.
The
Internet industry in China, including the operation of online activities, is
extensively regulated by the PRC government. Various PRC government authorities
such as the State Council, the MII, the SAIC, the State Press and Publication
Administration and the Ministry of Public Security are empowered to issue and
implement regulations governing various aspects of the Internet and online
activities. Substantial uncertainties exist regarding the potential impact
of current and future PRC laws and regulations on Internet companies like ours.
We are not able to control or restrict the operation of third-party websites
linked to or accessible through our website. If third-party websites linked
to
or accessible through our websites operate unlawful activities such as online
gambling on their websites, PRC regulatory authorities may require us to remove
the links to such websites or suspend or shut down the operation of such
websites. This in turn may reduce our user traffic and adversely affect our
business. In addition, we may be subject to potential liabilities for providing
links to third-party websites that operate unlawful activities.
Intensified
government regulation of Internet cafes could restrict our ability to maintain
or increase user traffic to our website.
In
April 2001, the PRC government began tightening its regulation of Internet
cafes. In particular, a large number of unlicensed Internet cafes have been
closed. In addition, the PRC government has imposed higher capital and facility
requirements for the establishment of Internet cafes. Furthermore, the PRC
government's policy, which encourages the development of a limited number of
national and regional Internet cafe chains and discourages the establishment
of
independent Internet cafes, may slow down the growth of Internet cafes.
Recently, the Ministry of Culture, together with other government authorities,
issued a joint notice suspending the issuance of new Internet cafe licenses.
It
is unclear when this suspension will be lifted. So long as Internet cafes are
one of the primary venues for our users to access our website, any reduction
in
the number, or any slowdown in the growth, of Internet cafes in China could
limit our ability to maintain or increase user traffic to our
website.
Adverse
changes in political and economic policies of the PRC government could
impede the overall economic growth of China, which could reduce the demand
for
our products and services and damage our business.
We
conduct substantially all of our operations and generate most of our revenue
in
China. Accordingly, our business, financial condition, results of
operations and prospects are affected significantly by economic, political
and
legal developments in China. The PRC economy differs from the economies of
most developed countries in many respects, including:
|
·
|
the
higher level of government involvement;
|
|
·
|
the
early stage of development of the market-oriented sector of the
economy;
|
|
·
|
the
higher level of control over foreign exchange; and
|
|
·
|
the
allocation of resources.
|
As
the
PRC economy has been transitioning from a planned economy to a more
market-oriented economy, the PRC government has implemented various measures
to
encourage economic growth and guide the allocation of resources. While these
measures may benefit the overall PRC economy, they may also have a negative
effect on us.
Although
the PRC government has in recent years implemented measures emphasizing the
utilization of market forces for economic reform, the PRC government continues
to exercise significant control over economic growth in China through the
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and imposing policies that impact
particular industries or companies in different ways.
Any
adverse change in the economic conditions or government policies in China could
have a material adverse effect on the overall economic growth and the level
of
internet investments and expenditures in China, which in turn could lead to
a
reduction in demand for our products and consequently have a material adverse
effect on our business and prospects.
Uncertainties
with respect to the PRC legal system could limit the legal protections available
to you and us.
We
conduct substantially all of our business through our operating subsidiaries
in
the PRC. Our operating subsidiaries are generally subject to laws and
regulations applicable to foreign investments in China and, in particular,
laws
applicable to foreign-invested enterprises. The PRC legal system is based on
written statutes, and prior court decisions may be cited for reference but
have
limited precedential value. Since 1979, a series of new PRC laws and
regulations have significantly enhanced the protections afforded to various
forms of foreign investments in China. However, since the PRC legal system
continues to rapidly evolve, the interpretations of many laws, regulations
and
rules are not always uniform and enforcement of these laws, regulations and
rules involve uncertainties, which may limit legal protections available to
you
and us. In addition, any litigation in China may be protracted and result in
substantial costs and diversion of resources and management attention.
You
may experience difficulties in effecting service of legal process and enforcing
judgments against us and our management.
We
are a
company incorporated under the laws of the State of Nevada, but our subsidiaries
and substantially all of our assets are located outside the United States.
In addition, some of our directors and officers and their assets are
located outside the United States. As a result, it may not be possible to
effect service of process within the United States upon our directors or
officers, including with respect to matters arising under U.S. federal
securities laws or applicable state securities laws. Our PRC legal
counsel, Grandall Legal Group, has advised us that the PRC does not have
treaties providing for the reciprocal recognition and enforcement of judgments
of courts with the United States, the United Kingdom or most other western
countries. As a result, recognition and enforcement in China of judgments of
a
court obtained in those jurisdictions in relation to any matter not subject
to a
binding arbitration provision may be difficult or impossible.
The
PRC government exerts substantial influence over the manner in which we must
conduct our business activities.
The
PRC
government has exercised and continues to exercise substantial control over
virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its
laws and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property and other matters.
We believe that our operations in China are in material compliance with
all applicable legal and regulatory requirements. However, the central or
local governments of the jurisdictions in which we operate may impose new,
stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations.
Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
Restrictions
on currency exchange may limit our ability to receive and use our sales revenue
effectively.
Most
of
our sales revenue and expenses are denominated in RMB. Under PRC law, the
RMB is currently convertible under the "current account," which includes
dividends and trade and service-related foreign exchange transactions, but
not
under the "capital account," which includes foreign direct investment and loans.
Currently, our PRC operating subsidiaries may purchase foreign currencies for
settlement of current account transactions, including payments of dividends
to
us, without the approval of SAFE, by complying with certain procedural
requirements. However, the relevant PRC government authorities may limit or
eliminate our ability to purchase foreign currencies in the future. Since a
significant amount of our future revenue will be denominated in RMB, any
existing and future restrictions on currency exchange may limit our ability
to
utilize revenue generated in RMB to fund our business activities outside China
that are denominated in foreign currencies.
Foreign
exchange transactions by PRC operating subsidiaries under the capital account
continue to be subject to significant foreign exchange controls and require
the
approval of or need to register with PRC government authorities, including
SAFE.
In particular, if our PRC operating subsidiaries borrow foreign currency through
loans from us or other foreign lenders, these loans must be registered with
SAFE, and if we finance the subsidiaries by means of additional capital
contributions, these capital contributions must be approved by certain
government authorities, including the Ministry of Commerce, or their respective
local counterparts. These limitations could affect their ability to obtain
foreign exchange through debt or equity financing.
We
may be unable to complete a business combination transaction efficiently or
on
favorable terms due to complicated merger and acquisition regulations which
became effective on September 8, 2006.
On
August
8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the
Regulation on Mergers and Acquisitions of Domestic Companies by Foreign
Investors, which became effective on September 8, 2006. This new
regulation, among other things, governs the approval process by which a PRC
company may participate in an acquisition of assets or equity interests.
Depending on the structure of the transaction, the new regulation will
require the PRC parties to make a series of applications and supplemental
applications to the government agencies. In some instances, the
application process may require the presentation of economic data concerning
a
transaction, including appraisals of the target business and evaluations of
the
acquirer, which are designed to allow the government to assess the transaction.
Government approvals will have expiration dates by which a transaction
must be completed and reported to the government agencies. Compliance with
the new regulations is likely to be more time consuming and expensive than
in
the past and the government can now exert more control over the combination
of
two businesses. Accordingly, due to the new regulation, our ability to
engage in business combination transactions has become significantly more
complicated, time consuming and expensive, and we may not be able to negotiate
a
transaction that is acceptable to our stockholders or sufficiently protect
their
interests in a transaction.
The
new
regulation allows PRC government agencies to assess the economic terms of a
business combination transaction. Parties to a business combination
transaction may have to submit to the Ministry of Commerce and other relevant
government agencies an appraisal report, an evaluation report and the
acquisition agreement, all of which form part of the application for approval,
depending on the structure of the transaction. The regulations also
prohibit a transaction at an acquisition price obviously lower than the
appraised value of the PRC business or assets and in certain transaction
structures, require that consideration must be paid within defined periods,
generally not in excess of a year. The regulation also limits our ability
to negotiate various terms of the acquisition, including aspects of the initial
consideration, contingent consideration, holdback provisions, indemnification
provisions and provisions relating to the assumption and allocation of assets
and liabilities. Transaction structures involving trusts, nominees and
similar entities are prohibited. Therefore, such regulation may impede our
ability to negotiate and complete a business combination transaction on
financial terms that satisfy our investors and protect our stockholders'
economic interests.
RISKS
RELATED TO OUR ORGANIZATION AND OUR COMMON STOCK
As
a result of the Share Exchange, BroadWebAsia became a consolidated subsidiary
of
a company that is subject to the reporting requirements of federal securities
laws, which can be expensive and may divert resources from other projects,
thus
impairing its ability to grow.
As
a
result of the Share Exchange, BroadWebAsia became a consolidated subsidiary
of a
public reporting company and, accordingly, subject to the information and
reporting requirements of the Exchange Act and other federal securities laws,
including compliance with the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley
Act"). The costs of preparing and filing annual and quarterly reports,
proxy statements and other information with the SEC (including reporting of
the
Share Exchange) and furnishing audited reports to stockholders will cause
BroadWebAsia's expenses to be higher than they would have been if BroadWebAsia
remained privately held and did not consummate the Share Exchange.
It
may be
time consuming, difficult and costly for us to develop and implement the
internal controls and reporting procedures required by the Sarbanes-Oxley Act.
We may need to hire additional financial reporting, internal controls and
other finance personnel in order to develop and implement appropriate internal
controls and reporting procedures. If we are unable to comply with the
internal controls requirements of the Sarbanes-Oxley Act, then we may not be
able to obtain the independent accountant certifications required by such act,
which may preclude us from keeping our filings with the SEC
current.
If
an event of default occurs under the Senior Secured Note and/or the Junior
Secured Note, then it could result in a material adverse effect on our business,
operating results and financial condition, or the loss of our assets, as
Lakewood Group, LLC has a first priority security interest, and EuroPlay has
a
subordinate security interest, in substantially all of our
assets.
Events
of
default under the Senior Secured Notes and the Junior Secured Notes include,
but
are not limited to, the following:
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·
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failure
to pay principal, interest or other amounts, if any, when
due;
|
|
·
|
any
failure to observe or perform any covenant or agreement contained
in the
Junior Secured Note or Senior Secured
Note;
|
|
·
|
a
default or event of default occurs in any of the senior loan and/or
junior
loan related documents;
|
|
·
|
any
representation or warranty made in either the Senior Secured Note
or the
Junior Secured Note or any senior loan or junior loan related documents
that is untrue or incorrect in any material
respect;
|
|
·
|
if
we or Brad Greenspan is subject to a bankruptcy event which shall
include
(i) any proceedings under bankruptcy, reorganization, dissolution,
insolvency or liquidation, etc, (ii) any bankruptcy type proceeding
that
is not dismissed within 60 days, (iii) we or a significant subsidiary
is
adjudicated bankrupt or insolvent, (iv) we or any significant subsidiary
suffers the appointment of a custodian (or similar action) and is
not
discharged within 60 days, (v) we or a significant subsidiary calls
a
meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts, or (v) we or a significant
subsidiary, by any act or failure to act indicates its consents to
the
foregoing or takes any corporate or other action for the purpose
of
effecting the foregoing;
|
|
·
|
if
we or Brad Greenspan defaults on any obligation under any agreement
that
involves an obligation greater than $100,000 and results in indebtedness
becoming or being declared due and payable prior to the date on which
it
would otherwise have become due and
payable;
|
|
·
|
any
monetary judgment against us or Brad Greenspan for more than $100,000
and
such judgment remains for a period of 20 calendar
days.
|
If
an
event of default were to occur, payment of the entire principal amount could
be
accelerated and become immediately due and payable. The cash that we may be
required to pay would most likely come out of our working capital, which may
be
insufficient to repay the obligation. In such event, we may lose some or all
of
our assets as the Lakewood has a first priority security interest, and EuroPlay
has a subordinate security interest, in substantially all of our assets. We
may
also be required to file for bankruptcy, sell assets, or cease operations,
any
of which would put our company, our investors and the value of our common stock,
at significant risk.
If
we fail to establish and maintain an effective system of internal control,
we
may not be able to report our financial results accurately or to prevent fraud.
Any inability to report and file our financial results accurately and
timely could harm our reputation and adversely impact the trading price of
our
common stock.
Effective
internal control is necessary for us to provide reliable financial reports
and
prevent fraud. If we cannot provide reliable financial reports or prevent
fraud, we may not be able to manage our business as effectively as we would
if
an effective control environment existed, and our business and reputation with
investors may be harmed. As a result, our small size and any current
internal control deficiencies may adversely affect our financial condition,
results of operation and access to capital. We have not performed an
in-depth analysis to determine if historical un-discovered failures of internal
controls exist, and may in the future discover areas of our internal control
that need improvement.
Public
company compliance may make it more difficult for us to attract and retain
officers and directors.
The
Sarbanes-Oxley Act and new rules subsequently implemented by the SEC have
required changes in corporate governance practices of public companies. As
a public company, we expect these new rules and regulations to increase our
compliance costs in 2007 and beyond and to make certain activities more time
consuming and costly. As a public company, we also expect that these new
rules and regulations may make it more difficult and expensive for us to obtain
director and officer liability insurance in the future and we may be required
to
accept reduced policy limits and coverage or incur substantially higher costs
to
obtain the same or similar coverage. As a result, it may be more difficult
for us to attract and retain qualified persons to serve on our board of
directors or as executive officers.
Because
BroadWebAsia became public by means of a "reverse merger" with Holdings, we
may
not be able to attract the attention of major brokerage
firms.
There
may
be risks associated with BroadWebAsia becoming public through a share exchange,
or "reverse merger." Securities analysts of major brokerage firms may not
provide coverage of us since there is no incentive to brokerage firms to
recommend the purchase of our common stock. No assurance can be given that
brokerage firms will, in the future, want to conduct any secondary offerings
on
behalf of our post-Share Exchange company.
Persons
associated with securities offerings, including consultants, may be deemed
to be
broker dealers, which may expose us to claims for rescission or
damages.
If
our
securities are offered without engaging a registered broker-dealer we may face
claims for rescission and other remedies. We may become engaged in costly
litigation to defend these claims, which would lead to increased expenditures
for legal fees and divert managements' attention from operating the business.
If we could not successfully defend these claims, we may be required to
return proceeds of any affected offering to investors, which would harm our
financial condition.
Our
stock price may be volatile.
The
market price of our common stock is likely to be highly volatile and could
fluctuate widely in price in response to various factors, many of which are
beyond our control, including the following:
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·
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changes
in our industry;
|
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·
|
competitive
pricing pressures;
|
|
·
|
our
ability to obtain working capital
financing;
|
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·
|
additions
or departures of key personnel;
|
|
·
|
limited
"public float" in the hands of a small number of persons whose sales
or
lack of sales could result in positive or negative pricing pressure
on the
market price for our common stock;
|
|
·
|
sales
of our common stock (particularly following effectiveness of any
resale
registration statement that we may be required to be file pursuant
to
registration rights);
|
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·
|
our
ability to execute our business
plan;
|
|
·
|
operating
results that fall below
expectations;
|
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·
|
loss
of any strategic relationship;
|
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·
|
regulatory
developments;
|
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·
|
economic
and other external factors; and
|
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·
|
period-to-period
fluctuations in our financial
results.
|
In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance
of
particular companies. These market fluctuations may also materially and
adversely affect the market price of our common stock.
We
have not paid dividends in the past and do not expect to pay dividends in the
future. Any return on investment may be limited to the value of our common
stock.
We
have
never paid cash dividends on our common stock and do not anticipate doing so
in
the foreseeable future. The payment of dividends on our common stock will
depend on earnings, financial condition and other business and economic factors
affecting us at such time as our board of directors may consider relevant.
If we do not pay dividends, our common stock may be less valuable because
a return on your investment will only occur if our stock price
appreciates.
There
is currently no liquid trading market for our common stock and we cannot ensure
that one will ever develop or be sustained.
To
date
there has been no liquid trading market for our common stock. We cannot
predict how liquid the market for our common stock might become. As soon
as is practicable, we anticipate applying for listing of our common stock on
either the American Stock Exchange, The Nasdaq Capital Market or other national
securities exchange, assuming that we can satisfy the initial listing standards
for such exchange. We currently do not satisfy the initial listing
standards, and cannot ensure that we will be able to satisfy such listing
standards or that our common stock will be accepted for listing on any such
exchange. Should we fail to satisfy the initial listing standards of such
exchanges, or our common stock is otherwise rejected for listing and remains
quoted on the OTC Bulletin Board or is suspended from the OTC Bulletin Board,
the trading price of our common stock could suffer and the trading market for
our common stock may be less liquid and our common stock price may be subject
to
increased volatility.
Furthermore,
for companies whose securities are quoted on the OTC Bulletin Board, it is
more
difficult (1) to obtain accurate quotations, (2) to obtain coverage for
significant news events because major wire services generally do not publish
press releases about such companies, and (3) to obtain needed
capital.
Our
common stock may be deemed a "penny stock," which would make it more difficult
for our investors to sell their shares.
Our
common stock may be subject to the "penny stock" rules adopted under Section
15(g) of the Exchange Act. The penny stock rules generally apply to
companies whose common stock is not listed on The Nasdaq Stock Market or other
national securities exchange and trades at less than $5.00 per share, other
than
companies that have had average revenue of at least $6,000,000 for the last
three years or that have tangible net worth of at least $5,000,000 ($2,000,000
if the company has been operating for three or more years). These rules
require, among other things, that brokers who trade penny stock to persons
other
than "established customers" complete certain documentation, make suitability
inquiries of investors and provide investors with certain information concerning
trading in the security, including a risk disclosure document and quote
information under certain circumstances. Many brokers have decided not to
trade penny stocks because of the requirements of the penny stock rules and,
as
a result, the number of broker-dealers willing to act as market makers in such
securities is limited. If we remain subject to the penny stock rules for
any significant period, it could have an adverse effect on the market, if any,
for our securities. If our securities are subject to the penny stock
rules, investors will find it more difficult to dispose of our
securities.
Exercise
of warrants may have a dilutive effect on our common
stock.
If
the
price per share of our common stock at the time of exercise of any warrants,
options, or any other convertible securities is in excess of the various
exercise or conversion prices of such convertible securities, then the exercise
or conversion of such convertible securities would have a dilutive effect on
our
common stock. As of February 12, 2008, holders of our outstanding options
may purchase up to 7,596,292 shares of our common stock at an exercise price
of
approximately $0.60 per share. The amount of dilution that may result from
the exercise of the foregoing, however, cannot currently be determined as it
would depend on the difference between our common stock price and the price
at
which such securities were exercised at the time of such exercise. In
addition, there are outstanding warrants to purchase a number of shares equal
to
$850,000 divided by 75% of the per share price received in the Triggering
Financing for an aggregate exercise price of $850,000, and warrants to purchase
a number of shares of Holdings' common stock equal to $300,000 divided by 100%
of the per share price received in the Triggering Financing for an aggregate
exercise price of $300,000. The exercise price and number of shares
issuable upon exercise of certain of our outstanding warrants will depend on
the
sale price in the Triggering Financing and cannot presently be determined.
The lower the sales price of our common stock may be in the Next
Financing, the greater the dilution to our existing stockholders' percentage
ownership and voting power will be upon any exercise of our future-priced
warrants. Furthermore, all of our outstanding warrants and options have
antidilution provisions that may result in the reduction of the exercise or
conversion price thereof as well as an increase in the number of shares of
our
common stock issuable pursuant thereto. Moreover, any additional financing
that we secure may require that we grant rights, preferences or privileges
senior to those of our common stock and which result in additional dilution
of
the existing ownership interests of our common stockholders.
Offers
or availability for sale of a substantial number of shares of our common stock
may cause the price of our common stock to decline.
If
our
stockholders sell substantial amounts of our common stock in the public market,
including shares sold pursuant to any resale registration statement that we
may
file, or upon the expiration of any statutory holding period under Rule 144,
or
upon expiration of lock-up periods applicable to outstanding shares, or issued
upon the exercise of outstanding options or warrants, it could create a
circumstance commonly referred to as an "overhang" and in anticipation of which
the market price of our common stock could fall. The existence of an
overhang, whether or not sales have occurred or are occurring, also could make
more difficult our ability to raise additional financing through the sale of
equity or equity-related securities in the future at a time and price that
we
deem reasonable or appropriate. We note that recent revisions to Rule 144
may result in shares of our common stock that we may issue in the future
becoming eligible for resale into the public market without registration in
as
little as six months after their issuance.
Because
our directors and executive officers are among our largest stockholders, they
can exert significant control over our business and affairs and have actual
or
potential interests that may depart from those of our other
stockholders.
Our
directors and executive officers own or control a significant percentage of
our
common stock. Immediately following the Share Exchange, our directors and
executive officers may be deemed beneficially to own an aggregate of
approximately 79,009,126 shares of our common stock, representing
approximately 93.0% of the outstanding shares of our common stock.
Additionally, these figures do not reflect any increase in beneficial
ownership that such persons may experience in the future upon vesting or other
maturation of exercise rights under any of the options or warrants they may
hold
or in the future be granted or if they otherwise acquire additional shares
of
our common stock. The interests of such persons may differ from the
interests of our other stockholders. As a result, in addition to their
board seats and offices, such persons will have significant influence over
and
control all corporate actions requiring stockholder approval, irrespective
of
how the Company's other stockholders may vote, including the following
actions:
|
·
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to
elect or defeat the election of our
directors;
|
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·
|
to
amend or prevent amendment of our Certificate of Incorporation or
By-laws;
|
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·
|
to
effect or prevent a merger, sale of assets or other corporate transaction;
and
|
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·
|
to
control the outcome of any other matter submitted to our stockholders
for
vote.
|
Such
persons' stock ownership may discourage a potential acquirer from making a
tender offer or otherwise attempting to obtain control of the Company, which
in
turn could reduce our stock price or prevent our stockholders from realizing
a
premium over our stock price.
Security
Ownership of Certain Beneficial Owners and Management
The
following tables set forth certain information as of February 12, 2008 regarding
the beneficial ownership of our common stock, taking into account the
consummation of the Share Exchange and the Split-Off, by (i) each person or
entity who, to our knowledge, owns more than 5% of our common stock; (ii) each
executive officer; (iii) each director; and (iv) all of our executive officers
and directors as a group. Unless otherwise indicated in the footnotes to
the following table, each of the stockholders named in the table has sole voting
and investment power with respect to the shares of our common stock beneficially
owned. Except as otherwise indicated, the address of each of the stockholders
listed below is: c/o World of Tea Inc., 9255 Sunset Boulevard, Suite 1010,
West
Hollywood, California 90069.
|
Name
of Beneficial Owner
|
|
Number
of
Shares
Beneficially
Owned (1)
|
|
|
|
Percentage
of
Outstanding
Beneficially
Owned
(2)
|
|
|
Brad
Greenspan
|
|
|
76,357,112
|
|
|
|
|
|
90.0
|
%
|
|
Daniel
Yeh
|
|
|
4,151,805
|
|
|
|
|
|
4.9
|
%
|
|
Peter
Schloss
|
|
|
--
|
|
|
(3
|
)
|
|
*
|
|
|
James
Yacabucci
|
|
|
2,652,014
|
|
|
(4
|
)
|
|
3.1
|
%
|
|
Choo
Kiam
|
|
|
--
|
|
|
|
|
|
*
|
|
|
Ruiming
Xu
|
|
|
--
|
|
|
|
|
|
*
|
|
|
All
executive officers and directors as a group (five persons)
|
|
|
79,009,126
|
|
|
(5
|
)
|
|
93.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Represents
less than 1%
|
(1)
Unless
otherwise indicated, includes shares owned by a spouse, minor children, and
relatives sharing the same home, as well as entities owned or controlled by
the
named beneficial owner.
(2)
Based
on
84,825,000 shares of our common stock outstanding immediately following the
Share Exchange and the Split-Off.
(3)
Does
not
include 4,150,000 shares of our common stock issuable upon exercise of options
granted to Mr. Schloss that vest with respect to 1,037,500 on October 1, 2008,
and thereafter vest in equal monthly installments over the following three-year
period.
(4)
Includes
2,491,083 shares of restricted stock granted pursuant to a Restricted Stock
Agreement between BroadWebAsia and Mr. Yacabucci and options to purchase an
aggregate of 160,931 shares of our common stock that will vest within 60 days
of
February 12, 2008. Does not include options to purchase an aggregate of
685,669 shares of our common stock that will not vest until more than 60 days
after February 12, 2008.
(5)
Does
not
include shares beneficially owned by Daniel Yeh, who was never an officer or
director of Holdings and has not been an officer of BroadWebAsia since September
2007.
Executive
Officers and Directors
The
following persons became our executive officers and directors on February 12,
2008, upon effectiveness of the Share Exchange, and hold the positions set
forth
opposite their respective names.
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
Brad
Greenspan
|
|
34
|
|
Chairman
|
|
|
|
|
|
|
|
Peter
Schloss
|
|
47
|
|
President,
Chief Executive Officer, Chief Financial Officer and Director
|
|
|
|
|
|
|
|
James
E. Yacabucci, Jr.
|
|
44
|
|
Chief
Operating Officer and Director
|
|
|
|
|
|
|
|
Choo
Kiam
|
|
35
|
|
Chief
Executive Officer of BBMAO BVI, BBMAO HK and BBMAO
|
|
|
|
|
|
|
|
Ruiming
Xu
|
|
19
|
|
Chief
Executive Officer of 9E3
|
Our
directors hold office until the earlier of their death, resignation or removal
or until their successors have been qualified. Our officers are elected
annually by, and serve at the pleasure of, our board of directors.
Biographies
BRAD
GREENSPAN.
Mr.
Greenspan became the Chairman of Holdings on February 12, 2008, in connection
with the Share Exchange. Mr. Greenspan has served as the Chairman of
BroadWebAsia since November 2005. Mr. Greenspan has also been Chairman/CEO
of LiveUniverse a U.S. Internet company since January 2005. Prior to this
Mr. Greenspan served as the Chairman and CEO of Intermix, the parent Company
of
MySpace, Flowgo and Skilljam, from April 1999 to October 2003, and as the
President of Palisades Capital, a merchant investment bank from 1996 to 1998.
Mr. Greenspan has also served as the non-executive Chairman of Borba LLC,
a manufacturer of skincare products since February 2005. Mr. Greenspan
received his BA in Political Science from University of Los Angeles in
1996.
PETER
SCHLOSS.
Mr.
Schloss became Holdings' President, Chief Executive Officer, Chief Financial
Officer and a member of the Board of Directors on February 12, 2008, in
connection with the Share Exchange. He has served as the President, Chief
Executive Officer and Chief Financial Officer of BroadWebAsia since October
1,
2007. Prior to joining BroadWebAsia, Mr. Schloss served as an executive
Director and chief legal officer of TOM Online Inc. from September 2005 to
September 2007, and as its executive director and chief financial officer from
December 2003 to September 2005. Prior to joining TOM Online, Mr. Schloss
served as managing director of Mediavest Limited from 2001 to 2003, and as
managing director of ING Barings and head of its Asia Media, Internet and
Technology Group from 1999 to 2001. Mr. Schloss has also served as an
independent director of Giant Interactive Group Inc. since November 2007.
Mr. Schloss holds a B.A. in Political Science and a J.D. from Tulane
University.
JAMES
E. YACABUCCI, JR.
Mr.
Yacabucci became Holdings' Chief Operating Officer and a member of the Board
of
Directors on February 12, 2008, in connection with the Share Exchange. He
has served in the same capacity for, and as a director of, BroadWebAsia since
November 2006. Mr. Yacabucci has over 20 years experience in technology
executive management and product development. Prior to joining
BroadWebAsia, Mr. Yacabucci served as Managing Director of Voltage Capital
from
September 2005 to October 2006, where he managed Mr. Greenspan's merchant
banking operation. Prior to this, Mr. Yacabucci is the founder, and
served from 1995 to 1998 as the Co-CEO and Chief Technology Officer of Xtiva,
a
provider of eBusiness enterprise incentive management and compensation systems
for brokerage firms. Mr. Yacabucci was also the Chief Technology Officer of
Xtiva from 1999 to 2001. Mr. Yacabucci remains a director and significant
shareholder of Xtiva. From time to time, Mr. Yacabucci uses "Iacabucci" as
an alternative spelling of his surname.
CHOO
KIAM.
Mr.
Kiam was the founder of our subsidiary BBMAO, and has served as the Chief
Executive Officer of BBMAO BVI and BBMAO since 2005, and as the Chief Executive
Officer of BBMAO HK since 2003. Prior to this, Mr. Kiam worked at Xerox
PARC, a research and development company, from 2002 to 2003, where he did
groundbreaking research on applied statistical methods for artificial
intelligence. From 2001 to 2002, Mr. Kiam was employed by Verity, Inc., a
provider of infrastructure software, where he made significant contributions
to
many search engine-related products. Kiam has authored several papers and
patents on artificial intelligence and search technologies. He holds a
Masters' degrees in both physics and computer science from the University of
Toronto.
RUIMING
XU.
Mr.
Ruiming Xu is the founder of our joint venture partner 9e3 ICP and has served
as
the Chief Executive Officer of 9e3 ICP since 2006. During this period Mr.
Xu has overseen the founding of 200 flash studios and 155 internet safety
organizations, and the investment and management of around 5000 personal
internet websites with 12 million independent visitors every each month.
Except
as
noted above, there are no other agreements or understandings for any of our
executive officers or directors to resign at the request of another person
and
no officer or director is acting on behalf of nor will any of them act at the
direction of any other person.
Board
Composition and Committees
Our
board
of directors is currently composed of 3 members, Brad Greenspan, James Yacabucci
and Peter Schloss are our directors. All Board action requires the
approval of a majority of the directors in attendance at a meeting at which
a
quorum is present. We intend to increase the size of our board of
directors in the future but have not determined the approximate time to take
such action.
We
currently do not have standing audit, nominating or compensation committees.
Our entire board of directors handles the functions that would otherwise
be handled by each of the committees. We intend, however, to establish an
audit committee, a nominating committee and a compensation committee of the
board of directors as soon as practicable. We envision that the audit
committee will be primarily responsible for reviewing the services performed
by
our independent auditors, evaluating our accounting policies and our system
of
internal controls. The nominating committee would be primarily responsible
for nominating directors and setting policies and procedures for the nomination
of directors. The nominating committee would also be responsible for
overseeing the creation and implementation of our corporate governance policies
and procedures. The compensation committee will be primarily responsible
for reviewing and approving our salary and benefit policies (including stock
options), including compensation of executive officers.
Our
board
of directors has not made a determination as to whether any member of our board
is an audit committee financial expert. Upon the establishment of an audit
committee, the board will determine whether any of the directors qualify as
an
audit committee financial expert.
Director
Compensation
We
have
not paid our director fees in the past for attending scheduled and special
meetings of our board of directors and we have no standard arrangement pursuant
to which any director is compensated for his or her services in such capacity.
In the future, when independent directors are appointed to our board, we
may adopt a policy of paying independent directors for their services as
independent directors.
We
do,
however, reimburse directors for reasonable travel expenses related to
attendance at board of directors and committee meetings.
Family
Relationships
There
are
no family relationships among our directors or officers.
Code
of Ethics
We
have
not yet adopted a code of ethics, however we intend to adopt one in the near
future.
Involvement
in Certain Legal Proceedings
We
may
become involved in lawsuits and legal proceedings arising from the ordinary
course of our business. This may adversely affect or harm our business.
Except as described below, we are currently not aware of any such legal
proceedings or claims that we believe will have a material adverse affect on
our
business, financial condition or operating results.
To
the
best of our knowledge, none of our directors or executive officers has been
convicted in a criminal proceeding, excluding traffic violations or similar
misdemeanors, or has been a party to any judicial or administrative proceeding
during the past five years that resulted in a judgment, decree or final order
enjoining the person from future violations of, or prohibiting activities
subject to, federal or state securities laws, or a finding of any violation
of
federal or state securities laws, except for matters that were dismissed without
sanction or settlement. Except as set forth in our discussion below in
"Certain Relationships and Related Transactions," none of our directors,
director nominees or executive officers has been involved in any transactions
with us or any of our directors, executive officers, affiliates or associates
which are required to be disclosed pursuant to the rules and regulations of
the
SEC.
Executive
Compensation
The
following table sets forth information concerning all cash and non cash
compensation awarded to, earned by or paid to the following persons for services
rendered in all capacities during the noted periods: (i) each person
serving as our chief executive officer at any time during the fiscal year ended
December 31, 2007; (ii) and our other executive officers whose total
compensation exceeded $100,000 during the fiscal year ended December 31,
2007.
|
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Option
Awards
($)
|
|
All
Other Compensation
($)
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter
Schloss
|
|
|
2007
|
|
|
45,750
|
|
|
--
|
|
|
--
|
|
|
49,250
|
|
|
95,000
|
|
|
President,
Chief Executive Officer and Chief Financial Officer (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Israel
Morgenstern
|
|
|
2007
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Former
President and Treasurer of Holdings (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel
Yeh
|
|
|
2007
|
|
|
145,171
|
|
|
|
|
|
|
|
|
|
|
|
145,171
|
|
|
Former
President and Chief Executive Officer of BroadWebAsia (3)
|
|
|
2006
|
|
|
109,166
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
109,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Yacabucci
|
|
|
2007
|
|
|
96,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
96,000
|
|
|
Chief
Operating Officer (4)
|
|
|
2006
|
|
|
8,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
8,000
|
|
________________
(1)
On
February 12, 2008, in connection with the Share Exchange, Mr. Schloss became
the
Chief Executive Officer and Chief Financial Officer of Holdings. Mr.
Schloss had served in the same capacities for BroadWebAsia beginning in
September 2007. The annual, long term and other compensation shown in this
table includes the amount Mr. Schloss received from BroadWebAsia prior to the
consummation of the reverse acquisition. In addition to Mr. Schloss'
annual base salary of $193,000, he is entitled to receive a various allowances
valued at an aggregate of approximately $197,000. Mr. Schloss is also
entitled to participate in the Company's executive bonus program. These
bonuses are granted at the sole discretion of the board of directors.
During 2007, Mr. Schloss received options that were exchanged in the Share
Exchange for options to purchase 4,150,000 shares of our common stock. The
options will vest with respect to 25% of the total number of shares granted
on
October 1, 2008 and then vest in equal monthly installments over the following
3
year period. No value has been assigned to Mr. Schloss's options for
2007
(2)
Mr.
Morgenstern served as the President and Treasurer of Holdings from February
15,
2007 through the closing of the Share Exchange. Mr. Morgenstern received
no compensation from Holdings for such services.
(3)
Mr.
Yeh
served as the President and Chief Executive Officer of BroadWebAsia from
September 2005 until September 2007. The annual, long term and other
compensation shown in this table includes the amount Mr. Yeh received from
BroadWebAsia prior to the consummation of the reverse acquisition.
(4)
On
February 12, 2008, in connection with the Share Exchange, Mr. Yacabucci became
the Chief Operating Officer of Holdings. Mr. Yacabucci had served in the
same capacities for BroadWebAsia beginning in November 2006. The annual,
long term and other compensation shown in this table includes the amount Mr.
Yacabucci received from BroadWebAsia prior to the consummation of the reverse
acquisition. Mr. Yacabucci's annual base salary is currently $96,000.
Upon the occurrence of the closing of our next financing, Mr. Yacabucci's
base salary will increase to $180,000 per annum. Upon the effective date
of Mr. Yacabucci's employment contract, he was issued 345,000 shares of
BroadWebAsia's capital stock which were exchanged for 2,491,083 shares of our
common stock in the Share Exchange. We have the right to repurchase such
shares at a price of approximately $0.00013849375903615 per share. The
shares will fully vest 45 months from their issuance, and our right to
repurchase the shares shall expire with respect to one-sixteenth of such shares
on each February 1, May 1, August 1 and November 1 commencing with February
1,
2007 and concluding with November 1, 2010. In addition, on November 13,
2007, BroadWebAsia granted Mr. Yacabucci options that were exchanged in the
Share Exchange for stock options to purchase an aggregate of 846,600 shares
of
our common stock. Such options vested immediately with respect to 110,387
shares, will vest in 12 equal quarterly installments with respect to another
217,461 shares and will vest in 16 equal quarterly installments with respect
to
the remaining 518,752 shares, in each case commencing February 13, 2008.
No value was assigned to Mr. Yacabucci's restricted stock or options for
2007. The closing of the Share Exchange was a milestone the achievement of
which entitled Mr. Yacabucci to a bonus of up to $60,000.
Outstanding
Equity Awards at Fiscal Year End
None
of
our named executive officers received any equity-based awards, including
options, restricted stock or other equity incentives, during the fiscal year
ended December 31, 2007, nor do we provide retirement benefits (other than
the
state pension scheme in which all of our employees in China are required to
participate), or severance or change of control benefits to our named executive
officers.
Employment
Agreements
On
September 18, 2007, Peter Schloss, our Chief Executive Officer and Chief
Financial Officer, entered into an employment agreement with our subsidiary
BroadWebAsia pursuant to which BroadWebAsia agreed to pay him an annual base
salary of $193,000, as consideration for performance of his duties as Chief
Executive Officer of BroadWebAsia. In addition to Mr. Schloss' base
salary; he is entitled to receive a $10,000 home leave allowance, a $20,000
automobile allowance, a $45,000 tuition allowance and a $72,000 housing
allowance. Mr. Schloss is also entitled to participate in our executive
bonus program. These bonuses are granted at the sole discretion of our
board of directors. Mr. Schloss is also entitled to an annual tax
equalization payment, by which we will pay on his behalf any personal income
taxes which Mr. Schloss is required to pay in China, less the personal income
tax he would be required to pay if (i) he were residing in Hong Kong, (ii)
he
was receiving the compensation provided by his employment agreement and (iii)
his compensation was subject to Hong Kong personal income tax. The tax
equalization payment is estimated to be equal to $50,000 per year, although
it
may be more or less. Pursuant to his employment agreement Mr. Schloss was
also entitled to receive stock options for the purchase of a number of shares
of
common stock equal to 5% of BroadWebAsia's outstanding common stock and in
fact
receive stock options to purchase 4,150,000 shares of our common stock (after
giving effect to the Share Exchange). The options will vest with respect
to 25% of the total number of shares granted on October 1, 2008 and then vesting
in equal monthly installments over the following 3 year period. The
initial term of Mr. Schloss' employment agreement is one year, and will
thereafter automatically renew until terminated upon three (3) months notice
by
either party. The initial term of Mr. Schloss's employment is for one
year, after which his employment shall be "at will." During the initial
term, Mr. Schloss may only be terminated by us for cause. Thereafter, we
must either give Mr. Schloss three months written notice of termination, or
pay
him three months of base salary plus allowances, in order to terminate his
employment. For a six month period following Mr. Yacabucci’s termination,
he will not divert, take away or attempt to take away any customer or business
partner of the Company who has been a customer or a partner within one year
prior to the termination.
On
January 31, 2007, James Yacabucci, our Chief Operating Officer, entered into
an
employment agreement with our subsidiary BroadWebAsia pursuant to which
BroadWebAsia agreed to pay Mr. Yacabucci an annual base salary of $96,000.
Upon the occurrence of the closing of a financing greater than or equal to
$5,000,000, Mr. Yacabucci's base salary will increase to $180,000 per annum.
Upon the effective date of Mr. Yacabucci's employment contract, he was
issued 345,000 shares of BroadWebAsia's capital stock which were exchanged
for
2,491,083 shares of our common stock in the Share Exchange. We have the
right to repurchase such shares at a price of approximately
$0.000138493975903615 per share. The shares will fully vest 45 months from
their issuance, and our right to repurchase the shares shall expire with respect
to one-sixteenth of such shares on each February 1, May 1, August 1 and November
1 commencing with February 1, 2007 and concluding with November 1, 2010.
In addition, on November 13, 2007, BroadWebAsia granted Mr. Yacabucci
options that were exchanged in the Share Exchange for stock options to purchase
an aggregate of 846,600 shares of our common stock. Such options vested
immediately with respect to 110,387 shares, will vest in 12 equal quarterly
installments with respect to another 217,461 shares and will vest in 16 equal
quarterly installments with respect to the remaining 518,752 shares. The
initial term of Mr. Yacabucci's employment agreement is one year, and shall
thereafter automatically renew for successive three-month periods until
terminated upon thirty (30) days notice by either party. Upon termination
by us for "cause" (as defined in our employment agreement with Mr. Yacabucci),
Mr. Yacabucci will be entitled to receive his salary through the date of his
termination. In the event of a termination by us without cause, Mr.
Yacabucci is entitled to receive his then salary for a period of six months,
as
severance. In such case, we will also be responsible for, during the
severance period, any major medical, hospitalization and health benefits, if
any, covering the Mr. Yacabucci prior to his termination. Furthermore, if we
terminate Mr. Yacabucci's employment for reasons other than for Cause (as
defined in his employment agreement), then the vesting of his restricted stock
will accelerate so that the shares of restricted stock that are scheduled to
vest on each of the next four vesting dates shall vest immediately upon such
termination date. For a six month period following Mr. Yacabucci's
termination, he will not divert, take away or attempt to take away any customer
or business partner of the Company who has been a customer or a partner within
one year prior to the termination.
2007
Equity Incentive Plan
We
have
adopted the World of Tea Inc. 2008 Equity Incentive Plan, pursuant to which
12,723,750 shares of our common stock are reserved for issuance as awards to
employees, directors, consultants, and other service providers.
Director
Compensation
There
have been no fees earned or paid in cash for services to our directors for
their
services as directors of the Company. No stock or stock options or
other equity incentives were awarded to our directors during the fiscal
year ended December 31, 2007, nor has any member of our board of directors
received stock, stock options or other equity incentives since the end of the
fiscal year ended December 31, 2007. We do not have non-equity incentive
or a deferred compensation plan in which our directors may
participate.
We
expect
that we will retain independent directors in the near future. Once we do
so, we expect that we will pay those directors a fee for their services as
our
directors.
Certain
Relationships and Related Transactions
Transactions
with Related Persons
The
following includes a summary of transactions since the beginning of the 2006
fiscal year, or any currently proposed transaction, in which we were or are
to
be a participant and the amount involved exceeded or exceeds $120,000, and
in
which any related person had or will have a direct or indirect material interest
(other than compensation described under "Executive Compensation"). We
believe the terms obtained or consideration that we paid or received, as
applicable, in connection with the transactions described below were comparable
to terms available or the amounts that would be paid or received, as applicable,
in arm's-length transactions.
|
·
|
On
February 12, 2008, Holdings consummated the Share Exchange contemplated
by
a share exchange agreement among us and the owners of the issued
and
outstanding capital stock of BroadWebAsia, including Brad Greenspan,
our
Chairman and James Yacabucci, our Chief Operating Officer. Pursuant
to the share exchange agreement, Holdings acquired 100 percent of
the
outstanding capital stock of BroadWebAsia in exchange for 83,000,000
shares of Holdings' common stock. As a result of this transaction,
Messrs. Greenspan and Yacabucci became the beneficial owners of
approximately 93.0% of our outstanding common stock, in the
aggregate.
|
|
·
|
From
time to time Brad Greenspan, our Chairman and controlling stockholder,
has
advanced us various amounts of funds for our working capital. At
September 30, 2007, we owed Mr. Greenspan approximately $3,000,000.
On December 7, 2007, BroadWebAsia issued to Mr. Greenspan a
convertible note (the "Convertible Note") in the principal amount
of
$1,150,000 and a "grid" promissory note (the "Grid Note") in the
initial
principal amount of $3,000,000.
The
principal amount of the Grid Note has been increased from time to
time to
reflect additional advances of funds by Mr. Greenspan to us. As of
December 31, 2007, the outstanding principal amount of the Grid Note
was
$3,343,214.
The Grid Note and Convertible Note were assumed by
Holdings at the time of the reverse acquisition with BroadWebAsia
in
accordance with the provisions of the share exchange agreement. The
notes bear interest at the federal short-term rate in effect during
the
periods in which any amount owed pursuant to the terms of the notes
remain
outstanding, or for any entire calendar year that the note remained
outstanding, the note bears interest at the "blended annual rate"
which is
published annually by the Internal Revenue Service. Principal and
accrued interest on the note is payable within sixty (60) days following
Mr. Greenspan's written demand for payment, but the Company has the
right
at any time to prepay, in whole or in part, the principal and accrued
interest without penalty upon fifteen (15) days prior written notice
to
Mr. Greenspan. The Convertible Note is convertible into shares of
our common stock, at the per share price received in the first
financing.
|
|
·
|
On
August 16, 2006, we completed the acquisition from Palisades Technology,
Inc., a company owned and controlled by Brad Greenspan, our controlling
shareholder, of stock representing 65% of the issued and outstanding
capital stock of BBMAO BVI, and of its wholly owned subsidiary BBMAO
HK,
for a nominal amount of $1. BBMAO BVI was incorporated in the BVI on
August 8, 2005 for the purpose of being a holding company. BBMAO HK
was incorporated in Hong Kong on August 23, 2005 for the purpose
of being
a holding company.
|
|
·
|
BroadWebAsia
sublets approximately 1,000 square feet of office space in Los Angeles
from LiveUniverse on a month-to-month basis for which we pay LiveUniverse
rent of approximately $5,000 per
month.
|
Guarantees
of Company Debt:
On
September 12, 2007, BroadWebAsia issued a $750,000 Senior Secured Note (the
"Lakewood Note") to the Lakewood Group, LLC. Pursuant to the terms of the
Lakewood Note, Brad Greenspan, our Chairman and controlling stockholder executed
a personal guaranty secured, among other things, by a securities account pledge
agreement in which he pledged his 10,575,000 ordinary shares of BroadWebAsia
and
763,336 shares of common stock of New Motion, Inc. as security for such
guaranty. The Lakewood Note bears interest at a rate of 18% per annum,
payable every two months in arrears, beginning on November 12, 2007, and on
the
maturity date. The Lakewood Note is due and payable on the earlier of (i)
March 4, 2008 and (ii) the occurrence of any financing (whether debt or equity)
or series of financings with aggregate gross proceeds to BroadWebAsia in excess
of $750,000.
On
December 5, 2007, BroadWebAsia issued a $600,000 Junior Secured Note (the
"EuroPlay Note") to EuroPlay Capital Advisors, LLC. Pursuant to the terms
of the EuroPlay Note, Brad Greenspan, our Chairman and controlling stockholder
executed a personal guaranty secured, among other things, by a securities
account pledge agreement in which he pledged his 10,575,000 ordinary shares
of
BroadWebAsia and 763,336 shares of common stock of New Motion, Inc. as security
for such guaranty. The EuroPlay Note bears an interest at a rate of 18% per
annum, payable every two months in arrears, beginning on January 31, 2008,
and
on the maturity date. The EuroPlay Note is due and payable on the earlier
of (i) March 14, 2008, and (ii) the date the Lakewood Note is repaid in
full.
Promoters
and Certain Control Persons
Except
as
set forth in our discussion above, none of our directors, director nominees
or
executive officers has been involved in any transactions with us or any of
our
directors, executive officers, affiliates or associates which are required
to be
disclosed pursuant to the rules and regulations of the SEC
Controls
and Procedures
Our
Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures as (defined in Rules 13a-14 and 15d-14
under the Securities Exchange Act of 1934) as of a date within 90 days prior
to
the filing date of this quarterly report and, based on this evaluation, have
concluded that the disclosure controls and procedures are
effective.
There
have been no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
most recent evaluation.
Upon
the
closing of the Share Exchange on February 12, 2008, the size of Holding’s Board
of Directors was increased from two to three directors, Israel Morgenstern
and
Svetlana Pojasnikova resigned as officers and directors of Holdings, and Brad
Greenspan, Peter Schloss and James E. Yacabucci, Jr. were appointed to Holding’s
Board of Directors. Simultaneously with the Share Exchange, Holdings appointed
the previous officers of BroadWebAsia as the new officers of Holdings.
This
current report on Form 8-K does not include either a report of management’s
assessment regarding internal control over financial reporting or an attestation
report of our registered public accounting firm regarding internal control
over
financial reporting pursuant to temporary rules of the Securities and Exchange
Commission.
Item
2.03
Creation
of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet
Arrangement of a Registrant.
Following
the Share Exchange and the Split-Off, on February 12, 2008, we sold an aggregate
of $300,000 principal amount of promissory notes ("Bridge Notes") to several
purchasers in a private placement transaction pursuant to a Note Purchase
Agreement, dated as of February 15, 2008, among us and the Lenders named
therein. The Bridge Notes are due on the earlier of August 13, 2008 and the
next
transaction (or series of related transactions) in which we or our successor
sell shares of our capital stock or securities convertible into shares of our
capital stock for aggregate gross proceeds of not less than $4,000,000
(including any amounts received upon conversion or cancellation of
indebtedness). Interest on the Bridge Notes accrues at a rate of 10% per annum
for the first month they are outstanding and at a rate of 18% per annum
thereafter. We may prepay the Bridge Notes at any time, in whole or in part,
without penalty or premium.
Events
of
default under each Bridge Note include, but are not limited to, the following:
|
·
|
we
default
in
the payment of interest and/or principal on such Bridge Note;
|
|
·
|
we
fail
to
materially perform any other obligation of ours under such Bridge
Note and
such failure continues uncured for a period of ten (10) business
days
after notice thereof;
|
|
·
|
we
experience
certain insolvency- and bankruptcy- related events;
|
|
·
|
we
sell
or
otherwise transfer all or substantially all of our assets; or
|
|
·
|
we
are
in
material default of any of our indebtedness that gives the holder
thereof
the right to accelerate such indebtedness.
|
Upon
the
occurrence of an event of default, the entire indebtedness with accrued interest
thereon due under each Bridge Note shall, at the option of its holder, be
immediately due and payable without notice.
If
we
default in the payment of interest and/or principal on any Bridge Note, the
holder thereof may at his option elect to convert all or a portion of the
outstanding principal and unpaid accrued interest thereon into shares of our
common stock at a conversion price equal to 50% of the closing sale price of
our
common stock on the date immediately prior to such conversion.
Item
3.02
Unregistered
Sales of Equity Securities
Sales
by Holdings
On
February 15, 2007, Holdings issued 700,000 shares of its common stock to Israel
Morgenstern, its President, Treasurer, and Director. The purchase price paid
for
such shares was equal to its par value, $0.001 per share, and amounted in the
aggregate to $700. The shares were issued in reliance upon exemptions from
the registration requirements of the Securities Act, including without
limitation, pursuant to Section 4(2) thereof, which exempts transactions by
an
issuer not involving any public offering.
On
February 19, 2007, Holdings issued 1,300,000 shares of its common stock to
Svetlana Pojasnikova, an officer and director of the Company. The purchase
price
paid for such shares was equal to their par value, $0.001 per share, and
amounted in the aggregate to $1,300. The shares were issued in reliance upon
exemptions from the registration requirements of the Securities Act, including
without limitation, pursuant to Section 4(2) thereof, which exempts transactions
by an issuer not involving any public offering.
In
March
2007 through May 2007, Holdings issued 1,800,000 shares of common stock to
53
investors in a private placement transaction. The consideration paid for
such shares was $0.035 per share, amounting in the aggregate to $63,000.
Such offering was made in reliance upon the exemption from the
registration requirements of the Securities Act provided by Regulation S
promulgated thereunder, which exempts offers and sales made outside of the
United States to purchasers that are not United States persons (as defined
in
Regulation S) and are not acquiring the shares for the account or benefit of
a
United States person. There were no underwriters or broker-dealers
involved in the private placement and no underwriting discounts or commissions
were paid.
On
February 12, 2008, we issued 83,000,000 shares of our common stock to the former
shareholders of BroadWebAsia. The total consideration for these shares of
our common stock was 11,495,000 ordinary shares of BroadWebAsia, which were
all
of the issued and outstanding capital stock of BroadWebAsia. We did not
receive any cash consideration in connection with the share exchange. The
number of our shares issued to the shareholders of BroadWebAsia was determined
based on an arms'-length negotiation. The issuance of our shares of common
stock to the former shareholders of BroadWebAsia
was
made
in reliance upon exemptions from the registration requirements of the Securities
Act, including without limitation, pursuant to Section 4(2) thereof, which
exempts transactions by an issuer not involving any public
offering.
We
also
issued options and warrants to purchase shares of our common stock to the former
holders of options and warrants to purchase ordinary shares of BroadWebAsia.
The issuance of such options and warrants, and the offer of our common
stock that may be deemed included therein, were made in reliance upon exemptions
from the registration requirements of the Securities Act, including without
limitation, pursuant to Section 4(2) thereof, which exempts transactions by
an
issuer not involving any public offering.
In
connection with the Share Exchange, Holdings issued 25,000 shares of common
stock to a finder. The issuance of such shares of common stock were made
in reliance upon exemptions from the registration requirements of the Securities
Act, including without limitation, pursuant to Section 4(2) thereof, which
exempts transactions by an issuer not involving any public
offering.
The
description of the Share Exchange set forth under Item 2.01 of this Current
Report on Form 8-K is hereby incorporated by reference into this Item
3.02.
On
February 12, 2008, we sold $300,000 aggregate principal amount of Bridge Notes.
Under certain circumstances, such Bridge Notes may be converted into shares
of
our common stock. The Bridge Notes were offered and sold, and any shares of
common stock that may be issued upon conversion of the Bridge Notes will be
offered and sold in reliance upon exemptions from the registration requirements
of the Securities Act, including without limitation, pursuant to Section 4(2)
thereof, which exempts transactions by an issuer not involving any public
offering. The description of the Bridge Notes set forth under Item 2.03 of
this
Current Report on Form 8-K is hereby incorporated by reference into this Item
3.02.
Sales
by BroadWebAsia
Upon
BroadWebAsia's incorporation, on November 22, 2005, BroadWebAsia issued an
aggregate of 300 of its ordinary shares to its founder, Brad Greenspan, in
exchange for an aggregate of $300 of consideration.
On
January 1, 2006, BroadWebAsia issued an additional 123 of its ordinary shares
to
Brad Greenspan for a consideration of $1.00 per share and 23 shares to Daniel
Yeh for consideration of $1.00 per share.
On
February 26, 2007, each previously outstanding ordinary share of BroadWebAsia,
par value $1.00 per share, was cancelled and replaced by 25,000 ordinary shares
of BroadWebAsia, par value $0.00004 per share. Pursuant to an Employment
Agreement dated January 31, 2007, BroadWebAsia obliged itself to issue 345,000
shares to James Yacabucci, who became the registered holder of such shares
on 26
February 2007, following the stock split, in exchange for $34,500 of
consideration.
BroadWebAsia's
issuances of its ordinary shares to Mssrs. Greenspan, Yeh and Yacabucci were
made in reliance upon exemptions from the registration requirements of the
Securities Act, including without limitation, pursuant to Section 4(2) thereof,
which exempts transactions by an issuer not involving any public
offering.
In
connection with BroadWebAsia's sale of $850,000 aggregate principal amount
of
notes on September 12, 14 and 19, 2007, BroadWebAsia issued to Lakewood, Ron
Greenspan and the J. M. Mallick Revocable Trust warrants exercisable, in the
aggregate, to purchase a number of its ordinary shares equal to $850,000 divided
by 75% of the per share price received in the Triggering Financing, for an
aggregate exercise price of $850,000. The issuance of such warrants to
Lakewood, Ron Greenspan and the J. M. Mallick Revocable Trust was, and the
issuance of any shares of common stock upon exercise thereof will be, made
in
reliance upon exemptions from the registration requirements of the Securities
Act, including without limitation, pursuant to Section 4(2) thereof, which
exempts transactions by an issuer not involving any public
offering.
In
connection with BroadWebAsia's sale of a note in the principal amount of
$600,000, on December 5, 2007, BroadWebAsia issued to EuroPlay warrants
exercisable to purchase a number of its ordinary shares equal to $300,000
divided by 100% of the per share price received in the Triggering Financing,
for
an aggregate exercise price of $300,000. The issuance of such warrants to
EuroPlay was, and the issuance of any shares of common stock upon exercise
thereof will be, made in reliance upon exemptions from the registration
requirements of the Securities Act, including without limitation, pursuant
to
Section 4(2) thereof, which exempts transactions by an issuer not involving
any
public offering.
On
December 7, 2007, BroadWebAsia issued a Convertible Promissory Note to Brad
Greenspan in the principal amount of $1,150,000. Such Convertible Note
provides that it is convertible into shares of common stock, at the per share
price received in the first financing. The issuance of the Convertible
Note to Mr. Greenspan was, and the issuance of any shares of common stock upon
conversion thereof will be, made in reliance upon exemptions from the
registration requirements of the Securities Act, including without limitation,
pursuant to Section 4(2) thereof, which exempts transactions by an issuer not
involving any public offering.
Description
of Capital Stock
Authorized
Capital Stock
We
have
authorized 105,000,000 shares of capital stock, par value $0.001 per share,
of
which 100,000,000 are shares of common stock and 5,000,000 are shares of
preferred stock.
Capital
Stock Issued and Outstanding
After
giving effect to the Share Exchange and the Split-Off, our issued and
outstanding securities, on a fully diluted basis, are as follows:
|
·
|
84,825,000
shares of our common stock;
|
|
·
|
Options
to purchase an aggregate of 7,596,292 shares of our common stock
at an
exercise price of approximately $0.60 per share.
|
|
·
|
Warrants
exercisable to purchase a number of shares of our common stock equal
to
$850,000 divided by 75% of the per share price we receive in the
Triggering Financing for an aggregate exercise price of $850,000;
and
|
|
·
|
A
warrant exercisable to purchase a number of shares of our common
stock
equal to $300,000 divided by 100% of the per share price we receive
in the
Triggering Financing for an aggregate exercise price of
$300,000.
|
Common
Stock
The
holders of our common stock are entitled to one vote per share. Our Articles
of
Incorporation does not provide for cumulative voting. The holders of our common
stock are entitled to receive ratably such dividends, if any, as may be declared
by our board of directors out of legally available funds; however, the current
policy of our board of directors is to retain earnings, if any, for operations
and growth. Upon liquidation, dissolution or winding-up, the holders of
our common stock are entitled to share ratably in all assets that are legally
available for distribution. The holders of our common stock have no preemptive,
subscription, redemption or conversion rights. The rights, preferences and
privileges of holders of our common stock are subject to, and may be adversely
affected by, the rights of the holders of any series of preferred stock, which
may be designated solely by action of our board of directors and issued in
the
future.
Preferred
Stock
Our
board
of directors is authorized, subject to any limitations prescribed by law,
without further vote or action by our stockholders, to issue from time to time
shares of preferred stock in one or more series. Each series of preferred
stock will have such number of shares, designations, preferences, voting powers,
qualifications and special or relative rights or privileges as shall be
determined by our board of directors, which may include, among others, dividend
rights, voting rights, liquidation preferences, conversion rights and preemptive
rights.
Options
In
connection with the Share Exchange, each holder of options to purchase ordinary
shares of BroadWebAsia exchanged such BroadWebAsia options for options to
purchase shares of common stock of Holdings. Specifically, at the time of
the Share Exchange, BroadWebAsia had outstanding stock options to purchase
an
aggregate of approximately 1,052,039 of its ordinary shares at an exercise
price
of approximately $4.35 per share. All such outstanding options were
exchanged for stock options to purchase an aggregate of 7,596,292 shares of
Holdings' common stock at an exercise price of approximately $0.60 per share.
The terms of the Holdings stock options issued in the Share Exchange were
substantially similar to the terms of the BroadWebAsia stock options outstanding
prior to such Share Exchange, except that exercise price and number of shares
issuable upon exercise thereof were proportionally adjusted to reflect the
exchange ratio in the Share Exchange.
We
have
adopted a stock incentive plan, pursuant to which 12,723,750 shares of our
common stock are reserved for issuance as awards to employees, directors,
consultants, and other service providers.
Warrants
In
the
Share Exchange, we issued warrants to purchase a number of shares or our common
stock equal to $850,000 divided by 75% of the per share price received in the
Triggering Financing and a warrant exercisable to purchase a number of shares
of
our common stock equal to $300,000 divided by 100% of the per share price we
receive in the Triggering Financing.
Lock-Up
Agreements
As
a
condition to the Share Exchange, stockholders of Holdings prior to the Share
Exchange who held an aggregate of at least 800,000 shares of Holdings' common
stock were required to enter into Lock-up Agreements with us, pursuant to which
their disposal of beneficial ownership of such shares of our common stock is
subject to certain restrictions for a period of 120 days following the date
of
the Share Exchange. The form of such Lock-up Agreement is attached hereto
as Exhibit 10.34 and incorporated herein by reference.
Dividend
Policy
We
have
not previously paid any cash dividends on our common stock and do not anticipate
or contemplate paying dividends on our common stock in the foreseeable future.
We currently intend to use all available funds to develop our business.
We can give no assurances that we will ever have excess funds available to
pay dividends.
Liability
and Indemnification of Directors and Officers
Nevada
Revised Statutes ("NRS") Sections 78.7502 and 78.751 provide us with the power
to indemnify any of our directors and officers. The director or officer
must have conducted himself/herself in good faith and reasonably believe that
his/her conduct was in, or not opposed to, our best interests. In a
criminal action, the director, officer, employee or agent must not have had
reasonable cause to believe his/her conduct was unlawful.
Under
NRS
Section 78.751, advances for expenses may be made by agreement if the director
or officer affirms in writing that he/she believes he/she has met the standards
and will personally repay the expenses if it is determined such officer or
director did not meet the standards.
Our
Bylaws include an indemnification provision under which we have the power to
indemnify our directors, officers, former directors and officers, or any person
who serves or served at our request for our benefit as a director or officer
of
another corporation or our representative in a partnership, joint venture,
trust, or other enterprise (including heirs and personal representatives)
against all expenses, liability, and loss actually and reasonably incurred,
including an amount paid to settle an action or satisfy a judgment to which
the
director or officer is made a party by reason of being or having been a
director, officer, or representative of ours or of any other entity at our
request.
Our
Articles of Incorporation provide a limitation of liability such that no
director or officer shall be personally liable to us or any of our stockholders
for damages for breach of fiduciary duty as a director or officer, involving
any
act or omission of any such director or officer, provided there was no
intentional misconduct, fraud or a knowing violation of the law, or payment
of
dividends in violation of NRS Section 78.300.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted for our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion
of
the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
We
also
have director and officer indemnification agreements with each of our executive
officers that provide, among other things, for the indemnification to the
fullest extent permitted or required by Nevada law, provided that such
indemnitee shall not be entitled to indemnification in connection with any
"claim" (as such term is defined in the agreement) initiated by the indemnitee
against us or our directors or officers unless we join or consent to the
initiation of such claim, or the purchase and sale of securities by the
indemnitee in violation of Section 16(b) of the Exchange Act.
We
are
also permitted to apply for insurance on behalf of any director, officer, agent,
fiduciary or employee for liability arising out of such person being made party
to a proceeding because he is our officer, agent, fiduciary or employee or
because he is or was serving another entity or employee benefit plan as a
director, officer, partner, trustee, employee, fiduciary or agent at our
request.
Trading
Information
Our
common stock is currently approved for quotation on the OTC Bulletin Board
maintained by the Financial Industry Regulatory Authority, Inc. under the symbol
WLTE.OB, but is not trading. We have notified the OTC Bulletin Board of
our name change and will obtain a new symbol. As soon as practicable, and
assuming we satisfy all necessary initial listing requirements, we intend to
apply to have our common stock listed for trading on the American Stock Exchange
or The Nasdaq Stock Market, although we cannot be certain that any of these
applications will be approved
.
Transfer
Agent
The
transfer agent for our common stock is Island Stock Transfer, Inc., 100 2nd
Avenue, South, Suite 104N, St. Petersburg, FL 33701.
Item
5.01
Changes
in Control of Registrant.
Reference
is made to the disclosure set forth under Item 2.01 of this Current Report
on
Form 8-K, which disclosure is incorporated herein by reference.
Item
5.02
Departure
of Directors or Certain Officers; Election of Directors; Appointment of Certain
Officers; Compensatory Arrangements of Certain Officers.
On
February 12, 2008, upon the closing of the Share Exchange, the size of Holdings'
Board of Directors was increased from two to three directors, Israel Morgenstern
and Svetlana Pojasnikova resigned as officers and directors of Holdings, and
Brad Greenspan, Peter Schloss and James Yacabucci were appointed to Holdings'
Board of Directors. Simultaneously with the Share Exchange, Holdings
appointed the previous officers of BroadWebAsia as the new officers of Holdings.
Reference is made to the disclosure set forth under Item 2.01 of this
Current Report on Form 8-K, which disclosure is incorporated herein by
reference.
Item
5.06
Change
in Shell Company Status.
Following
the consummation of the Share Exchange described in Item 2.01 of this Current
Report on Form 8-K, we believe that we are not a shell corporation as that
term
is defined in Rule 405 of the Securities Act and Rule 12b-2 of the Exchange
Act.
Item
8.01
Other
Events
On
January 7, 2008 our BVI subsidiary, BroadWebAsia, Inc., entered into an
agreement providing for investment banking services (the "Letter Agreement").
Under the Letter Agreement, the Company appointed an exclusive financial advisor
and placement agent. Following the three month anniversary of the Letter
Agreement the Letter Agreement may be terminated by either party on 10 days
prior written notice to the other party, provided the Company will remain
obligated for any fees earned prior to termination.
In
the
event an "Offering" is completed during the term of the Letter Agreement, the
Company for a period of twelve months after the expiration of the Letter
Agreement, shall grant the right to provide investment banking services to
the
Company on an exclusive basis in all matters involving the Company's equity
securities or other instruments that may at any time be convertible into,
exchangeable for, or otherwise entitle the holder thereof to receive, directly
or indirectly, equity securities of the Company, for which investment banking
services are sought by the Company (such right, the "Right of First Refusal").
For these purposes, investment banking services shall include, without
limitation, (i) acting as lead, book-running manager for any underwritten public
offering; (ii) acting as exclusive placement agent or financial advisor in
connection with any private offering of securities of the Company; and (iii)
acting as financial advisor in connection with any sale or other transfer by
the
Company, directly or indirectly, of a majority or controlling portion of its
capital stock or assets to another entity, any purchase or other transfer by
another entity, directly or indirectly, of a majority or controlling portion
of
the capital stock or assets of the Company, and any merger or consolidation
of
the Company with another entity. The Company shall be notified of the intention
to exercise the Right of First Refusal within 15 business days following receipt
of a written notice by the Company that it is considering any of the above
transactions. Any decision to act in any such capacity shall be contained in
separate agreements, which agreements would contain, among other matters,
provisions for customary fees for transactions of similar size and nature,
as
may be mutually agreed upon, and indemnification, and shall be subject to
general market conditions. If the Right of First Refusal is not exercised,
the
Company shall have the right to retain any other person or persons to provide
such services on terms and conditions which are not materially more favorable
to
such other person or persons than the terms declined.
In
the
event that the Company consummates an Offering, concurrently with the closing
of
the Offering, the Company will pay a cash fee equal to 8% of the gross proceeds
received from the sale of securities and issue warrants for the purchase of
an
amount equal to 10% of the securities issued in the Offering (the "Warrants").
The Warrants will be exercisable into the same class of common stock as issued
as part of the Offering, have a strike price equal to the 120% of the price
paid
by the investors in connection with the Offering price and have a term of five
years. The Warrants will provide for cashless or "net" exercise at all times.
In
the event warrants are issued to investors as part of the Offering ("Investor
Warrants"), the terms and conditions of the Warrants shall be the same as
Investor Warrants, except for provisions as to term, exercise price and cashless
exercise, which shall be as set forth above. The shares issuable upon exercise
of the Warrants will be entitled to the same registration rights as those
granted to the investors in connection with the Offering. The Company will
extend the indemnification protections granted to the investors as part of
the
agreement governing the registration of the investor securities sold in the
Offering, as a third party beneficiary.
Whether
or not the Offering closes, the Company has agreed to reimburse $25,000 of
expenses. For the purposes of the Letter Agreement, an "Offering" is defined
as
"a 'PIPE' transaction involving the sale of securities to institutional
investors." The Company is in discussions with various institutional investors
and strategic partners concerning investment in the Company.
Item
9.01
Financial
Statements and Exhibits.
(a)
Financial
Statements of Businesses Acquired
.
In accordance with Item 9.01(a):
(i)
BroadWebAsia's audited financial statements for the fiscal years ended December
31, 2006 and December 31, 2005 as previously filed in this Current Report
as Exhibit 99.1;
(ii)
BroadWebAsia's unaudited financial statements for the nine-month interim periods
ended September 30, 2007 and 2006 as previously filed in this Current Report
as
Exhibit 99.2; and
(iii)
BroadWebAsia's audited financial statements for the fiscal years ended December
31, 2007 are filed in this Current Report on Form 8-K/A as Exhibit
99.4.
(b)
Pro
Forma Financial Information
.
The Company has excluded the pro forma disclosure required under Rule 8-05
of
Regulation S-X since the Company’s historical information as presented in these
financial statements represent, in all material respects, what would be
presented on a pro forma basis due to the lack of operations of the
accounting
acquiree.
(d)
Exhibits.
The
exhibits listed in the following Exhibit Index are filed as part of this Current
Report on Form 8-K/A.
|
Exhibit
No.
|
Description
|
|
|
|
|
2.1*
|
Share
Exchange Agreement, dated February 12, 2008, among World of Tea
Inc.,
BroadWebAsia, Inc. and BroadWebAsia, Inc.'s
shareholders.
|
|
|
|
|
3.1
|
Articles
of Incorporation (incorporated herein by reference to Exhibit 3.1
to the
Company's Registration Statement on Form SB-2 filed September 10,
2007)
|
|
|
|
|
3.2
|
By-laws
(incorporated herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form SB-2 filed September 10,
2007)
|
|
|
|
|
10.1*
|
Chinese
Foreign Equity Joint Venture Contract, dated November 14, 2006,
between
Shangdong Linyi Yinguang Fusi Internet Digital Technology Co.,
Ltd and
BroadWebAsia, Inc. (English Translation)
|
|
|
|
|
10.2*
|
Articles
of Association of Equity Joint Venture Company b/n Beijing Dongfang
Shang
You Tech Co., Ltd. and BroadWebAsia, Inc., establishing Beijing
Souyo
Digital Technology Co. Ltd.
|
|
|
|
|
10.3*
|
Equity
Joint Venture Contract between Shanghai Haolai Computer Information
Technology Co, Ltd and BroadWeb Asia,
Inc.
|
|
10.4*
|
Exclusive
Management Consulting Services Agreement, dated November 13, 2007,
among
BWA Management Consulting (Shanghai) Co., Ltd., Beijing BBMAO Internet
Technology Co., Ltd., Xiaozhi Zhang, Xiaohong Dong
|
|
|
|
|
10.5*
|
Purchase
Option Agreement, dated November 13, 2007, among Beijing BBMAO
Internet
Technology Co., Ltd., and BWA Management Consulting (Shanghai)
Co., Ltd.,
Xiaozhi Zhang, Xiaohong Dong
|
|
|
|
|
10.6*
|
Equity
Pledge Agreement, dated November 13, 2007, among Xiaozhi Zhang,
Xiaohong
Dong, Beijing BBMAO Internet Technology Co., Ltd., and BWA Management
Consulting (Shanghai) Co., Ltd.
|
|
|
|
|
10.7*
|
Exclusive
Technology Consulting Agreement, dated November 13, 2007, between
BWA
Management Consulting (Shanghai) Co., Ltd. and Beijing BBMAO Internet
Technology Co., Ltd.
|
|
|
|
|
10.8*
|
Senior
Secured Note, dated September 12, 2007, by BroadWebAsia, Inc. in
favor of
Lakewood Group, LLC
|
|
|
|
|
10.9*
|
Security
Agreement, dated September 12, 2007, between BroadWebAsia, Inc.
and
Lakewood Group, LLC
|
|
|
|
|
10.10*
|
Promissory
Note, dated September 14, 2007, by BroadWebAsia, Inc. in favor
of Ron
Greenspan
|
|
|
|
|
10.11*
|
Promissory
Note, dated September 19, 2007, by BroadWebAsia, Inc. in favor
of JM
Mallick Revocable Trust, dated August 26, 1987
|
|
|
|
|
10.12*
|
Employment
Agreement, dated January 31, 2007, between BroadWebAsia, Inc. and
James
Yacabucci
|
|
|
|
|
10.13*
|
Employment
Agreement, dated September 18, 2007, between BroadWebAsia, Inc.
and Peter
Schloss
|
|
|
|
|
10.14*
|
BroadWebAsia,
Inc. Share Purchase Warrant, dated September 12, 2007, issued to
Lakewood
Group, LLC
|
|
|
|
|
10.15*
|
BroadWebAsia,
Inc. Share Purchase Warrant, dated September 19, 2007, issued to
Ron
Greenspan
|
|
|
|
|
10.16*
|
BroadWebAsia,
Inc. Share Purchase Warrant, dated September 19, 2007, issued to
JM
Mallick Revocable Trust, dated August 26, 1987
|
|
|
|
|
10.17*
|
Convertible
Promissory Note, dated December 7, 2007, by BroadWebAsia in favor
of Brad
Greenspan
|
|
|
|
|
10.18*
|
Promissory
Note, dated December 7, 2007, by BroadWebAsia in favor of Brad
Greenspan
|
|
|
|
|
10.19*
|
Restricted
Stock Agreement, dated as of January 31, 2007, by and between BroadWebAsia
and James Yacabucci
|
|
|
|
|
10.20*
|
World
of Tea Inc. 2008 Equity Incentive Plan
|
|
|
|
|
10.21*
|
Form
of 2008 Incentive Stock Option Agreement
|
|
|
|
|
10.22*
|
Form
of 2008 Non-Qualified Stock Option Agreement
|
|
|
|
|
10.23*
|
Agreement
of Conveyance, Transfer and Assignment of Assets and Assumptions
of
Obligations, dated as of February 12, 2008, between World of Tea
Inc. and
WTO Holdings, Inc.
|
|
|
|
|
10.24*
|
Stock
Purchase Agreement, dated as of February 12, 2008 among World of
Tea Inc.,
Israel Morgenstern and Svetlana Pojasnikova
|
|
|
|
|
10.25*
|
Note
Purchase Agreement, dated as of February 12, 2008, between World
of Tea
Inc. and the Lenders party thereto
|
|
|
|
|
10.26*
|
Form
of Promissory Notes, made by World of Tea Inc. for the benefit
of the
Lenders under the Note Purchase Agreement, dated as of February
12, 2008
|
|
|
|
|
10.27*
|
Resignation
and Release of Israel Morgenstern, dated as of February 12, 2008
|
|
|
|
|
10.28*
|
Resignation
and Release of Svetlana Pojasnikova, dated as of February 12, 2008
|
|
|
|
|
10.29*
|
Option
Agreement between BroadWebAsia and James Yacabucci, dated November
13,
2007, vesting over a three year period
|
|
|
|
|
10.30*
|
Option
Agreement between BroadWebAsia and James Yacabucci, dated November
13,
2007, vesting over a four year period
|
|
|
|
|
10.31*
|
Option
Agreement between BroadWebAsia and James Yacabucci, dated November
13,
2007, immediately vesting
|
|
|
|
|
10.32*
|
Option
Agreement between BroadWebAsia and Peter Schloss, dated November
13,
2007
|
|
|
|
|
10.33*
|
Form
of BroadWebAsia Employee Option Agreements
|
|
|
|
|
10.34*
|
Form
of Lock-Up Agreement
|
|
|
|
|
10.35*
|
Junior
Secured Note made by BroadWebAsia in favor of EuroPlay, dated as
of
December 5, 2007
|
|
|
|
|
10.36*
|
Junior
Security Agreement between BroadWebAsia and EuroPlay, dated as
of December
5, 2007
|
|
|
|
|
10.37*
|
Form
of Share Purchase Warrant issued by BroadWebAsia to
EuroPlay
|
|
|
|
|
10.38*
|
Form
of Letter Agreement, dated as of December 3, 2007, between BroadWebAsia
and Lakewood
|
|
|
|
|
99.1*
|
BroadWebAsia,
Inc. financial statements for the fiscal years ended December 31,
2006 and
2005
|
|
|
|
|
99.2*
|
BroadWebAsia,
Inc. unaudited financial statements for the nine months ended September
30, 2007
|
|
|
|
|
99.3*
|
Pro
forma unaudited consolidated financial statements as of September
30, 2007
and for the nine months ended September 30, 2007 and the year ended
December 31, 2006
|
|
|
|
|
99.4
|
BroadWebAsia,
Inc. financial statements for the fiscal years ended December 31,
2007 and
2006
|
*
Previously Filed
SIGNATURES
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.
Date:
May 23, 2008
BROADWEBASIA,
INC.
(f/k/a
WORLD OF TEA INC.)
By:
/s/
Peter
Schloss
Name:
Peter Schloss
Title:
Chief Executive Officer and Chief Financial Officer
INDEX
TO EXHIBITS
|
Exhibit
No.
|
Description
|
|
|
|
|
2.1*
|
Share
Exchange Agreement, dated February 12, 2008, among World of Tea Inc.,
BroadWebAsia, Inc. and BroadWebAsia, Inc.'s
shareholders
|
|
|
|
|
3.1
|
Articles
of Incorporation (incorporated herein by reference to Exhibit 3.1
to the
Company's Registration Statement on Form SB-2 filed September 10,
2007)
|
|
|
|
|
3.2
|
By-laws
(incorporated herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form SB-2 filed September 10,
2007)
|
|
|
|
|
10.1*
|
Chinese
Foreign Equity Joint Venture Contract, dated November 14, 2006, between
Shangdong Linyi Yinguang Fusi Internet Digital Technology Co., Ltd
and
BroadWebAsia, Inc. (English Translation)
|
|
|
|
|
10.2*
|
Articles
of Association of Equity Joint Venture Company b/n Beijing Dongfang
Shang
You Tech Co., Ltd. and BroadWebAsia, Inc., establishing Beijing Souyo
Digital Technology Co. Ltd.
|
|
|
|
|
10.3*
|
Equity
Joint Venture Contract between Shanghai Haolai Computer Information
Technology Co, Ltd and BroadWeb Asia, Inc.
|
|
|
|
|
10.4*
|
Exclusive
Management Consulting Services Agreement, dated November 13, 2007,
among
BWA Management Consulting (Shanghai) Co., Ltd., Beijing BBMAO Internet
Technology Co., Ltd., Xiaozhi Zhang, Xiaohong Dong
|
|
|
|
|
10.5*
|
Purchase
Option Agreement, dated November 13, 2007, among Beijing BBMAO Internet
Technology Co., Ltd., and BWA Management Consulting (Shanghai) Co.,
Ltd.,
Xiaozhi Zhang, Xiaohong Dong
|
|
|
|
|
10.6*
|
Equity
Pledge Agreement, dated November 13, 2007, among Xiaozhi Zhang, Xiaohong
Dong, Beijing BBMAO Internet Technology Co., Ltd., and BWA Management
Consulting (Shanghai) Co., Ltd.
|
|
|
|
|
10.7*
|
Exclusive
Technology Consulting Agreement, dated November 13, 2007, between
BWA
Management Consulting (Shanghai) Co., Ltd. and Beijing BBMAO Internet
Technology Co., Ltd.
|
|
|
|
|
10.8*
|
Senior
Secured Note, dated September 12, 2007, by BroadWebAsia, Inc. in
favor of
Lakewood Group, LLC
|
|
|
|
|
10.9*
|
Security
Agreement, dated September 12, 2007, between BroadWebAsia, Inc. and
Lakewood Group, LLC
|
|
|
|
|
10.10*
|
Promissory
Note, dated September 14, 2007, by BroadWebAsia, Inc. in favor of
Ron
Greenspan
|
|
|
|
|
10.11*
|
Promissory
Note, dated September 19, 2007, by BroadWebAsia, Inc. in favor of
JM
Mallick Revocable Trust, dated August 26, 1987
|
|
|
|
|
10.12*
|
Employment
Agreement, dated January 31, 2007, between BroadWebAsia, Inc. and
James
Yacabucci
|
|
|
|
|
10.13*
|
Employment
Agreement, dated September 18, 2007, between BroadWebAsia, Inc. and
Peter
Schloss
|
|
|
|
|
10.14*
|
BroadWebAsia,
Inc. Share Purchase Warrant, dated September 12, 2007, issued to
Lakewood
Group, LLC
|
|
|
|
|
10.15*
|
BroadWebAsia,
Inc. Share Purchase Warrant, dated September 19, 2007, issued to
Ron
Greenspan
|
|
|
|
|
10.16*
|
BroadWebAsia,
Inc. Share Purchase Warrant, dated September 19, 2007, issued to
JM
Mallick Revocable Trust, dated August 26, 1987
|
|
|
|
|
10.17*
|
Convertible
Promissory Note, dated December 7, 2007, by BroadWebAsia in favor
of Brad
Greenspan
|
|
|
|
|
10.18*
|
Promissory
Note, dated December 7, 2007, by BroadWebAsia in favor of Brad
Greenspan
|
|
|
|
|
10.19*
|
Restricted
Stock Agreement, dated as of January 31, 2007, by and between BroadWebAsia
and James Yacabucci
|
|
|
|
|
10.20*
|
World
of Tea Inc. 2008 Equity Incentive Plan
|
|
|
|
|
10.21*
|
Form
of 2008 Incentive Stock Option Agreement
|
|
|
|
|
10.22*
|
Form
of 2008 Non-Qualified Stock Option Agreement
|
|
|
|
|
10.23*
|
Agreement
of Conveyance, Transfer and Assignment of Assets and Assumptions
of
Obligations, dated as of February 12, 2008, between World of Tea
Inc. and
WTO Holdings, Inc.
|
|
|
|
|
10.24*
|
Stock
Purchase Agreement, dated as of February 12, 2008 among World of
Tea Inc.,
Israel Morgenstern and Svetlana Pojasnikova
|
|
|
|
|
10.25*
|
Note
Purchase Agreement, dated as of February 12, 2008, between World
of Tea
Inc. and the Lenders party thereto
|
|
|
|
|
10.26*
|
Form
of Promissory Notes, made by World of Tea Inc. for the benefit of
the
Lenders under the Note Purchase Agreement, dated as of February 12,
2008
|
|
|
|
|
10.27*
|
Resignation
and Release of Israel Morgenstern, dated as of February 12, 2008
|
|
|
|
|
10.28*
|
Resignation
and Release of Svetlana Pojasnikova, dated as of February 12, 2008
|
|
|
|
|
10.29*
|
Option
Agreement between BroadWebAsia and James Yacabucci, dated November
13,
2007, vesting over a three year period
|
|
|
|
|
10.30*
|
Option
Agreement between BroadWebAsia and James Yacabucci, dated November
13,
2007, vesting over a four year period
|
|
|
|
|
10.31*
|
Option
Agreement between BroadWebAsia and James Yacabucci, dated November
13,
2007, immediately vesting
|
|
|
|
|
10.32*
|
Option
Agreement between BroadWebAsia and Peter Schloss, dated November
13,
2007
|
|
|
|
|
10.33*
|
Form
of BroadWebAsia Employee Option Agreements
|
|
|
|
|
10.34*
|
Form
of Lock-Up Agreement
|
|
|
|
|
10.35*
|
Junior
Secured Note made by BroadWebAsia in favor of EuroPlay, dated as
of
December 5, 2007
|
|
|
|
|
10.36*
|
Junior
Security Agreement between BroadWebAsia and EuroPlay, dated as of
December
5, 2007
|
|
|
|
|
10.37*
|
Form
of Share Purchase Warrant issued by BroadWebAsia to
EuroPlay
|
|
|
|
|
10.38*
|
Form
of Letter Agreement, dated as of December 3, 2007, between BroadWebAsia
and Lakewood
|
|
|
|
|
99.1*
|
BroadWebAsia,
Inc. financial statements for the fiscal years ended December 31,
2006 and
2005
|
|
|
|
|
99.2*
|
BroadWebAsia,
Inc. unaudited financial statements for the nine months ended September
30, 2007
|
|
|
|
|
99.3*
|
Pro
forma unaudited consolidated financial statements as of September
30, 2007
and for the nine months ended September 30, 2007 and the year ended
December 31, 2006
|
|
|
|
|
99.4
|
BroadWebAsia,
Inc. financial statements for the fiscal years ended December 31,
2007 and
2006
|
|
|
|
*
Previously Filed
BroadWebAsia (CE) (USOTC:BWBA)
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