UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
ý
QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended March 31, 2009
or
¨
TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from __________ to __________
Commission
file number:
333-131651
BETAWAVE
CORPORATION
(Exact
name of registrant as specified in its charter)
Nevada
|
20-2471683
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification No.)
|
706 Mission Street, 10th
Floor
San
Francisco, CA 94103
(Address
of principal executive offices) (Zip Code)
(415)
738-8706
(Registrant’s
telephone number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
þ
Yes
¨
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨
Yes
¨
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
¨
|
Accelerated
filer
¨
|
|
|
Non-accelerated
filer
¨
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨
Yes
þ
No
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: The issuer had 29,229,284 shares of
common stock outstanding as of May 8, 2009.
BETAWAVE
CORPORATION
TABLE
OF CONTENTS
|
Page No.
|
PART
I - FINANCIAL INFORMATION
|
|
|
Item
1.
|
Financial
Statements
|
2
|
|
|
Condensed
Consolidated Balance Sheets (unaudited)
|
2
|
|
|
Condensed
Consolidated Statements of Operations (unaudited)
|
3
|
|
|
Condensed
Consolidated Statements of Cash Flows (unaudited)
|
4
|
|
|
Notes
to the Condensed Consolidated Financial Statements
(unaudited)
|
5
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
17
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
23
|
|
Item
4.
|
Controls
and Procedures
|
23
|
PART
II - OTHER INFORMATION
|
|
|
Item
1.
|
Legal
Proceedings
|
25
|
|
Item
1A.
|
Risk
Factors
|
26
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
40
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
40
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
40
|
|
Item
5.
|
Other
Information
|
40
|
|
Item
6.
|
Exhibits
|
40
|
SIGNATURES
|
41
|
EXHIBIT
INDEX
|
42
|
PART
I - FINANCIAL INFORMATION
ITEM
1.
FINANCIAL
STATEMENTS.
Betawave
Corporation
Condensed
Consolidated Balance Sheets (Unaudited)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
7,111,080
|
|
|
$
|
11,863,121
|
|
Trade
accounts receivable
|
|
|
2,093,655
|
|
|
|
3,108,136
|
|
Prepaid
expenses
|
|
|
265,567
|
|
|
|
961,829
|
|
Total
current assets
|
|
|
9,470,302
|
|
|
|
15,933,086
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
190,164
|
|
|
|
236,448
|
|
Financing
costs
|
|
|
119,373
|
|
|
|
—
|
|
Deposits
|
|
|
114,379
|
|
|
|
113,029
|
|
Total
assets
|
|
$
|
9,894,218
|
|
|
$
|
16,282,563
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,738,689
|
|
|
$
|
4,085,886
|
|
Accrued
liabilities
|
|
|
1,043,266
|
|
|
|
1,601,840
|
|
Deferred
revenue
|
|
|
196,420
|
|
|
|
109,243
|
|
Total
current liabilities
|
|
|
2,978,375
|
|
|
|
5,796,969
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
Stock: $0.001 par value; 10,000,000 shares authorized; 7,065,293 shares
issued and outstanding at March 31, 2009 and December 31,
2008
|
|
|
7,065
|
|
|
|
7,065
|
|
Common
Stock: $0.001 par value; 400,000,000 shares authorized; 29,229,284 shares
issued and outstanding at March 31, 2009 and December 31,
2008
|
|
|
29,230
|
|
|
|
29,230
|
|
Notes
receivable from stockholders
|
|
|
(18,910
|
)
|
|
|
(18,910
|
)
|
Additional
paid-in capital
|
|
|
52,407,399
|
|
|
|
51,563,483
|
|
Accumulated
deficit
|
|
|
(45,508,941
|
)
|
|
|
(41,095,274
|
)
|
Total
stockholders’ equity
|
|
|
6,915,843
|
|
|
|
10,485,594
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
9,894,218
|
|
|
$
|
16,282,563
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
Betawave
Corporation
Condensed
Consolidated Statements of Operations (Unaudited)
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Revenues
|
|
$
|
1,388,420
|
|
|
$
|
657,150
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues and expenses:
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
1,847,072
|
|
|
|
803,806
|
|
Sales
and marketing
|
|
|
2,216,480
|
|
|
|
1,686,889
|
|
Product
development
|
|
|
226,573
|
|
|
|
174,381
|
|
General
and administrative
|
|
|
1,516,474
|
|
|
|
1,607,140
|
|
Total
costs of revenues and expenses
|
|
|
5,806,599
|
|
|
|
4,272,216
|
|
Operating
loss
|
|
|
(4,418,179
|
)
|
|
|
(3,615,066
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
5,400
|
|
|
|
4,525
|
|
Miscellaneous
income
|
|
|
—
|
|
|
|
100
|
|
Interest
expense
|
|
|
(888
|
)
|
|
|
(568,957
|
)
|
Total
other income (expense)
|
|
|
4,512
|
|
|
|
(564,332
|
)
|
Net
loss before provision for income taxes
|
|
|
(4,413,667
|
)
|
|
|
(4,179,398
|
)
|
Provision
for income taxes
|
|
|
—
|
|
|
|
—
|
|
Net
loss
|
|
$
|
(4,413,667
|
)
|
|
$
|
(4,179,398
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per share - basic and diluted
|
|
$
|
(0.15
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
Shares
used to compute net loss per share - basic and diluted
|
|
|
29,229,284
|
|
|
|
25,298,310
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
Betawave
Corporation
Condensed
Consolidated Statements of Cash Flows (Unaudited)
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,413,667
|
)
|
|
$
|
(4,179,398
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and equipment
|
|
|
64,803
|
|
|
|
65,145
|
|
Amortization
of convertible note fees
|
|
|
—
|
|
|
|
122,077
|
|
Stock-based
compensation
|
|
|
810,123
|
|
|
|
680,456
|
|
Non
cash interest expense
|
|
|
—
|
|
|
|
414,457
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
1,014,481
|
|
|
|
621,327
|
|
Prepaid
expenses
|
|
|
696,262
|
|
|
|
(29,191
|
)
|
Other
assets
|
|
|
(1,350
|
)
|
|
|
—
|
|
Accounts
payable
|
|
|
(2,347,198
|
)
|
|
|
914,410
|
|
Accrued
liabilities
|
|
|
(558,573
|
)
|
|
|
749,715
|
|
Deferred
revenue
|
|
|
87,177
|
|
|
|
—
|
|
Net
cash used in operating activities
|
|
|
(4,647,942
|
)
|
|
|
(641,002
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Funds
held as restricted cash
|
|
|
—
|
|
|
|
(550,000
|
)
|
Purchase
of property and equipment
|
|
|
(18,520
|
)
|
|
|
(11,606
|
)
|
Net
cash used in investing activities
|
|
|
(18,520
|
)
|
|
|
(561,606
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Payment
of financing costs
|
|
|
(85,579
|
)
|
|
|
—
|
|
Advances
from a stockholder
|
|
|
—
|
|
|
|
210,000
|
|
Net
cash provided by (used in) financing activities
|
|
|
(85,579
|
)
|
|
|
210,000
|
|
Net
decrease in cash and cash equivalents
|
|
|
(4,752,041
|
)
|
|
|
(992,608
|
)
|
Cash
and cash equivalents at beginning of the year
|
|
|
11,863,121
|
|
|
|
1,108,834
|
|
Cash
and cash equivalents at the end of the year
|
|
$
|
7,111,080
|
|
|
$
|
116,226
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
Betawave
Corporation
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
General -
Unibio Inc. was incorporated in the state of Nevada on February 2, 2005.
On September 14, 2006, Unibio Inc. changed its name to GoFish Corporation. In
January 2009, GoFish Corporation changed its name to Betawave Corporation and
launched a rebranding campaign focused on attention-based digital
media.
Betawave
Corporation (the “Company,” “we,”, our,” or “us”) is the industry’s first
attention-based media company. The Company delivers quality advertising and
content to large audiences of highly-engaged users through innovative ad
formats. The Company has assembled a platform of some of the leading
immersive casual gaming, virtual world, social play and entertainment websites
into a network of sites (the “Betawave Network”). The Company generates revenues
by selling innovative, accountable and attention-grabbing advertising campaigns
on those sites to brand advertisers.
Management’s
Plan -
The Company has incurred operating losses and negative cash flows
since inception. Management expects that the Company's revenues will
increase from current levels as a result of its planned continued expansion
of the Betawave Network’s reach, scale and scope. The Company also expects to
incur additional expenses for the development and expansion of its publisher
network, marketing campaigns for a number of its programming launches and the
continuing integration of its businesses. In addition, the Company anticipates
gains in operating efficiencies as a result of the increase to its sales and
marketing organization. However, the Company expects that operating losses and
negative cash flows will continue for the foreseeable future but anticipates
that losses will decrease from current levels to the extent that the Company
continues to grow and develop. The Company expectations are subject to risks and
uncertainties that could cause actual results or events to differ materially
from those expressed or implied by such expectations, including those identified
under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on
Form 10-Q and those discussed in other documents we file with the Securities and
Exchange Commission (the “SEC”). While the Company believes that it will be able
to expand operations and gain market share, there can be no assurance that such
progress will be possible. For example, in the event that the Company requires
additional financing, such financing may not be available on terms that are
favorable or at all. Failure to generate sufficient cash flows from operations
or raise additional capital would have a material adverse effect on the
Company’s ability to achieve its intended business objectives. These factors
raise substantial doubt about the Company’s ability to continue as a going
concern.
Going Concern -
The Company’s condensed consolidated financial statements have been
presented on a basis that contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
continues to face significant risks associated with the successful execution of
its strategy given the current market environment for similar companies. The
condensed consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
2.
|
Summary
of Significant Accounting Policies
|
Basis of
Presentation -
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with United States
Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by U.S. GAAP for complete financial statements. The unaudited
interim condensed consolidated financial statements have been prepared on the
same basis as the annual consolidated financial statements as discussed below.
In the opinion of management, all adjustments, consisting of normal recurring
adjustments necessary for the fair presentation of the financial statements,
have been included. The results of operations for any interim period are not
necessarily indicative of the results of operations for the full year or any
other subsequent interim period. Further, the preparation of condensed
consolidated financial statements requires management to make estimates and
assumptions that affect the recorded amounts reported therein. Actual results
could differ from those estimates. A change in facts or circumstances
surrounding the estimate could result in a change to estimates and impact future
operating results.
The
condensed consolidated financial statements and related disclosures have been
prepared with the presumption that users of the interim financial statements
have read or have access to the Company’s audited consolidated financial
statements for the preceding fiscal year. Accordingly, the accompanying
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2008 filed with the SEC on March 31, 2009 (our “2008 Form
10-K”).
Comprehensive
Loss -
The
Company has no components of comprehensive loss other than its net loss and,
accordingly, comprehensive loss is the same as the net loss for all periods
presented.
Net Loss Per
Share
-
Basic
net loss per share is calculated based on the weighted-average number of shares
of common stock outstanding during the period excluding those shares that are
subject to repurchase by the Company. Diluted net loss per share would give
effect to the dilutive effect of stock options, warrants, convertible debt and
preferred stock. Dilutive securities have been excluded from the diluted net
loss per share computations as they have an antidilutive effect due to the
Company’s net loss for the three months ended March 31, 2009 and
2008.
The
following outstanding stock options, warrants, convertible debt and preferred
stock (on an as-converted into common stock basis) were excluded from the
computation of diluted net loss per share as they had an antidilutive effect for
the three months ended March 31, 2009 and 2008:
|
|
Three
Months
|
|
|
Three
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Shares
issuable upon exercise of employee and non-employee stock
options
|
|
|
544,586
|
|
|
|
12,247,853
|
|
Shares
issuable upon exercise of warrants
|
|
|
—
|
|
|
|
8,068,899
|
|
Nonvested
restricted stock
|
|
|
—
|
|
|
|
300,000
|
|
Shares
issuable upon conversion of convertible notes
|
|
|
—
|
|
|
|
6,437,500
|
|
Total
|
|
|
544,586
|
|
|
|
27,054,252
|
|
Concentration of
Credit
Risk -
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents and accounts
receivable. The Company’s credit risk is managed by investing its cash in a
certificate of deposit account. The receivables credit risk is controlled
through credit approvals, credit limits and monitoring procedures.
The
Company places its cash in banks. Cash in excess of federally insured limits
totaled $6,861,080 at March 31, 2009 and $11,613,121 at December 31,
2008.
Accounts
Receivable Concentration
s
-
At March 31, 2009, four
customers accounted for 16%, 9%, 8% and 7%, respectively, of the Company’s
accounts receivable. At December 31, 2008, three customers accounted for 26%,
13% and 7%, respectively, of the Company’s accounts receivable.
Revenue
Concentration
s -
The
Company’s revenues are generated mainly from advertisers who purchase inventory
in the form of graphical, text-based or video ads on the Betawave Network. These
advertisers’ respective agencies facilitate the purchase of inventory on behalf
of their advertisers. For the three months ended March 31, 2009, five customers
accounted for 14%, 12%, 10%, 10% and 7%, respectively, of the Company’s total
revenues. For the three months ended March, 31, 2008, three customers accounted
for 58%, 8% and 7%, respectively, of the Company’s total revenues.
Stock-Based
Compensatio
n
-
Effective January 1, 2006, the Company
adopted the fair value recognition provisions of the FASB’s Statement of
Financial Accounting Standards
(“SFAS”) No.
123 (revised 2004),
Share-Based Payment
(“SFAS
123(R)”) using the modified prospective transition method. Under that transition
method, compensation cost recognized for the periods ended December 31, 2008 and
2007 includes: (a) compensation cost for all stock-based payments granted prior
to, but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of FASB Statement No. 123,
Accounting for Stock-Based
Compensation
(“SFAS 123”), and (b) compensation cost for all stock-based
payments granted or modified subsequent to January 1, 2006, based on the grant
date fair value estimated in accordance with the provisions of SFAS
123(R).
Stock-based
compensation expense for performance-based options granted to non-employees is
determined in accordance with SFAS 123(R) and Emerging Issues Task Force Issue
No. 96-18,
Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services
, (“EITF 96-18”), at the fair
value of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measured. The fair value of options granted
to non-employees is measured as of the earlier of the performance commitment
date or the date at which performance is complete (“measurement date”). When it
is necessary under U.S. GAAP to recognize the cost for the transaction prior to
the measurement date, the fair value of unvested options granted to
non-employees is re-measured at the balance sheet date.
The
Company currently uses the Black-Scholes option pricing model to determine the
fair value of stock options. The determination of the fair value of stock-based
payment awards on the date of grant using an option-pricing model is affected by
our stock price as well as by assumptions regarding a number of complex and
subjective variables. These variables include our expected stock price
volatility over the term of the awards, actual and projected employee stock
option exercise behaviors, risk-free interest rate and expected dividends. We
estimate the volatility of our common stock at the date of the grant based on a
combination of the implied volatility of publicly traded options on our common
stock and our historical volatility rate. The dividend yield assumption is based
on historical dividend payouts. The risk-free interest rate is based on observed
interest rates appropriate for the term of our employee options. We use
historical data to estimate pre-vesting option forfeitures and record
stock-based compensation expense only for those awards that are expected to
vest. For options granted, we amortize the fair value on a straight-line basis.
All options are amortized over the requisite service periods of the awards,
which are generally the vesting periods. If factors change we may decide to use
different assumptions under the Black-Scholes option model and stock-based
compensation expense may differ materially in the future from that recorded in
the current periods.
Included
in cost of revenues and expenses is $810,123 and $680,456 of stock-based
compensation for the three months ended March 31, 2009 and 2008, respectively.
At March 31, 2009, this amount included $5,184 of stock-based compensation
related to non-employees, $801,590 of stock-based compensation related to
employees and $3,349 related to warrants. At March 31, 2008, this amount
included $656,981 of stock-based compensation related to employees, $14,578
related to restricted stock and $8,897 related to warrants.
The
following table presents stock-based compensation expense included in the
Consolidated Statements of Operations related to employee and non-employee stock
options, restricted shares and warrants as follows for the three months ended
March 31, 2009 and 2008:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Cost
of revenue
|
|
$
|
(585
|
)
|
|
$
|
20,933
|
|
Sales
and marketing
|
|
|
226,634
|
|
|
|
239,940
|
|
Product
development
|
|
|
75,333
|
|
|
|
15,386
|
|
General
and administrative
|
|
|
508,741
|
|
|
|
404,197
|
|
Total
stock-based compensation
|
|
$
|
810,123
|
|
|
$
|
680,456
|
|
Stock-based
compensation cost is measured at the grant date, based on the calculated fair
value of the award, and is recognized as an expense over the service period,
generally the vesting period of the equity grant.
The fair
value of each option grant has been estimated on the date of grant using the
Black-Scholes valuation model with the following assumptions (weighted-average)
for the three months ended March 31, 2009 and 2008:
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Risk
free interest rate
|
|
|
1.94
|
%
|
|
|
2.86
|
%
|
Expected
volatility
|
|
|
73.99
|
%
|
|
|
68.74
|
%
|
Dividend
yields
|
|
|
—
|
|
|
|
—
|
|
Expected
lives
|
|
6.16 Years
|
|
|
5.63 Years
|
|
The
Company estimates the fair value of stock options using the Black-Scholes
valuation model. Key input assumptions used to estimate the fair value of stock
options include the exercise price of the award, expected option term, expected
volatility of the stock over the option’s expected term, risk-free interest rate
over the option’s expected term, and the expected annual dividend yield. The
Company believes that the valuation technique and approach utilized to develop
the underlying assumptions are appropriate in calculating the fair values of the
stock options granted in the three months ended March 31, 2009 and
2008.
Recent
Accounting Pronouncements
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary Impairments
(“FSP FAS 115-2/124-2”). FSP FAS
115-2/124-2 requires entities to separate any other-than-temporary impairment of
a debt security into two components when there are credit related losses
associated with the impaired debt security for which management asserts that it
does not have the intent to sell the security, and it is more likely than not
that it will not be required to sell the security before recovery of its cost
basis. The amount of the other-than-temporary impairment related to a credit
loss is recognized in earnings, and the amount of the other-than-temporary
impairment related to other factors is recorded in other comprehensive loss. FSP
FAS 115-2/124-2 is effective for periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. We expect the
adoption of FSP FAS 115-2/124-2 will not have a material impact on our
consolidated financial condition or results of operations.
In April
2009, the FASB issued FSP FAS 157-4,
Determining Fair Value When Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions that are Not Orderly
(“FSP FAS 157-4”).
Under FSP FAS 157-4, if an entity determines that there has been a significant
decrease in the volume and level of activity for the asset or the liability in
relation to the normal market activity for the asset or liability (or similar
assets or liabilities), then transactions or quoted prices may not accurately
reflect fair value. In addition, if there is evidence that the transaction for
the asset or liability is not orderly, the entity shall place little, if any
weight on that transaction price as an indicator of fair value. FSP FAS 157-4 is
effective for periods ending after June 15, 2009, with early adoption permitted
for periods ending after March 15, 2009. We expect the adoption of FSP FAS 157-4
will not have a material impact on our consolidated financial condition or
results of operations.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value
of Financial Instruments
(“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1
and APB 28-1 require disclosures about fair value of financial instruments in
interim and annual financial statements. FSP FAS 107-1 and APB 28-1 are
effective for periods ending after June 15, 2009, with early adoption permitted
for periods ending after March 15, 2009. We expect the adoption of FSP FAS 107-1
and APB 28-1 will not have a material impact on our consolidated financial
condition or results of operations.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),
Business
Combinations
(“SFAS 141R”). We adopted
SFAS 141(R) on January 1, 2009, the first day of our 2009 fiscal year. SFAS
141(R) significantly changed the accounting for business combinations. Under
SFAS 141(R), an acquiring entity is required to recognize all the assets
acquired and all the liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. Transaction costs are no
longer included in the measurement of the business acquired. Instead, these
costs are expensed as they are incurred. SFAS 141(R) also includes a substantial
number of new disclosure requirements. SFAS 141(R) applies to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008, which for
us was the beginning of our 2009 fiscal year. The adoption of SFAS 141(R) did
not have a material impact on our consolidated financial
statements.
We
adopted SFAS No. 157,
Fair
Value Measurements
(“SFAS 157”) on January 1, 2008, the first day of our
2008 fiscal year. FSP FAS No. 157-2,
Effective Date of FASB Statement No.
157
(“FSP FAS 157-2”), amended SFAS 157 by delaying its effective date,
by one year, for non-financial assets and non-financial liabilities, except for
items that are recognized or disclosed at fair value in the financial statements
on a recurring basis. In accordance with FSP FAS 157-2, we adopted the
provisions of SFAS 157 to non-financial assets and non-financial liabilities in
the first quarter of 2009. The adoption did not have a material impact on our
consolidated financial statements.
We
adopted SFAS No. 160 on January 1, 2009, the first day of our 2009 fiscal year.
SFAS No. 160 establishes new accounting and reporting standards for
noncontrolling interests, previously known as minority interest, in a subsidiary
and for the deconsolidation of a subsidiary. Specifically, this statement
requires the recognition of noncontrolling interests as equity in the
consolidated financial statements separate from the parent’s equity. The amount
of net income or loss attributable to the noncontrolling interests is included
in consolidated net income on the face of the income statement. SFAS
No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary
that do not result in deconsolidation are equity transactions if the parent
retains its controlling financial interest. In addition, this statement requires
that a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss is measured using the fair value of the
noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also
includes expanded disclosure requirements regarding the interests of the parent
and its noncontrolling interests. SFAS No. 160 is applied prospectively for
fiscal years and interim periods within those fiscal years, beginning with the
current fiscal year, except for the presentation and disclosure requirements,
which are applied retrospectively for all periods presented. The adoption of
SFAS No. 160 did not have a material impact on our consolidated financial
statements.
We
adopted SFAS No. 161 on January 1, 2009, the first day of our 2009 fiscal year.
SFAS No. 161 requires enhanced disclosure of derivatives and hedging activities
in order to improve the transparency of financial reporting. Under SFAS No. 161,
entities are required to provide enhanced disclosures relating to: (a) how and
why an entity uses derivative instruments; (b) how derivative instruments and
related hedge items are accounted for under SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities
(“SFAS No. 133”), and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
SFAS No. 161 is applied prospectively to all derivative instruments and
non-derivative instruments that are designated and qualify as hedging
instruments and related hedged items accounted for under SFAS No. 133 for all
financial statements issued for fiscal years and interim periods beginning with
our current fiscal year. The adoption of SFAS No. 161 did not have a material
impact on our consolidated financial statements.
SFAS 157
specifies a hierarchy of valuation techniques based upon whether the inputs to
those valuation techniques reflect assumptions other market participants would
use based upon market data obtained from independent sources (observable inputs)
or reflect the company’s own assumptions of market participant valuation
(unobservable inputs). In accordance with SFAS 157, these two types of inputs
have created the following fair value hierarchy:
|
·
|
Level
1 - Quoted prices in active markets that are unadjusted and accessible at
the measurement date for identical, unrestricted assets or
liabilities;
|
|
·
|
Level
2 - Quoted prices for identical assets and liabilities in markets that are
not active, quoted prices for similar assets and liabilities in active
markets or financial instruments for which significant inputs are
observable, either directly or
indirectly;
|
|
·
|
Level
3 - Prices or valuations that require inputs that are both significant to
the fair value measurement and
unobservable.
|
SFAS 157
requires the use of observable market data if such data is available without
undue cost and effort.
Measurement
of Fair Value - The Company measures fair value as an exit price using the
procedures described below for all assets and liabilities measured at fair
value. When available, the company uses unadjusted quoted market prices to
measure fair value and classifies such items within Level 1. If quoted market
prices are not available, fair value is based upon internally developed models
that use, where possible, current market-based or independently-sourced market
parameters such as interest rates and currency rates. Items valued using
internally generated models are classified according to the lowest level input
or value driver that is significant to the valuation. Thus, an item may be
classified in Level 3 even though there may be inputs that are readily
observable. If quoted market prices are not available, the valuation model used
generally depends on the specific asset or liability being valued.
Credit
risk adjustments are applied to reflect the Company’s own credit risk when
valuing all liabilities measured at fair value. The methodology is consistent
with that applied in developing counterparty credit risk adjustments, but
incorporates the Company’s own credit risk as observed in the credit default
swap market.
The
following table presents the Company’s assets and liabilities that are measured
at fair value on a recurring basis at March 31, 2009:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Cash
and cash equivalents
|
|
$
|
7,111,080
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,111,080
|
|
4.
|
Property
and Equipment
|
Property
and equipment, net consisted of the following at March 31, 2009 and December 31,
2008:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
Computer
equipment and software
|
|
$
|
671,397
|
|
|
$
|
652,877
|
|
Leasehold
improvements
|
|
|
145,794
|
|
|
|
145,794
|
|
Furniture
and fixtures
|
|
|
7,737
|
|
|
|
7,737
|
|
Total
property and equipment
|
|
|
824,928
|
|
|
|
806,408
|
|
Less
accumulated depreciation and amortization
|
|
|
(634,764
|
)
|
|
|
(569,960
|
)
|
Property
and equipment, net
|
|
$
|
190,164
|
|
|
$
|
236,448
|
|
Depreciation
and amortization expense totaled $64,803 and $65,145 for the three months ended
March 31, 2009 and 2008, respectively.
Accrued
liabilities consisted of the following at March 31, 2009 and December 31,
2008:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
Accrued
vendor obligations
|
|
$
|
352,783
|
|
|
$
|
687,928
|
|
Accrued
compensation
|
|
|
581,488
|
|
|
|
777,290
|
|
Accrued
city and county taxes
|
|
|
13,798
|
|
|
|
41,836
|
|
Other
|
|
|
95,197
|
|
|
|
94,786
|
|
Total
accrued liabilities
|
|
$
|
1,043,266
|
|
|
$
|
1,601,840
|
|
6.
|
Stock
Options and Warrants
|
In 2004,
the Company’s Board of Directors (the “Board”) adopted the 2004 Stock Plan (the
“2004 Plan”).
The 2004
Plan authorized the Board to grant incentive stock options and nonstatutory
stock options to employees, directors, and consultants for up to 2,000,000
shares of common stock. Options vested over a period of time according to the
Option Agreement, and are exercisable for a maximum period of ten years after
date of grant.
In May
2006, the Company increased the shares reserved for issuance under the 2004 Plan
from 2,000,000 to 4,588,281. Upon completion of the Mergers, the Company
decreased the shares reserved under the 2004 Plan from 4,588,281 to 804,188 and
froze the 2004 Plan resulting in no additional options being available for grant
under the 2004 Plan.
In 2006,
the Board adopted the 2006 Stock Plan (the “2006 Plan”). The 2006 Plan
authorized the Board of Directors to grant incentive stock options and
nonstatutory stock options to employees, directors, and consultants for up to
2,000,000 shares of common stock. In October 2006, the Board of Directors
increased the shares available under the 2006 Plan to 4,000,000 shares. Options
will vest over a period according to the Option Agreement, and are exercisable
for a maximum period of ten years after date of grant. In March 2008, the Board
of Directors froze the 2006 Plan resulting in no additional options being
available for grant under the 2006 Plan.
On
October 24, 2007, the Board approved the Non-Qualified Stock Option Plan (the
“Non-Qualified Plan”). The purposes of the Non-Qualified Plan are to attract and
retain the best available personnel, to provide additional incentives to
employees, directors and consultants and to promote the success of our business.
The Non-Qualified Plan initially provided for a maximum aggregate of 3,600,000
shares of our common stock that may be issued upon the exercise of options
granted pursuant to the Non-Qualified Plan. On November 1, 2007, the Board
adopted an amendment to the Non-Qualified Plan to increase the total number of
shares of our common stock that may be issued pursuant to the Non-Qualified Plan
from 3,600,000 shares to 4,000,000 shares. On December 18, 2007, the Board
adopted a further amendment to the Non-Qualified Plan to increase the total
number of shares of our common stock that may be issued pursuant to the
Non-Qualified Plan from 4,000,000 shares to 5,500,000 shares. On February 5,
2008, the Board adopted an additional amendment to the Non-Qualified Plan to
increase the total plan shares that may be issued from 5,500,000 shares to
10,500,000 shares. On June 4, 2008, the Board further increased the number of
shares reserved under the 2007 Plan to 16,500,000. On December 2, 2008, the
Board increased the number of shares reserved under the 2007 Plan to
69,141,668. On January 16, 2009, the Board increased the number of
shares reserved under the 2007 Plan to 82,963,169. The Board (or any committee
composed of members of the Board appointed by it to administer the Non-Qualified
Plan), has the authority to administer and interpret the Non-Qualified Plan. The
administrator has the authority to, among other things, (i) select the
employees, consultants and directors to whom options may be granted, (ii) grant
options, (iii) determine the number of shares underlying option grants, (iv)
approve forms of option agreements for use under the Non-Qualified Plan, (v)
determine the terms and conditions of the options and (vi) subject to certain
exceptions, amend the terms of any outstanding option granted under the
Non-Qualified Plan. The Non-Qualified Plan authorizes grants of nonqualified
stock options to eligible employees, directors and consultants. The exercise
price for an Option shall be determined by the administrator. The term of each
option under the Non-Qualified Plan shall be no more than ten years from the
date of grant. The Non-Qualified Plan became effective upon its adoption by the
Board and will continue in effect for a term of ten years, unless sooner
terminated. The Board may at any time amend, suspend or terminate the
Non-Qualified Plan. The Non-Qualified Plan also contains provisions governing:
(i) the treatment of options under the Non-Qualified Plan upon the occurrence of
certain corporate transactions (including merger, consolidation, sale of all or
substantially all the assets of our company, or complete liquidation or
dissolution of our company) and changes in control of our company, (ii)
transferability of options and (iii) tax withholding upon the exercise or
vesting of an option.
On March
31, 2008, the Board adopted the Betawave Corporation 2008 Stock Incentive
Plan
(as amended,
the “2008 Plan”). The 2008 Plan is intended to replace the frozen 2006 Plan and
permits options and other equity compensation to be awarded to employees,
directors and consultants. As originally adopted, the 2008 Plan provided for the
issuance of up to 2,400,000 shares of the Company’s common stock pursuant to
awards granted thereunder, up to 2,200,000 of which may be issued pursuant to
incentive stock options granted thereunder.
On June
4, 2008, the Board adopted an amendment to the 2008 Plan to (i) decrease the
maximum aggregate number of shares of Common Stock that may be issued pursuant
to awards granted under the plan from 2,400,000 shares to 1,500,000 shares and
(ii) decrease the maximum aggregate number of shares the Company’s common stock
that may be issued pursuant to incentive stock options granted under the plan
from 2,200,000 shares to 1,500,000 shares. On December 2, 2008 the Board
increased the number of shares reserved under the Plan to a maximum of
19,224,774. The 2008 Plan is administered, with respect to grants to employees,
directors, officers, and consultants, by the plan administrator (the
“Administrator”), defined as the Board or one or more committees designated by
the Board. The Board is currently the Administrator for the 2008
Plan.
A summary
of stock option transactions for the period from January 1, 2008 through March
31, 2009 is as follows:
|
|
|
|
|
Options
Outstanding
|
|
|
|
Options
available for
grant
|
|
|
Number of
options
|
|
|
Weighted
average
exercise price
|
|
Balances
at January 1, 2008
|
|
|
3,021,584
|
|
|
|
7,194,770
|
|
|
$
|
0.91
|
|
Additional
shares reserved
|
|
|
82,866,442
|
|
|
|
—
|
|
|
|
—
|
|
Shares
frozen under the 2004 and 2006 Plans
|
|
|
(3,370,966
|
)
|
|
|
—
|
|
|
|
—
|
|
Options
granted
|
|
|
(75,606,727
|
)
|
|
|
75,606,727
|
|
|
$
|
0.39
|
|
Options
cancelled
|
|
|
2,754,001
|
|
|
|
(2,754,001
|
)
|
|
$
|
1.30
|
|
Balances
at December 31, 2008
|
|
|
9,664,334
|
|
|
|
80,047,496
|
|
|
$
|
0.41
|
|
Additional
shares reserved
|
|
|
13,821,501
|
|
|
|
—
|
|
|
|
—
|
|
Options
granted
|
|
|
(3,688,325
|
)
|
|
|
3,688,325
|
|
|
$
|
0.16
|
|
Options
cancelled
|
|
|
(120,394
|
)
|
|
|
(613,804
|
)
|
|
$
|
0.66
|
|
Balances
at March 31, 2009
|
|
|
19,677,116
|
|
|
|
83,122,017
|
|
|
$
|
0.39
|
|
The following
table summarizes information concerning outstanding options as of March 31,
2009:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
Exercise
price
|
|
Number
of
Options
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in
Years)
|
|
Aggregate
Intrinsic
Value
|
|
Number
of Options
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in
Years)
|
|
Aggregate
Intrinsic
Value
|
$0.06
|
|
|
202,160
|
|
|
|
5.49
|
|
|
|
|
196,226
|
|
|
|
5.46
|
|
|
$0.16
|
|
|
3,688,325
|
|
|
|
9.97
|
|
|
|
|
63,667
|
|
|
|
9.97
|
|
|
$0.19
|
|
|
234,765
|
|
|
|
9.64
|
|
|
|
|
4,765
|
|
|
|
9.64
|
|
|
$0.20
|
|
|
48,538,342
|
|
|
|
9.67
|
|
|
|
|
8,238,934
|
|
|
|
9.68
|
|
|
$0.23
|
|
|
4,825,000
|
|
|
|
9.04
|
|
|
|
|
2,018,750
|
|
|
|
8.95
|
|
|
$0.24
|
|
|
102,000
|
|
|
|
9.18
|
|
|
|
|
38,375
|
|
|
|
9.18
|
|
|
$0.25
|
|
|
105,000
|
|
|
|
9.34
|
|
|
|
|
25,000
|
|
|
|
9.34
|
|
|
$0.27
|
|
|
400,000
|
|
|
|
8.59
|
|
|
|
|
188,889
|
|
|
|
8.59
|
|
|
$0.29
|
|
|
400,000
|
|
|
|
9.00
|
|
|
|
|
113,580
|
|
|
|
9.00
|
|
|
$0.35
|
|
|
4,840,000
|
|
|
|
8.84
|
|
|
|
|
3,100,694
|
|
|
|
8.84
|
|
|
$0.37
|
|
|
1,755,775
|
|
|
|
8.55
|
|
|
|
|
1,198,881
|
|
|
|
8.55
|
|
|
$0.42
|
|
|
130,000
|
|
|
|
8.78
|
|
|
|
|
37,917
|
|
|
|
8.78
|
|
|
$0.60
|
|
|
2,998,324
|
|
|
|
9.67
|
|
|
|
|
-
|
|
|
|
-
|
|
|
$0.80
|
|
|
5,498,324
|
|
|
|
9.45
|
|
|
|
|
625,000
|
|
|
|
9.18
|
|
|
$1.00
|
|
|
2,998,324
|
|
|
|
9.67
|
|
|
|
|
-
|
|
|
|
-
|
|
|
$1.20
|
|
|
2,998,324
|
|
|
|
9.67
|
|
|
|
|
-
|
|
|
|
-
|
|
|
$1.40
|
|
|
2,998,324
|
|
|
|
9.67
|
|
|
|
|
-
|
|
|
|
-
|
|
|
$1.50
|
|
|
67,676
|
|
|
|
7.58
|
|
|
|
|
42,936
|
|
|
|
7.58
|
|
|
$3.08
|
|
|
50,000
|
|
|
|
7.72
|
|
|
|
|
31,667
|
|
|
|
7.72
|
|
|
$3.65
|
|
|
64,271
|
|
|
|
7.62
|
|
|
|
|
64,271
|
|
|
|
7.62
|
|
|
$3.78
|
|
|
15,000
|
|
|
|
8.14
|
|
|
|
|
6,875
|
|
|
|
8.14
|
|
|
$3.80
|
|
|
65,000
|
|
|
|
8.05
|
|
|
|
|
31,146
|
|
|
|
8.05
|
|
|
$5.79
|
|
|
147,083
|
|
|
|
7.84
|
|
|
|
|
91,666
|
|
|
|
7.84
|
|
|
|
|
|
83,122,017
|
|
|
|
9.53
|
|
$ 98,025
|
|
|
16,119,239
|
|
|
|
9.22
|
|
$ 24,821
|
The
weighted-average grant date fair value of the options granted during the
three-month periods ended March 31, 2009 and March 31, 2008 were $0.11 and
$0.22, respectively.
On
December 2, 2008, the Company granted (under the Non-Qualified Plan) certain
employees options to purchase 14,991,620 shares of Company common stock. These
options will only vest with a change in control of the Company, as defined in
the option agreement. As the condition for vesting is not probable, the Company
has not recognized any compensation expense related to these options at March
31, 2009. At March 31, 2009, all of these options remain
outstanding.
At March
31, 2009, there was $6,748,073 of total unrecognized compensation cost related
to nonvested stock-based compensation arrangements granted under the plans. This
cost is expected to be recognized over the weighted average period of 2.60
years.
The
Company did not realize any tax benefits from tax deductions of stock-based
payment arrangements during the three month periods ended March 31, 2009 and
2008.
Stock-based
compensation expense related to stock options granted to non-employees is
recognized as earned. In accordance with EITF 96-18,
Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services,
the Company re-values the
non-employee stock-based compensation, at each reporting date, using the
Black-Scholes pricing model. As a result, stock-based compensation expense will
fluctuate as the estimated fair market value of the Company’s common stock
fluctuates. The Company recorded stock-based compensation expense related to
non-employees of $8,533 and $23,475 for the three-month periods ended March 31,
2009 and 2008, respectively.
A summary
of outstanding Common Stock Warrants included those issued as non-employee
compensation as of March 31, 2009 is as follows:
|
|
|
|
|
|
|
|
Securities
into which warrants are convertible and
reference
|
|
Shares
|
|
|
Exercise
Price
|
|
Expiration
Date
|
Common
Stock-
Non-employee
compensation
|
|
|
300,000
|
|
|
$
|
1.75
|
|
February
2013
|
Common
Stock-
Non-employee
compensation
|
|
|
80,000
|
|
|
$
|
0.20
|
|
February
2013
|
Common
Stock-
Non-employee
compensation
|
|
|
3,133,333
|
|
|
$
|
1.72
|
|
October
2011
|
Common
Stock-
Series A preferred
stock units
|
|
|
56,522,344
|
|
|
$
|
0.20
|
|
December
2013
|
Common
Stock-
Non-employee
compensation
|
|
|
6,665,343
|
|
|
$
|
0.20
|
|
December
2013
|
Common
Stock-
Non-employee
compensation
|
|
|
50,000
|
|
|
$
|
0.20
|
|
November
2013
|
Common
Stock-
See
below
|
|
|
600,000
|
|
|
$
|
0.20
|
|
March
2014
|
Total
|
|
|
67,351,020
|
|
|
|
|
|
|
In March
2009, the Company issued warrants to purchase 600,000 shares of the Company’s
common stock at an exercise price of $0.20 to Silicon Valley Bank in connection
with the Loan and Security Agreement for the revolving credit
arrangement. Utilizing the Black-Scholes option pricing model and an
assumed estimated volatility of 75%, an assumed contractual life of two and
one-half years, an assumed zero dividend rate, an assumed 1.27% risk-free
interest rate, and an assumed fair value of the Company’s stock of $0.20 per
share on the date of issuance, the Company determined the allocated fair value
of these warrants that are exercisable for 600,000 shares of the Company’s
common stock to be $33,794. This amount was recorded as financing
costs and will be amortized over the term of the revolving credit
arrangement.
Cash paid
during the three months ended March 31, 2009 and 2008 is as
follows:
|
|
March
31,
2009
|
|
|
March
31,
2008
|
|
Interest
|
|
$
|
888
|
|
|
$
|
—
|
|
Income
taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
Supplemental
disclosure of non-cash investing and financing activities for the three months
ended March 31, 2009 and 2008 is as follows:
|
|
March 31,
2009
|
|
|
March
31,
2008
|
|
Issuance
of warrants to Silicon Valley Bank
|
|
$
|
33,794
|
|
|
$
|
—
|
|
Issuance
of common stock to publisher
|
|
$
|
—
|
|
|
$
|
102,000
|
|
On March
27, 2009, the Company entered into a Loan and Security Agreement (the “Loan and
Security Agreement”) with Silicon Valley Bank that provides for a secured
revolving credit arrangement to provide advances in an aggregate principal
amount of up to $4,000,000 on the terms and conditions set forth in the Loan and
Security Agreement. The Loan and Security Agreement consists of a $4,000,000
credit facility with a $500,000 sublimit for stand-by letters of credit,
$500,000 sublimit for cash management services and a $500,000 sublimit for
foreign exchange contracts. The borrowings are secured based upon a percentage
of certain eligible billed and unbilled receivables. The Company may borrow,
repay and reborrow under the line of credit facility at any time. As of March
27, 2009, the advances under the line of credit facility shall accrue interest
at a per annum rate equal to 3.0% above the greater of (i) Silicon Valley Bank’s
announced prime rate or (ii) 7.0%. This interest rate shall be adjusted upward
at times when the Company’s liquidity ratio (as described in the Loan and
Security Agreement) equals less than 2.25 to 1.00. The Company is required to
pay a termination fee if the Loan and Security Agreement is terminated prior to
March 27, 2011 (the “Maturity Date”) in an amount equal to the interest that
would have accrued on an advance of an aggregate principal amount of $1 million
through the Maturity Date.
The
Company’s line of credit is collateralized by substantially all of the Company’s
assets and requires the Company to comply with customary affirmative and
negative covenants principally relating to liens, indebtedness, investments,
distributions to shareholders, use and disposition of assets, the satisfaction
of a liquidity ratio test and minimum tangible net worth requirements. In
addition, the Loan and Security Agreement contains customary events of default.
Upon occurrence of an uncured event of default, among other things, Silicon
Valley Bank may declare that all amounts owing under the credit arrangement are
due and payable and the applicable interest rate shall become 4% above the rate
that would otherwise apply. The line of credit and facility expire on the
Maturity Date. As of March 31, 2009, there is no amount outstanding under this
revolving credit arrangement. The amount available for borrowing
totaled approximately $1.275 million at March 31, 2009.
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations provides information that we believe is relevant to an assessment and
understanding of our financial condition and results of operations. This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the unaudited consolidated
financial statements and related notes thereto included under the heading
“Financial Statements” in Part I, Item 1 of this Quarterly Report on Form 10-Q
and our 2008 Form 10-K.
This
Quarterly Report on Form 10-Q, including this Management’s Discussion and
Analysis of Financial Condition and Results of Operations, contains, in addition
to historical information, forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions. Any statements that are not statements of historical fact are
forward-looking statements. When used, the words “believe,” “plan,” “intend,”
“anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense
or conditional constructions (e.g., “will,” “may,” “could,” “should,” etc.) or
similar expressions identify certain of these forward-looking statements.
These
forward-looking statements include, without limitation: (1) management’s
expectation that revenues will increase as a result of our planned continued
expansion of the Betawave Network’s reach, scale and scope; (2) our expectation
that we will incur additional expenses for the development and expansion of our
publisher network, marketing campaigns for a number of our programming launches
and the continuing integration of our businesses; (3) our anticipation of gains
in operating efficiencies as a result of the increase to our sales and marketing
organization; (4) our expectation that operating losses and negative cash flows
will continue for the foreseeable future; (5) our anticipation that that losses
will decrease from current levels to the extent that we continue to grow and
develop; (6) our belief that we will be able to expand operations and gain
market share; (7) our anticipation that revenues for the full fiscal year of
2009 will increase from revenues for the full fiscal year of 2008; (8) our
anticipation that our revenues will show quarter over quarter and year over year
growth for 2009; (9) our expectation that the launch of the Betawave Network,
the increase in the size of the Betawave Network and the sales cycle all are
expected to mature; and (10) statements regarding trends in our
business.
These
forward-looking statements are subject to risks and uncertainties that could
cause actual results or events to differ materially from those expressed or
implied by the forward-looking statements in this Quarterly Report on Form 10-Q.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this Quarterly Report on Form 10-Q, and in
particular, the risks discussed under the heading “Risk Factors” in Part II,
Item 1A of this Quarterly Report on Form 10-Q and those discussed in other
documents that we file with the SEC. We undertake no obligation to revise or
publicly release the results of any revision to these forward-looking
statements. Given these risks and uncertainties, readers are urged not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this Quarterly Report on Form 10-Q.
Overview
Betawave
Corporation is an attention-based digital media company. We have assembled some
of the leading immersive casual gaming, virtual world, social play and
entertainment websites into a network of sites (the “Betawave Network”). We
generate revenues by selling innovative, accountable and attention-grabbing
advertising campaigns on those sites to brand advertisers.
Recent
Developments
In
January 2009, the Company changed its name from GoFish Corporation to Betawave
Corporation, launched a rebranding campaign and broadened its focus to include
the sale of advertising and the provision of content for websites across the
Internet in high attention environments.
In March
2009, the Company entered into a Loan and Security Agreement with Silicon Valley
Bank that provides for a secured revolving credit arrangement to provide
advances in an aggregate principal amount of up to $4,000,000 (based upon a
percentage of certain eligible billed and unbilled accounts
receivable).
Trends
in Our Business
In
February 2008, we formally launched our youth entertainment network. Our focus
was on entering into relationships with youth-focused websites (“publishers”),
under which we sold their inventory of available advertising opportunities.
Shortly after the launch of our youth entertainment network, because many of our
publishers also attracted a high number of co-viewing parents, we expanded our
focus to include moms. Our revenues increased as a result of the launch of the
youth entertainment network, but we felt there was an opportunity to pursue a
larger and more lucrative market.
In
January 2009, in conjunction with our name change to Betawave Corporation, we
announced that we were broadening our focus from youth and moms to focus on the
highest attention span media environments across the Internet, as measured by
time spent per month, time spent per page and receptivity to brand advertising.
We believe that this approach, coupled with an emphasis on immersive advertising
products, allows us to more fully integrate brands into the consumer experience
and deliver measurable results that exceed industry norms.
During
the first quarter of 2009, we added key publishers and increased the “reach” of
our network to over 30 million domestic unique users (according to comScore
Media Metrix, March 2009). When ranked against the networks and properties in
comScore Media Metrix, we place at or near the top in total audience reach and
time spent across the relevant demographic in five key categories as
follows:
|
·
|
In
the Community-Teens category, we place first in reach and total time
spent by teens (ages 12-17);
|
|
·
|
In
the Entertainment-Kids category, we place second in reach and third in
total time spent by kids (ages
6-11);
|
|
·
|
In
the Games category, we place first in reach and total time spent
by tweens (ages 9-14);
|
|
·
|
In
the Lifestyles category, we place second in reach and first in total time
spent by both women (ages 18-49) and moms (ages 25-54);
and
|
|
·
|
In
the Parenting category, we place first in reach and first in total time
spent by households with kids.
|
The size
of our network represents our total advertising opportunity. In general, the
sales cycle in our business ranges from three to nine months. This is due to the
general practice for all advertiser categories to plan at least one quarter in
advance. In some cases, several of our key advertiser categories, such as
consumer packaged goods, buy ad media well in advance of a campaign (generally
six to 12 months).
During
the first quarter of 2009, we have continued to see an increase in demand for
our services. Since the expansion of our network to include different age
groups, we have been invited to pitch more business and, as a result, we believe
we have built a robust sales pipeline. We anticipate that our revenues will show
quarter over quarter and year over year growth for 2009 as the launch of the
Betawave Network, the increase in the size of the Betawave Network and the sales
cycle all are expected to mature. We remain subject to seasonal fluctuations in
our business. In general, advertisers tend to place fewer advertisements during
the first calendar quarter of each year. In the youth advertising market, the
first half of the year tends to experience lower spending, while the second half
of the year tends to experience higher spending. In general, online advertising,
as well as the demand for performance-based marketing services has, in the past,
peaked during the fourth quarter holiday season.
Despite
the recent downturn in the economy generally, the online advertising industry
grew 11% in 2008, according to eMarketer and is expected to continue to grow
(4.5% growth in 2009 and growing to $37.2 billion by 2013). The research firm
has given several reasons for the resiliency of Internet advertising spending in
the context of the overall macroeconomic decline in the economy. These are:
measurability with a better understanding of the audience, more effective ad
placements resulting in increased prices, easier purchases for advertisers and
their agencies through networks and exchanges, better targeting, attracting
audiences through video advertising and continuing to reach those audiences by
tracking the focus of users’ attention.
The
growth of online video consumption further underscores the trend toward
consuming media online at the expense of other sources. According to comScore
Media Metrix, in November 2008, 146 million people (77% of the U.S. Internet
audience) viewed online video, watching 34% more videos than they did in 2007.
The increase in online video consumption has lead to the creation of new
vernacular, for example, “video snacking,” a term now used to describe how
consumers’ viewing habits consist of repeated, quick consumption of online
video, with significant spikes in online video watching seen at lunchtime. As
MediaPost puts it, there are “more people, watching more videos, more
often.”
We
believe that advertisers must reach consumers online, as this is where they
increasingly spend time relative to other media. The advertiser’s ability to
effectively reach these consumers, however, is being impacted by several trends
taking place on the Internet. Consumer behavior online is changing through an
accelerated progression towards “deportalization.” Deportalization describes the
phenomenon of Internet traffic moving from large portals to smaller, niche
sites. The drivers of this trend are search and increased user confidence with
regard to the medium. We expect that, in the next several years, the large sites
will continue to lose traffic to smaller sites. Our goal is to fill in the gap
for brand advertisers by uniting attractive, content-rich mid-size sites,
providing the size and scale of portals, with the immersive experience and
customization of niche sites.
We are
seeking to invest significantly in building the employee and systems
infrastructures that we believe are necessary to manage our growth and develop
and promote our products and services in order to take advantage of the trends
described above, which will require us to continue to use significant cash
resources in the near future. In general, the demand for high quality
salespeople in online advertising sales is very competitive and requires paying
competitive market salaries in order to obtain the results we seek to grow our
business. In addition, we believe that attracting, hiring and retaining
mid-level digital advertising executives are important to building our business,
and the market for these executives in our industry is also very
competitive.
Results
of Operations - Three Months Ended March 31, 2009 Compared to Three Months Ended
March 31, 2008
Revenues
Revenues
consist of advertising fees, primarily from graphical and rich-media
ads.
Total
revenues increased to $1,388,420 for the three months ended March 31, 2009 from
$657,150 for the three months ended March 31, 2008, representing an increase of
$731,270. This increase reflected higher sales from advertising that was sold
across the Betawave Network. The sales cycle in our business generally ranges
from three to nine months.
We
anticipate that our revenues for the full fiscal year of 2009 will increase from
our revenues for the full fiscal year of 2008. While management believes this
projection has a reasonable basis, this projection is subject to risks and
uncertainties that could cause actual results or events to differ materially
from those expressed or implied by such projections, including those identified
under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on
Form 10-Q and those discussed in other documents we file with the
SEC.
Costs
of Revenues
Cost of
revenues consist primarily of direct payments to publishers on advertising
revenues, costs associated with hosting our websites and ad serving costs for
impressions delivered in connection with advertising revenues.
Cost of
revenues increased to $1,847,072 for the three months ended March 31, 2009 from
$803,806 for the three months ended March 31, 2008, representing an increase of
$1,043,266. This increase included $990,287 of payments made to publishers,
including a one-time write-off of $605,391, which represents the unrecovered
portion of a minimum guarantee paid to a publisher that the company terminated
during the first quarter, $63,912 for ad serving, $87,549 for custom media
player and game design and $6,240 for Betawave TV production costs. These
increases were offset by $61,108 for web hosting costs, $21,518 for stock-based
compensation expenses related to SFAS 123(R) and $22,096 for licensing
expenses.
Sales
and Marketing
Sales and
marketing expenses consist primarily of advertising and other marketing related
expenses, compensation-related expenses, sales commissions, and travel
costs.
Sales and
marketing expenses increased to $2,216,480 for the three months ended March 31,
2009 from $1,686,889 for the three months ended March 31, 2008, representing an
increase of $529,591. This increase was attributable to a $487,732 increase in
personnel and other benefits related costs, including a $13,306 decrease in
stock-based compensation expenses related to SFAS 123(R), a $30,688 increase in
travel expenses and a $126,091 increase in allocation of facilities, IT and
other operating expenses. These increases were offset by an $87,574 reduction in
advertising and other marketing related expenses and a $27,346 decrease in
professional services for public relations and related development research
expense. The increase in personnel and other benefits-related costs
is due to the headcount increase.
Employees
in sales and marketing at March 31, 2009 and 2008 were 40 and 22,
respectively.
Product
Development
Product
development expenses consist primarily of compensation-related expenses incurred
for the development of, and enhancement to systems that enable us to drive and
support revenue-generating activities across our network of
websites.
Product
development expenses increased to $226,573 for the three months ended March 31,
2009 from $174,381 for the three months ended March 31, 2008, representing an
increase of $52,192. This increase was attributable primarily to an $80,353
increase in compensation related expenses, including a $59,947 increase in
stock-based compensation expenses related to SFAS 123(R), which was offset by a
$28,161 decrease in allocation of facilities, IT and other operating
expenses.
Employees
in product development at March 31, 2009 and 2008 were 4 and 5,
respectively.
General
and Administrative
General
and administrative expenses consist primarily of compensation-related expenses
related to our executive management, finance and human resource organizations
and legal, accounting, insurance, investor relations and other operating
expenses to the extent not otherwise allocated to other functions.
General
and administrative expenses decreased to $1,516,474 for the three months ended
March 31, 2009 from $1,607,140 for the three months ended March 31, 2008,
representing a decrease of $90,666. This decrease was attributable to a $122,077
reduction of amortization of deferred financing costs, a $119,520 decrease in
accounting, investor relations and other professional services, a $105,242
decrease in unallocated facilities, IT and other operating expenses, and a
$13,478 reduction in travel expenses. These decreases were offset by a $269,651
increase in compensation-related expenses, including a $104,544 increase in
stock-based compensation expenses related to SFAS 123(R). This increase in
compensation-related expenses was due to headcount increase and stock-based
compensation expenses in the first quarter of 2009.
Employees
in general and administrative at March 31, 2009 and 2008 were 9 and 6,
respectively.
Other
Income and
Expenses
Total
other income (expense) changed to $4,512 of income for the three months ended
March 31, 2009 from $(564,332) of expense for the three months ended March 31,
2008.
Interest
income is derived primarily from short-term interest earned on operating cash
balances.
Interest
expense for the three months ended March 31, 2009 relates to the directors and
officers insurance policy and the interest expense for the three months ended
March 31, 2008 relates to our unsecured convertible 15% original issue discount
notes due June 8, 2010 that we issued under the terms of a subscription
agreement dated April 18, 2008 and an accession agreement dated June 30, 2008,
which were retired in December 2008.
Liquidity
and Capital Resources
To date,
we have funded our operations primarily through private sales of securities and
borrowings. As of March 31, 2009, we had $7,111,080 in cash and cash
equivalents. Because we expect to continue to incur an operating loss in fiscal
2009, we may need to raise additional capital in the future, which may not be
available on reasonable terms or at all. Any raising of additional capital may
dilute our current stockholders’ ownership interests.
Net cash
used in operating activities was $4,647,942, and $641,002 for the three months
ended March 31, 2009 and 2008, respectively. For the three months ended March
31, 2009, the cash used in operating activities was primarily due to a net loss
of $3,538,741, which is net of non cash expenses of $874,926, and a negative
change in working capital of $1,109,201. The non cash expense items included
depreciation and amortization of $64,803 and stock-based compensation of
$810,123. For the three months ended March 31, 2008, the primary use of cash was
due to a net loss of $2,897,263, which is net of non cash expenses of
$1,282,135, and a change in working capital of $2,256,261. The non cash expense
items included depreciation and amortization of $65,145, amortization of
convertible note fees of $122,077, stock-based compensation of $680,456 and non
cash interest expense of $414,457.
Net cash
used in investing activities was $18,520 and $561,606 for the three months ended
March 31, 2009 and 2008, respectively. For the three months ended March 31,
2009, net cash used in investing activities consisted of $18,520 for the
purchase of property and equipment. For the three months ended March 31, 2008,
net cash used in investing activities consisted of $550,000 deposited as
security to a service provider and the purchase of property and equipment of
$11,606.
Net cash
used in financing activities was $85,579 for the three months ended March 31,
2009 and net cash provided by financing activities was $210,000 for the three
months ended March 31, 2008. The net cash used in financing activities for the
three months ended March 31, 2009 of $85,579 was for financing costs related to
the new credit facility with Silicon Valley Bank. The net cash provided by
financing activities for the three months ended March 31, 2008 was $210,000 of
advances from a stockholder.
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. The preparation of these consolidated financial
statements requires us to make estimates, judgments and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses, and the
related disclosure of contingent assets and liabilities. We base our estimates
on historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
An
accounting policy is considered to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates that reasonably
could have been used, or changes in the accounting estimate that are reasonably
likely to occur, could materially impact the consolidated financial statements.
We believe that the following critical accounting policies reflect the more
significant estimates and assumptions used in the preparation of the
consolidated financial statements.
Revenue
Recognition
We
recognize revenues from the display of graphical advertisements on the websites
of the publishers in the Betawave Network as “impressions” are delivered up to
the amount contracted for by the advertiser. An “impression” is delivered when
an advertisement appears in pages viewed by users. Arrangements for these
services generally have terms of less than one year.
We
recognize these revenues as such because the services have been provided, and
the other criteria set forth under Staff Accounting Bulletin Topic 13:
Revenue Recognition
have been
met: namely, the fees charged by the Company are fixed or determinable, the
advertisers understand the specific nature and terms of the agreed-upon
transactions and collectability is reasonably assured. In accordance with
Emerging Issues Task Force (“EITF”) Issue No. 99-19,
Reporting Revenue Gross as Principal
Versus Net as an Agent
(“EITF 99-19”), Betawave reports revenues on a
gross basis principally because the Company is the primary obligor to the
advertisers.
Costs
of Revenues and Expenses
Cost of
revenues and expenses primarily consist of payments to publishers in the
Betawave Network, personnel-related costs, including payroll, recruitment and
benefits for executive, technical, corporate and administrative employees, in
addition to professional fees, insurance and other general corporate expenses.
We believe that a key element to the execution of our strategy is the hiring of
personnel in all areas that are vital to our business. Our investments in
personnel include hiring employees in the areas of business development, sales
and marketing, advertising, service and general corporate marketing and
promotions.
Accounting
for Stock Based Compensation
Prior to
January 1, 2006, we used the intrinsic value method to record stock-based
compensation for employees, which requires that deferred stock-based
compensation be recorded for the difference between an option’s exercise price
and the fair value of the underlying common stock on the grant date of the
option.
Effective
January 1, 2006, we adopted the fair value recognition provisions of FASB
Statement No. 123 (R),
Share-Based Payment
, (“SFAS
123 (R)”) using the modified prospective transition method. Under that
transition method, compensation cost recognized for the periods ended December
31, 2008 and 2007 includes: (a) compensation cost for all stock-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of FASB
Statement No. 123,
Accounting
for Stock-Based Compensation
(“SFAS 123”), and (b) compensation cost for
all stock-based payments granted or modified subsequent to January 1, 2006,
based on the grant date fair value estimated in accordance with the provisions
of SFAS 123(R).
Stock-based
compensation expense for performance-based options granted to non-employees is
determined in accordance with SFAS 123(R) and Emerging Issues Task Force Issue
No. 96-18, Accounting for Equity Instruments that are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services
(“EITF 96-18”), at the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measured. The
fair value of options granted to non-employees is measured as of the earlier of
the performance commitment date or the date at which performance is complete
(“measurement date”). When it is necessary under U.S. GAAP to recognize the cost
for the transaction prior to the measurement date, the fair value of unvested
options granted to non-employees is remeasured at the balance sheet
date.
We
currently use the Black-Scholes option pricing model to determine the fair value
of stock options. The determination of the fair value of stock based payment
awards on the date of grant using an option-pricing model is affected by our
stock price as well as by assumptions regarding a number of complex and
subjective variables. These variables include our expected stock price
volatility over the term of the awards, actual and projected employee stock
option exercise behaviors, risk-free interest rate and expected dividends. We
estimate the volatility of our common stock at the date of the grant based on a
combination of the implied volatility of publicly traded options on our common
stock and our historical volatility rate. The dividend yield assumption is based
on historical dividend payouts. The risk-free interest rate is based on observed
interest rates appropriate for the term of our employee options. We use
historical data to estimate pre-vesting option forfeitures and record
stock-based compensation expense only for those awards that are expected to
vest. For options granted, we amortize the fair value on a straight-line basis.
All options are amortized over the requisite service periods of the awards,
which are generally the vesting periods. If factors change we may decide to use
different assumptions under the Black-Scholes option model and stock-based
compensation expense may differ materially in the future from that recorded in
the current periods.
Property
and Equipment
Property
and equipment are recorded at cost less accumulated depreciation and
amortization. Major improvements are capitalized, while repair and maintenance
costs that do not improve or extend the lives of the respective assets are
expensed as incurred. Depreciation and amortization charges are calculated using
the straight-line method over the following estimated useful lives:
|
Estimated
Useful Life
|
Computer
equipment and software
|
3
years
|
Furniture
and fixtures
|
5
years
|
Leasehold
improvements
|
Shorter
of estimated useful life or lease
term
|
Upon
retirement or sale of property or equipment, the associated cost and related
accumulated depreciation are removed from the balance sheet and the resulting
gain or loss is reflected in operating expenses. If factors change we may decide
to use shorter or longer estimated useful lives and depreciation and
amortization expense may differ materially in the future from that recorded in
the current periods.
Impairment
of Long-Lived Assets
We
continually evaluate whether events and circumstances have occurred that
indicate the remaining estimated useful life of long-lived assets may warrant
revision or that the remaining balance of long-lived assets may not be
recoverable. When factors indicate that long-lived assets should be evaluated
for possible impairment, we typically make various assumptions about the future
prospects the asset relates to, consider market factors and use an estimate of
the related undiscounted future cash flows over the remaining life of the
long-lived assets in measuring whether they are recoverable. If the estimated
undiscounted future cash flows exceed the carrying value of the asset, a loss is
recorded as the excess of the asset’s carrying value over its fair value. There
have been no such impairments of long-lived assets through March 31,
2009.
Assumptions
and estimates about future values are complex and often subjective. They can be
affected by a variety of factors, including external factors such as industry
and economic trends, and internal factors such as changes in our business
strategy and our internal forecasts. Although we believe the assumptions and
estimates we have made in the past have been reasonable and appropriate,
different assumptions and estimates could materially affect our reported
financial results. More conservative assumptions of the anticipated future
benefits could result in impairment charges, which would increase net loss and
result in lower asset values on our balance sheet. Conversely, less conservative
assumptions could result in smaller or no impairment charges, lower net loss and
higher asset values.
Income
Taxes
We are
subject to federal and state income taxes in the United States of America. We
use the asset and liability approach to account for income taxes. This
methodology recognizes deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax base of assets and liabilities and operating loss and tax
carryforwards. We then record a valuation allowance to reduce deferred tax
assets to an amount that more likely than not will be realized. In evaluating
our ability to recover our deferred income tax assets we consider all available
positive and negative evidence, including our operating results, ongoing tax
planning and forecasts of future taxable income. We have provided a valuation
allowance against our entire net deferred tax asset, primarily consisting of net
operating loss carryforwards. In the event we were to determine that we would be
able to realize our deferred income tax assets in the future in excess of their
net recorded amount, we would make an adjustment to the valuation allowance
which would reduce the provision for income taxes.
Advertising
and Promotion Costs
Expenses
related to advertising and promotions of products are charged to expense as
incurred. Advertising and promotional costs totaled $0 and $113,146 for the
three months ended March 31, 2009 and 2008, respectively.
Recent
Accounting Pronouncements
See
“Recent Accounting Pronouncements” under Note 2 to the unaudited consolidated
financial statements included under the heading “Financial Statements” in Part
I, Item 1 of this Quarterly Report on Form 10-Q for information on the adoption
of new accounting standards in the first quarter of 2009, none of which had a
material impact on our consolidated financial statements, and the future
adoption of recently-issued accounting pronouncements, which we do not expect to
have a material impact on our consolidated financial statements.
Off
Balance Sheet Arrangements
We do not
have any off balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET
RISK.
|
Not
applicable.
ITEM 4.
|
CONTROLS AND
PROCEDURES.
|
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by this Quarterly Report on Form 10-Q, our management
performed, with the participation of our Chief Executive Officer and Chief
Accounting Officer, an evaluation of the effectiveness of our disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure
controls and procedures are designed to reasonably ensure that information
required to be disclosed in the report we file or submit under the Exchange Act
is recorded, processed, summarized, and reported within the time periods
specified in the SEC’s forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and our
Chief Accounting Officer, to allow timely decisions regarding required
disclosures.
As
previously disclosed in our 2008 Form 10-K, in connection with our assessment of
our internal control over financial reporting as of December 31, 2008 as
required under Section 404 of the Sarbanes-Oxley Act of 2002, we had identified
the following material weaknesses in our internal control over financial
reporting:
|
•
|
Our
control environment did not sufficiently promote effective internal
control over financial reporting resulting in recurring material
weaknesses which were not
remediated.
|
|
•
|
Our
board of directors has not established adequate financial reporting
monitoring activities to mitigate the risk of management override,
specifically:
|
|
-
|
a
majority of our board of directors is not
independent;
|
|
-
|
no
financial expert on our board of directors has been
designated;
|
|
-
|
no
formally documented financial analysis is presented to our board of
directors, specifically fluctuation, variance, trend analysis or business
performance reviews;
|
|
-
|
delegation
of authority has not been formally
communicated;
|
|
-
|
an
effective whistleblower program has not been
established;
|
|
-
|
there
is insufficient oversight of external audit specifically related to fees,
scope of activities, executive sessions, and monitoring of results;
and
|
|
-
|
there
is insufficient oversight of accounting principle
implementation.
|
|
•
|
Due
to an insufficient number of personnel in our accounting group there have
been material audit adjustments to the annual financial
statements.
|
|
•
|
We
have not maintained sufficient competent evidence to support the effective
operation of our internal controls over financial reporting, specifically
related to our board of directors oversight of quarterly and annual SEC
filings; and management’s review of SEC filings, journal entries, account
analyses and reconciliations, and critical spreadsheet
controls.
|
|
•
|
We
have not sufficiently restricted access to data or adequately divided, or
compensated for, incompatible functions among personnel to reduce the risk
that a potential material misstatement of the financial statements would
occur without being prevented or detected. Specifically we have not
divided the authorizing of transactions, recording of transactions,
reconciling of information, and maintaining custody of assets within the
financial closing and reporting, revenues and accounts receivable,
purchases and accounts payable, and cash receipts and disbursements
processes.
|
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will
not be prevented or detected on a timely basis by our internal
controls. As previously disclosed in our 2008 Form 10-K, because of
the material weaknesses noted above, our management had concluded that we did
not maintain effective internal control over financial reporting as of December
31, 2008, based on
Internal
Control over Financial Reporting – Guidance for Smaller Public Companies
issued by COSO.
As
previously disclosed in our 2008 Form 10-K, we have been in the process of
implementing remediation efforts with respect to the material weaknesses noted
above as follows:
|
•
|
We
plan, over the course of this year, to evaluate the composition of our
board of directors and to determine whether to add independent directors
or to replace an inside director with an independent director, in both
cases, in order to have a majority of our board of directors become
independent. We will determine whether any of its current directors is a
financial expert and, if not, will ensure that one of the new directors is
a financial expert.
|
|
•
|
We
plan on drafting quarterly financial statement variance analysis of actual
versus budget with relevant explanations of variances for distribution to
our board of directors.
|
|
•
|
We
are currently working on formally documenting the delegation of authority.
There will be a document that specifies exactly what requires board
approval. Other than the specific items that our board of directors must
authorize, all other authority will be delegated to the Chief Accounting
Officer and point to the further delegation from the Chief Accounting
Officer to employees.
|
|
•
|
We
are in the process of developing, documenting, and communicating a formal
whistleblower program to employees. We expect to post the policy on the
web site in the governance section and in the common areas in the office.
We plan on providing a 1-800 number for reporting complaints and will hire
a specific 3rd party whistleblower company to monitor the hotline and
provide monthly reports of activity to our board of
directors.
|
|
•
|
Management
intends to continue to provide SEC and US GAAP training for employees and
retain external consultants with appropriate SEC and US GAAP expertise to
assist in financial statement review, account analysis review, review and
filing of SEC reports, policy and procedure compilation assistance, and
other related advisory services.
|
|
•
|
We
intend on developing an internal control over financial reporting evidence
policy and procedures which contemplates, among other items, a listing of
all identified key internal controls over financial reporting, assignment
of responsibility to process owners within the Company, communication of
such listing to all applicable personnel, and specific policies and
procedures around the nature and retention of evidence of the operation of
controls.
|
|
•
|
We
intend on undertaking a restricted access review to analyze all financial
modules and the list of persons authorized to have edit access to each. We
will remove or add authorized personnel as appropriate to mitigate the
risks of management or other
override.
|
|
•
|
We
plan to re-assign roles and responsibilities in order to improve
segregation of duties.
|
We
believe the foregoing efforts will enable us to improve our internal control
over financial reporting. Management is committed to continuing efforts aimed at
improving the design adequacy and operational effectiveness of its system of
internal controls. The remediation efforts noted above will be subject to our
internal control assessment, testing, and evaluation process.
While we
have been in the process of implementing the remediation efforts with respect to
the material weaknesses noted above, these material weaknesses were not fully
remediated as of March 31, 2009.
Based on
our management’s evaluation of our disclosure controls and procedures, including
the continuing unremediated material weaknesses in our internal control over
financial reporting, our Chief Executive Officer and our Chief Accounting
Officer concluded that, as of March 31, 2009, our disclosure controls and
procedures were not effective.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting during the
first quarter ended March 31, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
ITEM 1.
|
LEGAL
PROCEEDINGS.
|
From time
to time we may be named in claims arising in the ordinary course of business.
Currently, no legal proceedings, government actions, administrative actions,
investigations or claims are pending against us or involve us that, in the
opinion of our management, would reasonably be expected to have a material
adverse effect on our business and financial condition.
In
December 2008, Sunrise Equity Partners, L.P. (“Sunrise”) brought an action
against us in the United States District Court in the Southern District of New
York on behalf of itself and all other purchasers of our securities in our 2006
private placement. In the complaint, Sunrise alleged, among other things, that
we breached the representation in the subscription agreement for the 2006
private placement which provided that no purchaser in the private placement had
an agreement or understanding on terms that differed substantially from those of
any other investor. Sunrise claimed that we breached this representation because
Mr. Zehil’s entities received certificates without any restrictive legend while
all other investors in the private placement received certificates with such
restrictive legends. Sunrise dismissed this suit without prejudice in
February 2009. Although it is possible that Sunrise may refile the lawsuit in
state or federal court, in the opinion of our management, we do not reasonably
expect this case to have a material adverse effect on our business and financial
condition.
We
face a variety of risks that may affect our financial condition, results of
operations or business, and many of those risks are driven by factors that we
cannot control or predict. The following discussion addresses those risks that
management believes are the most significant, although there may be other risks
that could arise, or may prove to be more significant than expected, that may
affect our financial condition, results of operations or business.
RISKS
RELATED TO OUR COMPANY
We
have a history of operating losses which we expect to continue, and we may not
be able to achieve profitability.
We have a
history of losses and expect to continue to incur operating and net losses for
the foreseeable future. We incurred a net loss of approximately $4.4 million for
the three months ended March 31, 2009, approximately $17.0 million for the year
ended December 31, 2008, approximately $16.4 million for the year ended December
31, 2007 and approximately $5.3 million for the year ended December 31, 2006. As
of March 31, 2009 and December 31, 2008,our accumulated deficit was
approximately $45.5 million and $41.1 million, respectively. We have not
achieved profitability on a quarterly or on an annual basis. We may not be able
to achieve profitability. Our revenues for the three months ended March 31, 2009
were approximately $1.4 million. If our revenues grow more slowly than
anticipated or if our operating expenses exceed expectations, then we may not be
able to achieve profitability in the near future or at all, which may depress
the price for our common stock.
The
effects of the current global economic crisis may impact our business, operating
results, or financial condition.
The
current global economic crisis has caused significant disruptions and extreme
volatility in global financial markets and increased rates of default and
bankruptcy, and has significantly impacted levels of consumer spending. The
current deterioration in economic conditions has caused and could cause
additional decreases in or delays in advertising spending in general. In
addition, many industry forecasts are predicting negative growth or a decrease
in the rate of growth in certain channels of online advertising in 2009. These
developments could negatively affect our business, operating results, or
financial condition in a number of ways. For example, current or potential
customers such as advertisers may delay or decrease spending with us or may not
pay us or may delay paying us for previously purchased services. In addition, if
consumer spending continues to decrease, this may affect consumer’s behavior on
the Internet and online advertising spending.
A
limited number of advertisers account for a significant percentage of our
revenue, and a loss of one or more of these advertisers could materially
adversely affect our results of operations.
We
generate almost entirely all of our revenues from advertisers on our network.
For the three months ended March 31, 2009 and the year ended December 31, 2008,
revenues from our five largest advertisers accounted for 49% and 36.3%,
respectively, of our revenues. For the three months ended March 31, 2009 and the
year ended December 31, 2008, our largest advertiser accounted for 13% and
12.3%, respectively, of our revenues. Our advertisers can generally terminate
their contracts with us at any time. The loss of one or more of the advertisers
that represent a significant portion of our revenues could materially adversely
affect our results of operations. In addition, our relationships with publishers
participating in our network require us to bear the risk of non-payment of
advertising fees from advertisers. Accordingly, the non-payment or late payment
of amounts due to us from a significant advertiser could materially adversely
affect our financial condition and results of operations.
A
small number of publishers account for a substantial percentage of our revenues
and our failure to develop and sustain long-term relationships with our
publishers, or the reduction in traffic of a current publisher in our network,
could limit our ability to generate revenues.
For the
three months ended March 31, 2009 and the year ended December 31, 2008,
advertising revenues connected to our largest publisher accounted for
approximately 45% and 66%, respectively, of our total revenues. Until the sales
cycle on the newest sites in our publisher network matures, a small number of
publishers will account for a substantial percentage of our revenues. We cannot
assure you that any of the publishers participating in our network will continue
their relationships with us. Moreover, we may lose publishers to competing
publisher networks that have longer operating histories, the ability to attract
higher ad rates, greater brand recognition, or the ability to generate greater
financial, marketing and other resources. Furthermore, we cannot assure you that
we would be able to replace a departed publisher with another publisher with
comparable traffic patterns and demographics, if at all. Accordingly, our
failure to develop and sustain long-term relationships with publishers or the
reduction in traffic of a current publisher in our network could limit our
ability to generate revenues.
Our
future financial results, including our expected revenues, are unpredictable and
difficult to forecast.
Our
revenues, expenses and operating results fluctuate from quarter to quarter and
are unpredictable which could increase the volatility of the price of our common
stock. We expect that our operating results will continue to fluctuate in the
future due to a number of factors, some of which are beyond our
control.
These
factors include:
|
·
|
our
ability to attract and incorporate publishers into our
network;
|
|
·
|
the
ability of the publishers in our network to attract visitors to their
websites;
|
|
·
|
the
amount and timing of costs relating to the expansion of our operations,
including sales and marketing
expenditures;
|
|
·
|
our
ability to control our gross
margins;
|
|
·
|
our
ability to generate revenues through third-party advertising and our
ability to be paid fees for advertising on our network;
and
|
|
·
|
our
ability to obtain cost-effective advertising throughout our
network.
|
Due to
all of these factors, our operating results may fall below the expectations of
investors, which could cause a decline in the price of our common stock. In
addition, since we expect that our operating results will continue to fluctuate
in the future, it is difficult for us to accurately forecast our
revenues.
Our
limited operating history in the operation of an online entertainment and media
network of websites makes evaluation of our business difficult, and our revenues
are currently insufficient to generate positive cash flows from our
operations.
We have
limited historical financial data upon which to base planned operating expenses
or forecast accurately our future operating results. We formally launched our
website in October 2004 and only began building our network during 2007. We
formally launched our network in February 2008 and we rebranded as Betawave
Corporation in January 2009. Our revenues are currently insufficient to generate
positive cash flows from our operations.
We
may need to raise additional capital to meet our business requirements in the
future and such capital raising may be costly or difficult to obtain and could
dilute current stockholders’ ownership interests.
We may
need to raise additional capital in the future, which may not be available on
reasonable terms or at all, especially in light of the recent downturn in the
economy and dislocations in the credit and capital markets. The raising of
additional capital may dilute our current stockholders’ ownership interests. We
may need to raise additional funds through public or private debt or equity
financings to meet various objectives including, but not limited
to:
|
·
|
pursuing
growth opportunities, including more rapid
expansion;
|
|
·
|
acquiring
complementary businesses;
|
|
·
|
growing
our network, including the number of publishers and advertisers in our
network;
|
|
·
|
hiring
qualified management and key
employees;
|
|
·
|
responding
to competitive pressures; and
|
|
·
|
maintaining
compliance with applicable laws.
|
In
addition, the raising of any additional capital through the sale of equity or
equity-backed securities would dilute our current stockholders’ ownership
percentages and would also result in a decrease in the fair market value of our
equity securities because our assets would be owned by a larger pool of
outstanding equity. The terms of those securities issued by us in future capital
transactions may be more favorable to new investors, and may include
preferences, superior voting rights and the issuance of warrants or other
derivative securities, which may have a further dilutive effect.
If we are
unable to obtain required additional capital, we may have to curtail our growth
plans or cut back on existing business and, further, we may not be able to
continue operating if we do not generate sufficient revenues from operations
needed to stay in business.
We may
incur substantial costs in pursuing future capital financing, including
investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs. We may also be
required to recognize non-cash expenses in connection with certain securities we
issue, such as convertible notes and warrants, which may adversely impact our
financial condition.
Our
auditors have indicated that there are a number of factors that raise
substantial doubt about our ability to continue as a going concern.
Our
audited consolidated financial statements for the fiscal year ended December 31,
2008 were prepared on a going concern basis in accordance with U.S. GAAP. The
going concern basis of presentation assumes that we will continue in operation
for the foreseeable future and will be able to realize our assets and discharge
our liabilities and commitments in the normal course of business. However, the
report of our independent registered public accounting firm on our audited
consolidated financial statements for the fiscal year ended December 31, 2008
has indicated that we have incurred net loss since our inception, have
experienced liquidity problems, negative cash flows from operations, and a
working capital deficit at December 31, 2008, that raise substantial doubt about
our ability to continue as a going concern.
If
we acquire or invest in other companies, assets or technologies and we are not
able to integrate them with our business, or we do not realize the anticipated
financial and strategic goals for any of these transactions, our financial
performance may be impaired.
As part
of our growth strategy, we occasionally consider acquiring or making investments
in companies, assets or technologies that we believe are strategic to our
business. We do not have extensive experience in integrating new businesses or
technologies, and if we do succeed in acquiring or investing in a company or
technology, we will be exposed to a number of risks, including:
|
·
|
we
may find that the acquired company or technology does not further our
business strategy, that we overpaid for the acquired company or technology
or that the economic conditions underlying our acquisition decision have
changed;
|
|
·
|
we
may have difficulty integrating the assets, technologies, operations or
personnel of an acquired company, or retaining the key personnel of the
acquired company;
|
|
·
|
our
ongoing business and management’s attention may be disrupted or diverted
by transition or integration issues and the complexity of managing
geographically or culturally diverse
enterprises;
|
|
·
|
we
may encounter difficulty entering and competing in new markets or
increased competition, including price competition or intellectual
property litigation; and
|
|
·
|
we
may experience significant problems or liabilities associated with
technology and legal contingencies relating to the acquired business or
technology, such as intellectual property or employment
matters.
|
If we
were to proceed with one or more significant acquisitions or investments in
which the consideration included cash, we could be required to use a substantial
portion of our available cash. To the extent we issue shares of capital stock or
other rights to purchase capital stock, including options and warrants, existing
stockholders might be diluted.
Our
recently-announced refined business model and rebranding of our business using
the “Betawave” name carry a number of risks that could adversely affect our
company, business prospects and operating results.
We
recently refined our business model to become an attention-based media company
and launched a campaign to rebrand our business using the “Betawave” name,
including changing the name of our company from GoFish Corporation to Betawave
Corporation. If we are unable to effectively implement our refined business
model and rebranding campaign, it would adversely affect our company, business
prospects and operating results. Our future success will depend in significant
part on our ability to forge contractual relationships with additional
third-party websites (“publishers”) under which we assume responsibility for
selling their inventory of available advertising opportunities, as well as
syndicating video content to them. We are susceptible to the risks of operating
an advertising-supported business. There is no guarantee that we will be able to
enter into contracts with such publishers and, if we are unable to enter into
such contractual relationships, our business and revenues will be adversely
affected. In addition, as a result of our rebranding campaign, we may lose any
brand recognition associated with the “GoFish” name that we previously
established with advertisers, publishers in our network and other partners. We
may not be able to establish, maintain or enhance brand recognition associated
with the “Betawave” name that is comparable to the brand recognition that we may
have previously had associated with the “GoFish” name. If we fail to establish,
maintain and enhance brand recognition associated with the “Betawave” name, it
could affect our ability to attract advertisers, publishers in our network and
other partners, which could adversely affect our ability to generate revenues
and could impede our business plan. Furthermore, in connection with
the development and implementation of our refined business model and rebranding
campaign, we have spent, and continue to expect to spend, additional time and
costs, including those associated with advertising and marketing efforts and
building a network that includes other publishers.
Our
business depends on enhancing our brand, and any failure to enhance our brand
would hurt our ability to expand our base of advertisers and publishers in our
network.
Enhancing
our brand is critical to expanding our base of advertisers, publishers in our
network, and other partners. We believe that the importance of brand recognition
will increase due to the relatively low barriers to entry in the Internet
market. If we fail to enhance our brand, or if we incur excessive expenses in
this effort, our business, operating results and financial condition will be
materially and adversely affected. Enhancing our brand will depend largely on
our ability to provide high-quality products and services, which we may not do
successfully.
We
intend to expand our operations and increase our expenditures in an effort to
grow our business. If we are unable to achieve or manage significant growth and
expansion, or if our business does not grow as we expect, our operating results
may suffer.
Our
business plan anticipates continued additional expenditure on development and
other growth initiatives. We may not achieve significant growth. If achieved,
significant growth would place increased demands on our management, accounting
systems, network infrastructure and systems of financial and internal controls.
We may be unable to expand associated resources and refine associated systems
fast enough to keep pace with expansion. If we fail to ensure that our
management, control and other systems keep pace with growth, we may experience a
decline in the effectiveness and focus of our management team, problems with
timely or accurate reporting, issues with costs and quality controls and other
problems associated with a failure to manage rapid growth, all of which would
harm our results of operations.
Payments
to certain of our publishers have exceeded the related fees we receive from our
advertisers.
We are
obligated under certain agreements to make non-cancelable guaranteed minimum
revenue share payments to certain of our publishers. In these agreements, we
promise to make these minimum payments to the publisher for a pre-negotiated
period of time. At March 31, 2009, our aggregate outstanding non-cancelable
guaranteed minimum revenue share commitments totaled $4.95 million through 2010.
It is difficult to forecast with certainty the fees that we will earn under
agreements with guarantees, and sometimes the fees we earn fall short of the
guaranteed minimum payment amounts.
Losing
key personnel or failing to attract and retain other highly skilled personnel
could affect our ability to successfully grow our business.
Our
future performance depends substantially on the continued service of our senior
management, sales and other key personnel. We do not currently maintain key
person life insurance. If our senior management were to resign or no longer be
able to serve as our employees, it could impair our revenue growth, business and
future prospects. In addition, the success of our monetization and sales plans
depends on our ability to retain people in direct sales and to hire additional
qualified and experienced individuals into our sales organization.
To meet
our expected growth, we believe that our future success will depend upon our
ability to hire, train and retain other highly skilled personnel. Competition
for quality personnel is intense among technology and Internet-related
businesses such as ours. We cannot be sure that we will be successful in hiring,
assimilating or retaining the necessary personnel, and our failure to do so
could cause our operating results to fall below our projected growth and profit
targets.
Decreased
effectiveness of equity compensation could adversely affect our ability to
attract and retain employees and harm our business.
We have
historically used stock options as a key component of our employee compensation
program in order to align employees’ interests with the interests of our
stockholders, encourage employee retention, and provide competitive compensation
packages. Volatility or lack of positive performance in our stock price may
adversely affect our ability to retain key employees, many of whom have been
granted stock options, or to attract additional highly-qualified
personnel.
Rules
issued under the Sarbanes-Oxley Act of 2002 may make it difficult for us to
retain or attract qualified officers and directors, which could adversely affect
the management of our business and our ability to retain the trading status of
our common stock on the OTC Bulletin Board.
We may be
unable to attract and retain those qualified officers, directors and members of
board committees required to provide for our effective management because of
rules and regulations that govern publicly held companies, including, but not
limited to, certifications by principal executive officers. The enactment of the
Sarbanes-Oxley Act of 2002 has resulted in the issuance of rules and regulations
and the strengthening of existing rules and regulations by the SEC. The
perceived increased personal risk associated with these recent changes may deter
qualified individuals from accepting roles as directors and executive
officers.
We may
have difficulty attracting and retaining directors with the requisite
qualifications. If we are unable to attract and retain qualified officers and
directors, the management of our business and our ability to retain the
quotation of our common stock on the OTC Bulletin Board or obtain a listing of
our common stock on a stock exchange or NASDAQ could be adversely
affected.
Our
management has identified a number of material weaknesses in our internal
control over financial reporting as of December 31, 2008, which, if not
sufficiently remediated, could result in material misstatements in our annual or
interim financial statements in future periods and the ineffectiveness of our
disclosure controls and procedures.
In
connection with our management’s assessment of our internal control over
financial reporting as required under Section 404 of the Sarbanes-Oxley Act of
2002, our management identified a number of material weaknesses in our internal
control over financial reporting as of December 31, 2008. A material weakness is
a deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis by our internal controls. As a result, our
management concluded that we did not maintain effective internal control over
financial reporting as of December 31, 2008. In addition, based on the
evaluation and the identification of these material weaknesses in our internal
control over financial reporting, our Chief Executive Officer and our Chief
Accounting Officer concluded that, as of March 31, 2009, our disclosure controls
and procedures were not effective.
We are in
the process of implementing remediation efforts with respect to our control
environment and these material weaknesses. However, if these remediation efforts
are insufficient to address these material weaknesses, or if additional material
weaknesses in our internal control over financial reporting are discovered in
the future, we may fail to meet our future reporting obligations, our
consolidated financial statements may contain material misstatements and our
financial condition and results of operations may be adversely impacted. Any
such failure could also adversely affect our results of periodic management
assessment regarding the effectiveness of our internal control over financial
reporting, as required by the SEC’s rules under Section 404 of the
Sarbanes-Oxley Act of 2002. The existence of a material weakness could result in
errors in our consolidated financial statements that could result in a
restatement of financial statements or failure to meet reporting obligations,
which in turn could cause investors to lose confidence in reported financial
information leading to a decline in our stock price.
Although
we believe that these remediation efforts will enable us to improve our internal
control over financial reporting, we cannot assure you that these remediation
efforts will remediate the material weaknesses identified or that any additional
material weaknesses will not arise in the future due to a failure to implement
and maintain adequate internal control over financial reporting. Furthermore,
there are inherent limitations to the effectiveness of controls and procedures,
including the possibility of human error and circumvention or overriding of
controls and procedures.
We
may have undisclosed liabilities that could harm our revenues, business,
prospects, financial condition and results of operations.
Our
present management had no affiliation with Unibio Inc. (which changed its name
to GoFish Corporation on September 14, 2006 and subsequently to Betawave
Corporation on January 20, 2009) prior to the October 27, 2006 mergers, in which
we acquired GoFish Technologies, Inc. as a wholly-owned subsidiary in a reverse
merger transaction and IDT Acquisition Corp., a wholly-owned subsidiary of the
Company, simultaneously merged with and into Internet Television Distribution,
Inc. as a wholly-owned subsidiary. Pursuant to the mergers, the officers and
board members of Betawave Corporation resigned and were replaced by officers of
GoFish Technologies, Inc. along with newly elected board members.
Although
the October 27, 2006 Agreement and Plan of Merger contained customary
representations and warranties regarding our pre-merger operations and customary
due diligence was performed, all of our pre-merger material liabilities may not
have been discovered or disclosed. We do not believe this to be the case but can
offer no assurance as to claims which may be made against us in the future
relating to such pre-merger operations. The Agreement and Plan of Merger and
Reorganization contained a limited, upward, post-closing, adjustment to the
number of shares of common stock issuable to pre-merger GoFish Technologies Inc.
and Internet Television Distribution Inc. shareholders as a means of providing a
remedy for breaches of representations made by us in the Agreement and Plan of
Merger and Reorganization, including representations related to any undisclosed
liabilities, however, there is no comparable protection offered to our other
stockholders. Any such undisclosed pre-merger liabilities could harm our
revenues, business, prospects, financial condition and results of operations
upon our acceptance of responsibility for such liabilities.
Regulatory
requirements may materially adversely affect us.
We are
subject to various regulatory requirements, including the Sarbanes-Oxley Act of
2002. Section 404 of the Sarbanes-Oxley Act of 2002 requires the evaluation and
determination of the effectiveness of a company’s internal control over its
financial reporting. In connection with management’s assessment of our internal
control over financial reporting as required under Section 404 of the
Sarbanes-Oxley Act of 2002, we identified material weaknesses in our internal
control over financial reporting as of December 31, 2008. As a result, we have
incurred additional costs and may suffer adverse publicity and other
consequences of this determination.
We
may be subject to claims relating to certain actions taken by our former
external legal counsel.
In
February 2007, we learned that approximately half of the three million shares of
our common stock issued as part of a private placement transaction we
consummated in October 2006 to entities controlled by Louis Zehil, who at the
time of the purchase was a partner of our former external legal counsel for the
private placement transaction, McGuire Woods LLP, may have been improperly
traded. We believe that Mr. Zehil improperly caused our former transfer agent
not to place a required restrictive legend on the certificate for these three
million shares and that Mr. Zehil then caused the entities he controlled to
resell certain of these shares. Mr. Zehil’s conduct was reported to the SEC, and
the SEC recently sued Mr. Zehil in connection with this matter and further
alleged that Mr. Zehil engaged in a similar fraudulent scheme with respect to
six additional public companies represented at the relevant time by McGuire
Woods LLP. Mr. Zehil also is the subject of criminal charges brought by federal
prosecutors in connection with the fraudulent scheme.
In
December 2008, Sunrise Equity Partners, L.P. (“Sunrise”) brought an action
against us in the United States District Court in the Southern District of New
York on behalf of itself and all other purchasers of our securities in our 2006
private placement. In the complaint, Sunrise alleged, among other things, that
we breached the representation in the subscription agreement for the 2006
private placement which provided that no purchaser in the private placement had
an agreement or understanding on terms that differed substantially from those of
any other investor. Sunrise claimed that we breached this representation because
Mr. Zehil’s entities received certificates without any restrictive legend while
all other investors in the private placement received certificates with such
restrictive legends. In February 2009, the complaint was dismissed without
prejudice. It is possible that Sunrise will re-file the complaint in federal or
state court or that one or more other stockholders could also claim that they
somehow suffered a loss as a result of Mr. Zehil’s conduct and attempt to hold
us responsible for their losses. If any such claims are successfully made
against us and we are not adequately indemnified for those claims from available
sources of indemnification, then such claims could have a material adverse
effect on our financial condition. We also may incur significant costs resulting
from our investigation of this matter, defending any litigation against us
relating to this matter, and our cooperation with governmental authorities. We
may not be adequately indemnified for such costs from available sources of
indemnification.
RISKS
RELATED TO OUR BUSINESS
We
may be unable to attract advertisers to our network.
Advertising
revenues comprise, and are expected to continue to comprise, almost entirely all
of our revenues. Most large advertisers have fixed advertising budgets, only a
small portion of which have traditionally been allocated to Internet
advertising. In addition, the overall market for advertising, including Internet
advertising, has been generally characterized in recent periods by softness of
demand, reductions in marketing and advertising budgets, and by delays in
spending of budgeted resources. Advertisers may continue to focus most of their
efforts on traditional media or may decrease their advertising spending. If we
fail to convince advertisers to spend a portion of their advertising budgets
with us, we will be unable to generate revenues from advertising as we
intend.
Even if
we initially attract advertisers to our network, they may decide not to
advertise to our community if their investment does not have the desired result,
or if we do not deliver their advertisements in an appropriate and effective
manner. If we are unable to provide value to our advertisers, advertisers may
reduce the rates they are willing to pay or may not continue to place ads with
us.
We
generate almost entirely all of our revenues from advertising, and the reduction
in spending by, or loss of, advertisers could seriously harm our
business.
We
generate almost entirely all of our revenues from advertisers on our network.
Our advertisers can generally terminate their contracts with us at any time. If
we are unable to remain competitive and provide value to our advertisers, they
may stop placing ads with us, which would negatively affect our revenues and
business. In addition, expenditures by advertisers tend to be cyclical,
reflecting overall economic conditions and budgeting and buying patterns. Any
decreases in or delays in advertising spending due to general economic
conditions could reduce our revenues or negatively impact our ability to grow
our revenues. We also may encounter difficulty collecting from our advertisers.
We are a relatively small company and advertisers may choose to pay our bills
after paying debts owed to their larger clients.
If
we fail to compete effectively against other Internet advertising companies, we
could lose customers or advertising inventory and our revenues and results of
operations could decline.
The
Internet advertising markets are characterized by rapidly changing technologies,
evolving industry standards, frequent new product and service introductions, and
changing customer demands. The introduction of new products and services
embodying new technologies and the emergence of new industry standards and
practices could render our existing products and services obsolete and
unmarketable or require unanticipated technology or other investments. Our
failure to adapt successfully to these changes could harm our business, results
of operations and financial condition.
The
market for Internet advertising and related products and services is highly
competitive. We expect this competition to continue to increase, in part because
there are no significant barriers to entry to our industry. Increased
competition may result in price reductions for advertising space, reduced
margins and loss of market share. We compete against well-capitalized
advertising companies as well as smaller companies.
We
compete against self-serve advertising networks such as Google AdSense,
Valueclick, Advertising.com and Tribal Fusion that serve impressions onto a wide
variety of mostly small and medium sites. We compete against behavioral
networks, such as Tacoda and Blue Lithium, which serve the same inventory as
general networks, but add behavioral targeting. We also compete against other
full-service advertising networks that provide a more complete service when
selling advertising, such as Gorilla Nation and Glam.
If
existing or future competitors develop or offer products or services that
provide significant performance, price, creative or other advantages over those
offered by us, our business, results of operations and financial condition could
be negatively affected. Many current and potential competitors enjoy competitive
advantages over us, such as longer operating histories, greater name
recognition, larger customer bases and significantly greater financial,
technical, sales and marketing resources. As a result, we may not be able to
compete successfully. If we fail to compete successfully, we could lose
customers or advertising inventory and our revenues and results of operations
could decline.
We
face competition from websites catering to consumers, as well as traditional
media companies, and we may not be included in the advertising budgets of large
advertisers, which could harm our revenues and results of
operations.
In the
online advertising market, we compete for advertising dollars with all websites
catering to consumers, including portals, search engines and websites belonging
to other advertising networks. We also compete with traditional advertising
media, such as direct mail, television, radio, cable, and print, for a share of
advertisers’ total advertising budgets. Most large advertisers have fixed
advertising budgets, a small portion of which is allocated to Internet
advertising. We expect that large advertisers will continue to focus most of
their advertising efforts on traditional media. If we fail to convince these
companies to spend a portion of their advertising budgets with us, or if our
existing advertisers reduce the amount they spend on our programs, our revenues
and results of operations would be harmed.
We
may be unable to attract and incorporate high quality publishers into our
network.
Our
future revenues and success depend upon, among other things, our ability to
attract and contract with high-quality publishers to participate in our network.
We cannot assure you that publishers will want to participate, or continue to
participate, in our network. If we are unable to successfully attract publishers
to our network, it could adversely affect our ability to generate revenues and
could impede our business plan. Even if we do successfully attract publishers,
there can be no assurance that we will be able to incorporate these publishers
into our network without substantial costs, delays or other
problems.
Our
services may fail to maintain the market acceptance they have achieved or to
grow beyond current levels, which would adversely affect our competitive
position.
We have
not conducted any independent studies with regard to the feasibility of our
proposed business plan, present and future business prospects and capital
requirements. Our services may fail to gain market acceptance and our
infrastructure to enable such expansion is still limited. Even if adequate
financing is available and our services are ready for market, we cannot be
certain that our services will find sufficient acceptance in the marketplace to
fulfill our long and short-term goals. Failure of our services to achieve or
maintain market acceptance would have a material adverse effect on our business,
financial condition and results of operations.
We
may fail to select the best publishers for our network.
The
number of websites has increased substantially in recent years. Our publishers’
websites face numerous competitors both on the Internet, and in the more
traditional broadcasting arena. Some of these companies have substantially
longer operating histories, significantly greater financial, marketing and
technical expertise, and greater resources and name recognition than we do.
Moreover, the offerings on our network may not be sufficiently distinctive or
may be copied by others. If we fail to attain commercial acceptance of our
services and to be competitive with these companies, we may not ever generate
meaningful revenues. In addition, new companies may emerge at any time with
services that are superior, or that the marketplace perceives are superior, to
ours.
If
we fail to anticipate, identify and respond to the changing tastes and
preferences of consumers, our business is likely to suffer.
Our
business and results of operations depend upon the appeal of the sites in our
network to consumers. The tastes and preferences of our consumers frequently
change, and our success depends on our ability to anticipate, identify and
respond to these changing tastes and preferences by incorporating appropriate
publishers into our network. If we are unable to successfully anticipate,
identify or respond to changing tastes and preferences of consumers or misjudge
the market for our network, we may not be able to establish relationships with
the most popular publishers, which may cause our revenues to
decline.
We
may be subject to market risk and legal liability in connection with the data
collection capabilities of the publishers in our network.
Many
components of websites on our network are interactive Internet applications that
by their very nature require communication between a client and server to
operate. To provide better consumer experiences and to operate effectively, many
of the websites on our network collect certain information from users. The
collection and use of such information may be subject to U.S. state and federal
privacy and data collection laws and regulations, as well as foreign laws such
as the EU Data Protection Directive. Recent growing public concern regarding
privacy and the collection, distribution and use of information about Internet
users has led to increased federal, state and foreign scrutiny and legislative
and regulatory activity concerning data collection and use practices. Any
failure by us to comply with applicable federal, state and foreign laws and the
requirements of regulatory authorities may result in, among other things, in
liability and materially harm our business.
The
websites on our network post privacy policies concerning the collection, use and
disclosure of user data, including that involved in interactions between our
client and server products. Because of the evolving nature of our business and
applicable law, such privacy policies may now or in the future fail to comply
with applicable law. The websites on our network are subject to various federal
and state laws concerning the collection and use of information regarding
individuals. These laws include the Children’s Online Privacy Protection Act,
the Federal Drivers Privacy Protection Act of 1994, the privacy provisions of
the Gramm-Leach-Bliley Act, the Federal CAN-SPAM Act of 2003, as well as other
laws that govern the collection and use of information. We cannot assure you
that the websites on our network are currently in compliance, or will remain in
compliance, with these laws and their own privacy policies. Any failure to
comply with posted privacy policies, any failure to conform privacy policies to
changing aspects of the business or applicable law, or any existing or new
legislation regarding privacy issues could impact the market for our publishers’
websites, technologies and products, and this may adversely affect our
business.
Activities
of advertisers or publishers in our network could damage our reputation or give
rise to legal claims against us.
The
promotion of the products and services by publishers in our network may not
comply with federal, state and local laws, including but not limited to laws and
regulations relating to the Internet. Failure of our publishers to comply with
federal, state or local laws or our policies could damage our reputation and
adversely affect our business, results of operations or financial condition. We
cannot predict whether our role in facilitating our customers’ marketing
activities would expose us to liability under these laws. Any claims made
against us could be costly and time-consuming to defend. If we are exposed to
this kind of liability, we could be required to pay substantial fines or
penalties, redesign our business methods, discontinue some of our services or
otherwise expend resources to avoid liability.
We also
may be held liable to third parties for the content in the advertising we
deliver on behalf of our publishers. We may be held liable to third parties for
content in the advertising we serve if the music, artwork, text or other content
involved violates the copyright, trademark or other intellectual property rights
of such third parties or if the content is defamatory, deceptive or otherwise
violates applicable laws or regulations. Any claims or counterclaims could be
time consuming, result in costly litigation or divert management’s
attention.
We
depend on third-party Internet, telecommunications and technology providers for
key aspects in the provision of our services and any failure or interruption in
the services that third parties provide could disrupt our business.
We depend
heavily on several third-party providers of Internet and related
telecommunication services, including hosting and co-location facilities, as
well as providers of technology solutions, including software developed by third
party vendors, in delivering our services. In addition, we use third party
vendors to assist with product development, campaign deployment, video streaming
for Betawave TV and support services for some of our products and services.
These companies may not continue to provide services or software to us without
disruptions in service, at the current cost or at all.
If the
products and services provided by these third-party vendors are disrupted or not
properly supported, our ability to provide our products and services would be
adversely impacted. In addition, any financial or other difficulties our third
party providers face may have negative effects on our business, the nature and
extent of which we cannot predict. While we believe our business relationships
with our key vendors are good, a material adverse impact on our business would
occur if a supply or license agreement with a key vendor is materially revised,
is not renewed or is terminated, or the supply of products or services were
insufficient or interrupted. The costs associated with any transition to a new
service provider could be substantial, require us to reengineer our computer
systems and telecommunications infrastructure to accommodate a new service
provider and disrupt the services we provide to our customers. This process
could be both expensive and time consuming and could damage our relationships
with customers.
In
addition, failure of our Internet and related telecommunications providers to
provide the data communications capacity in the time frame we require could
cause interruptions in the services we provide. Unanticipated problems affecting
our computer and telecommunications systems in the future could cause
interruptions in the delivery of our services, causing a loss of revenues and
potential loss of customers.
More
individuals are using non-PC devices to access the Internet. We may be unable to
capture market share for advertising on these devices.
The
number of people who access the Internet through devices other than personal
computers, including mobile telephones, smart phones, handheld computers and
video game consoles, has increased dramatically in the past few years. Most of
the publishers in our network originally designed their services for rich,
graphical environments such as those available on desktop and laptop computers.
The lower resolution, functionality and memory associated with alternative
devices make the use of these websites difficult and the publishers in our
network developed for these devices may not be compelling to users of
alternative devices. In addition, the creative advertising solutions that thrive
in rich environments may be less attractive to advertisers on these devises. The
use of such creative advertising is part what makes our services attractive to
advertisers and is what most contributes to our margins. If we are slow to
develop services and technologies that are more compatible with non-PC
communications devices or if we are unable to attract and retain a substantial
number of publishers that focus on alternative device users to our online
services, we will fail to capture a significant share of an increasingly
important portion of the market for online services, which could adversely
affect our business.
RISKS
RELATED TO OUR INDUSTRY
Anything
that causes users of websites on our network to spend less time on their
computers, including seasonal factors and national events, may impact our
profitability.
Anything
that diverts users of our network from their customary level of usage could
adversely affect our business. Geopolitical events such as war, the threat of
war or terrorist activity, and natural disasters such as hurricanes or
earthquakes all could adversely affect our profitability. Similarly, our results
of operations historically have varied seasonally because many of our users
reduce their activities on our website with the onset of good weather during the
summer months, and on and around national holidays.
If
the delivery of Internet advertising on the Web is limited or blocked, demand
for our services may decline.
Our
business may be adversely affected by the adoption by computer users of
technologies that harm the performance of our services. For example, computer
users may use software designed to filter or prevent the delivery of Internet
advertising; block, disable or remove cookies used by our ad serving
technologies; prevent or impair the operation of other online tracking
technologies; or misrepresent measurements of ad penetration and effectiveness.
We cannot assure you that the proportion of computer users who employ these or
other similar technologies will not increase, thereby diminishing the efficacy
of our products and services. In the event that one or more of these
technologies became more widely adopted by computer users, demand for our
products and services would decline.
Advertisers
may be reluctant to devote a portion of their budgets to marketing technology
and data products and services or online advertising.
Companies
doing business on the Internet, including us, must compete with traditional
advertising media, including television, radio, cable and print, for a share of
advertisers' total marketing budgets. Potential customers may be reluctant to
devote a significant portion of their marketing budget to online advertising or
marketing technology and data products and services if they perceive the
Internet to be a limited or ineffective marketing medium. Any shift in marketing
budgets away from marketing technology and data products or services or online
advertising spending, or our offerings in particular, could materially and
adversely affect our business, results of operations or financial condition. In
addition, online advertising could lose its appeal to those advertisers using
the Internet as a result of its ad performance relative to other
media.
The
lack of appropriate measurement standards or tools may cause us to lose
customers or prevent us from charging a sufficient amount for our products and
services.
Because
many online marketing technology and data products and services remain
relatively new disciplines, there is often no generally accepted methods or
tools for measuring the efficacy of online marketing and advertising as there
are for advertising in television, radio, cable and print. Therefore, many
advertisers may be reluctant to spend sizable portions of their budget on online
marketing and advertising until more widely accepted methods and tools that
measure the efficacy of their campaigns are developed.
We could
lose customers or fail to gain customers if our services do not utilize the
measuring methods and tools that may become generally accepted. Further, new
measurement standards and tools could require us to change our business and the
means used to charge our customers, which could result in a loss of customer
revenues and adversely impact our business, financial condition and results of
operation.
We
may infringe on third-party intellectual property rights and could become
involved in costly intellectual property litigation.
Other
parties claiming infringement by the advertisements or video content on the
sites in our network could sue us. We may be liable to third parties for
elements of advertising campaigns designed by us, which may violate the
copyright, trademark, or other intellectual property rights of such third
parties.
In
addition, any future claims, with or without merit, could impair our business
and financial condition because they could:
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result
in significant litigation costs;
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divert
the attention of management;
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require
us to enter into royalty and licensing agreements that may not be
available on terms acceptable to us or at all;
or
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require
us to stop using the intellectual property that is the subject of the
claim.
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We
may experience unexpected expenses or delays in service enhancements if we are
unable to license third-party technology on commercially reasonable
terms.
We rely
on a variety of technology that we license from third parties. These third-party
technology licenses might not continue to be available to us on commercially
reasonable terms or at all. If we are unable to obtain or maintain these
licenses on favorable terms, or at all, our ability to efficiently deliver
advertisements at the best rates available might be impaired and this would
adversely impact our business.
It
is not yet clear how laws designed to protect children that use the Internet may
be interpreted and enforced, and whether new similar laws will be enacted in the
future which may apply to our business in ways that may subject us to potential
liability.
The
Children’s Online Privacy Protection Act (“COPPA”) imposes civil penalties for
collecting personal information from children under the age of 13 without
complying with the requirements of COPPA. Publishers in our network may violate
COPPA on their websites. Although COPPA is a relatively new law, the Federal
Trade Commission (the “FTC”) has recently been more active in enforcing
violations with COPPA. In the last two years, the FTC has brought a number of
actions against website operators for failure to comply with COPPA requirements,
and has imposed fines of up to $3 million. Future legislation similar to these
Acts could subject us to potential liability if we were deemed to be
noncompliant with such rules and regulations.
Increasing
governmental regulation of the Internet could harm our business.
The
publishers in our network are subject to the same federal, state and local laws
as other companies conducting business on the Internet. Today there are
relatively few laws specifically directed towards conducting business on the
Internet. However, due to the increasing popularity and use of the Internet,
many laws and regulations relating to the Internet are being debated at the
state and federal levels. These laws and regulations could cover issues such as
user privacy, freedom of expression, pricing, fraud, quality of products and
services, advertising, intellectual property rights and information security.
Furthermore, the growth and development of Internet commerce may prompt calls
for more stringent consumer protection laws that may impose additional burdens
on companies conducting business over the Internet.
Applicability
to the Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, libel, obscenity and personal
privacy could also harm our business. The majority of these laws were adopted
before the advent of the Internet, and do not contemplate or address the unique
issues raised by the Internet. The courts are only beginning to interpret those
laws that do reference the Internet, such as the Digital Millennium Copyright
Act and COPPA, and their applicability and reach are therefore uncertain. These
current and future laws and regulations could harm our business, results of
operation and financial condition.
In
addition, several telecommunications carriers have requested that the Federal
Communications Commission regulate telecommunications over the Internet. Due to
the increasing use of the Internet and the burden it has placed on the current
telecommunications infrastructure, telephone carriers have requested the FCC to
regulate Internet service providers and impose access fees on those providers.
If the FCC imposes access fees, the costs of using the Internet could increase
dramatically which could result in the reduced use of the Internet as a medium
for commerce and have a material adverse effect on our Internet business
operations.
We
depend on the growth of the Internet and Internet infrastructure for our future
growth, and any decrease or less than anticipated growth in Internet usage could
adversely affect our business prospects.
Our
future revenues and profits, if any, depend upon the continued widespread use of
the Internet as an effective commercial and business medium. Factors which could
reduce the widespread use of the Internet include:
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possible
disruptions or other damage to the Internet or telecommunications
infrastructure;
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failure
of the individual networking infrastructures of our merchant advertisers
and distribution partners to alleviate potential overloading and delayed
response times;
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a
decision by merchant advertisers to spend more of their marketing dollars
in offline areas;
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increased
governmental regulation and taxation;
and
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actual
or perceived lack of security or privacy
protection.
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In
addition, websites have experienced interruptions in their service as a result
of outages and other delays occurring throughout the Internet network
infrastructure, and as a result of sabotage, such as electronic attacks designed
to interrupt service on many websites. The Internet could lose its viability as
a commercial medium due to reasons including increased governmental regulation
or delays in the development or adoption of new technologies required to
accommodate increased levels of Internet activity. If use of the Internet does
not continue to grow, or if the Internet infrastructure does not effectively
support our growth, our revenues and results of operations could be materially
and adversely affected.
RISKS
RELATED TO OUR COMMON STOCK
You
may have difficulty trading our common stock as there is a limited public market
for shares of our common stock.
Our
common stock is currently quoted on the NASD’s OTC Bulletin Board under the
symbol “BWAV.OB.” Our common stock is not actively traded and there is a limited
public market for our common stock. As a result, a stockholder may find it
difficult to dispose of, or to obtain accurate quotations of the price of, our
common stock. This severely limits the liquidity of our common stock, and would
likely have a material adverse effect on the market price for our common stock
and on our ability to raise additional capital. An active public market for
shares of our common stock may not develop, or if one should develop, it may not
be sustained.
Applicable
SEC rules governing the trading of “penny stocks” may limit the trading and
liquidity of our common stock which may affect the trading price of our common
stock.
Our
common stock is currently quoted on the NASD’s OTC Bulletin Board. On May 8,
2009, the closing bid price of our common stock was $0.12 per share. Stocks such
as ours which trade below $5.00 per share are generally considered “penny
stocks” and subject to SEC rules and regulations which impose limitations upon
the manner in which such shares may be publicly traded. These regulations
require the delivery, prior to any transaction involving a penny stock, of a
disclosure schedule explaining the penny stock market and the associated risks.
Under these regulations, certain brokers who recommend such securities to
persons other than established customers or certain accredited investors must
make a special written suitability determination regarding such a purchaser and
receive such purchaser’s written agreement to a transaction prior to sale. These
regulations have the effect of limiting the trading activity of our common stock
and reducing the liquidity of an investment in our common stock.
There
is a limited public market for shares of our common stock, which may make it
difficult for investors to sell their shares.
There is
a limited public market for shares of our common stock. An active public market
for shares of our common stock may not develop, or if one should develop, it may
not be sustained. Therefore, investors may not be able to find purchasers for
their shares of our common stock.
The
price of our common stock has been and is likely to continue to be highly
volatile, which could lead to losses by investors and costly securities
litigation.
The
trading price of our common stock has been and is likely to continue to be
highly volatile and could fluctuate in response to factors such as:
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actual
or anticipated variations in our operating
results;
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announcements
of technological innovations by us or our
competitors;
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announcements
by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital
commitments;
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adoption of new accounting standards
affecting our industry;
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additions or departures of key
personnel;
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introduction
of new services by us or our
competitors;
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sales
of our common stock or other securities in the open
market;
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conditions
or trends in the Internet and online commerce industries;
and
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other events or factors, many of which are
beyond our control.
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The stock
market has experienced significant price and volume fluctuations, and the market
prices of stock in technology companies have been highly volatile. In the past,
following periods of volatility in the market price of a company’s securities,
securities class action litigation has often been initiated against the Company.
Litigation initiated against us, whether or not successful, could result in
substantial costs and diversion of our management’s attention and resources,
which could harm our business and financial condition.
We
do not anticipate dividends to be paid on our common stock, and stockholders may
lose the entire amount of their investment.
A
dividend has never been declared or paid in cash on our common stock, and we do
not anticipate such a declaration or payment for the foreseeable future. We
expect to use future earnings, if any, to fund business growth. Therefore,
stockholders will not receive any funds absent a sale of their shares. We cannot
assure stockholders of a positive return on their investment when they sell
their shares, nor can we assure that stockholders will not lose the entire
amount of their investment.
Securities
analysts may not initiate coverage or continue to cover our common stock, and
this may have a negative impact on our market price.
The
trading market for our common stock will depend, in part, on the research and
reports that securities analysts publish about us and our business. We do not
have any control over these analysts. There is no guarantee that securities
analysts will cover our common stock. If securities analysts do not cover our
common stock, the lack of research coverage may adversely affect its market
price. If we are covered by securities analysts, and our stock is downgraded,
our stock price would likely decline. If one or more of these analysts ceases to
cover us or fails to publish regular reports on us, we could lose visibility in
the financial markets, which could cause our stock price or trading volume to
decline.
You
may experience dilution of your ownership interests because of the future
issuance of additional shares of our common stock and our preferred
stock.
In the
future, we may issue our authorized but previously unissued equity securities,
resulting in the dilution of the ownership interests of our present
stockholders. We are currently authorized to issue an aggregate of 410,000,000
shares of capital stock consisting of 400,000,000 shares of common stock, par
value $0.001 per share, and 10,000,000 shares of "blank check" preferred stock,
par value $0.001 per share, of which we have designated 8,003,000 of such shares
of Series A preferred stock. As of May 8, 2009, there were: (i) 29,229,284
shares of common stock outstanding; (ii) 7,065,293 shares of Series A preferred
stock outstanding; (iii) 102,799,333 shares reserved for issuance upon the
exercise of options granted or available for grant under our 2004 stock plan,
our 2006 equity incentive plan, our 2007 non-qualified stock option plan and our
2008 stock incentive plan; and (iv) 67,351,020 shares reserved for issuance upon
the exercise of outstanding warrants.
We may
also issue additional shares of our common stock or other securities that are
convertible into or exercisable for common stock in connection with hiring or
retaining employees or consultants, future acquisitions, future sales of our
securities for capital raising purposes, or for other business purposes. The
future issuance of any such additional shares of our common stock or other
securities may create downward pressure on the trading price of our common
stock. There can be no assurance that we will not be required to issue
additional shares, warrants or other convertible securities in the future in
conjunction with hiring or retaining employees or consultants, future
acquisitions, future sales of our securities for capital raising purposes or for
other business purposes, including at a price (or exercise prices) below the
price at which shares of our common stock are currently quoted on the OTC
Bulletin Board.
Even
though we are not a California corporation, our common stock could still be
subject to a number of key provisions of the California General Corporation
Law.
Under
Section 2115 of the California General Corporation Law (the “CGCL”),
corporations not organized under California law may still be subject to a number
of key provisions of the CGCL. This determination is based on whether the
corporation has significant business contacts with California and if more than
50% of its voting securities are held of record by persons having addresses in
California. In the immediate future, we will continue the business and
operations of GoFish Technologies Inc. and a majority of our business
operations, revenues and payroll will be conducted in, derived from, and paid to
residents of California. Therefore, depending on our ownership, we could be
subject to certain provisions of the CGCL. Among the more important provisions
are those relating to the election and removal of directors, cumulative voting,
standards of liability and indemnification of directors, distributions,
dividends and repurchases of shares, shareholder meetings, approval of certain
corporate transactions, dissenters’ and appraisal rights, and inspection of
corporate records.
Panorama
Capital, L.P., Rembrandt Venture Partners Fund Two, L.P., Rembrandt Venture
Partners Fund Two-A, L.P. and Rustic Canyon Ventures III, L.P., whose interests
may not be aligned with yours, collectively control approximately 65.97% of our
company, which could result in actions of which you or other stockholders do not
approve.
In two
closings that occurred on December 3, 2008 and December 12, 2008, we completed a
$22.5 million preferred stock financing pursuant to the terms of a securities
purchase agreement dated December 3, 2008 that we entered into with Panorama
Capital, L.P. (“Panorama”), Rembrandt Venture Partners Fund Two, L.P.
(“Rembrandt Fund Two”), Rembrandt Venture Partners Fund Two-A, L.P. (“Rembrandt
Fund Two-A” and, together with Rembrandt Fund Two, “Rembrandt”) and Rustic
Canyon Ventures III, L.P. (“Rustic” and, together with Panorama and Rembrandt,
the “Lead Investors”). The Lead Investors currently own, collectively,
approximately 65.97% of our outstanding shares of common stock, assuming the
conversion of Series A preferred stock. Prior to the December 2008 financing,
the Lead Investors did not own any shares of our common stock.
In
addition, pursuant to the investors’ rights agreement we entered into with the
Lead Investors in connection with the December 2008 financing, we granted the
following rights: (i) Panorama has the right to designate one board member for
so long as Panorama shall own not less than 16,666,667 shares of common stock
issued or issuable upon conversion of Series A preferred stock, (ii) Rustic has
the right to designate one board member for so long as Rustic shall own not less
than 12,500,000 shares of common stock issued or issuable upon conversion of
Series A preferred stock, (iii) Rembrandt has the right to designate one board
member for so long as Rembrandt shall own not less than 8,333,333 shares of
common stock issued or issuable upon conversion of Series A preferred stock and
(iv) Internet Television Distribution, Inc. and its affiliates have the right to
appoint one board member for so long as Internet Television Distribution, Inc.
shall own not less than 3,088,240 shares of common stock issued or issuable upon
conversion of Series A preferred stock. The investors’ rights agreement also
provides that each investor party to the investors’ rights agreement shall take
all actions necessary within its control so that for as long as Panorama owns at
least 16,666,667 shares of common stock issued or issuable upon conversion of
Series A preferred stock, (i) the compensation committee of the board of
directors shall consist of three members, at least two of which shall be
directors appointed by the Lead Investors as stated above, and (ii) each
committee of the board of directors shall include, at the option of Panorama,
the member of the board of directors designated by Panorama.
As a
result of the foregoing, and provided that the Lead Investors do vote their
shares together, they will be able to determine a significant part of the
composition of our board of directors, will hold significant voting power with
respect to matters requiring stockholder approval and will be able to exercise
significant influence over our operations. The interests of the Lead Investors
may be different than the interests of other stockholders on these and other
matters. This concentration of ownership also could have the effect of delaying
or preventing a change in our control or otherwise discouraging a potential
acquirer from attempting to obtain control of us, which could reduce the price
of our common stock.
ITEM 2.
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UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF
PROCEEDS.
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During
the three months ended March 31, 2009, we granted an aggregate of 3,688,325
stock options under our 2008 Stock Incentive Plan to 26 individuals. The options
have exercise prices of $0.16. The grants of the options were exempt from the
registration requirements of the Securities Act by virtue of Section 4(2)
thereof and Regulation D promulgated thereunder. None of the securities were
sold through an underwriter and accordingly, there were no underwriting
discounts or commissions involved in the sale of the Series A Preferred and the
Related Warrants. In addition, we issued a warrant to purchase 600,000 shares of
our common stock to Silicon Valley Bank with an exercise price of $0.20 pursuant
to our March 27, 2009 Security and Loan Agreement.
ITEM 3.
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DEFAULTS UPON SENIOR
SECURITIES.
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None.
ITEM 4.
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SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.
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None.
ITEM 5.
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OTHER
INFORMATION.
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On May
12, 2009, we issued a press release regarding our results for the quarter ended
March 31, 2009. The text of this press release is attached hereto as Exhibit
99.1. The information in this Item 5 and Exhibit 99.1 to this Quarterly Report
on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the
Exchange Act, or otherwise subject to the liabilities of that Section, nor shall
it be deemed incorporated by reference in any filing under the Securities Act or
the Exchange Act, regardless of any general incorporation language in such
filing.
The
exhibits filed as part of this Quarterly Report on Form 10-Q are listed in the
Exhibit Index immediately preceding such exhibits, which Exhibit Index is
incorporated herein by reference into this Item 6.
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.
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BETAWAVE
CORPORATION
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Date:
May 12, 2009
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By:
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/s/ Matt Freeman
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Name:
Matt Freeman
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Title:
Chief Executive Officer
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Date:
May 12, 2009
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By:
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/s/ Lennox L. Vernon
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Name:
Lennox L. Vernon
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Title:
Chief Accounting Officer and Director of
Operations
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EXHIBIT
INDEX
Exhibit
No.
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Description
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Filed Herewith or Incorporated by
Reference
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3.1
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Certificate
of Amendment to the Amended and Restated Articles of Incorporation of
GoFish Corporation
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Incorporated
herein by reference to Exhibit 3.1 to the registrant’s Current Report on
Form 8-K, filed with the SEC on January 21, 2009
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4.1
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Warrant
to purchase Betawave Corporation common stock issued to Silicon Valley
Bank on March 27, 2009
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Incorporated
herein by reference to Exhibit 4.1 to the registrant’s Current Report on
Form 8-K, filed with the SEC on April 1, 2009
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10.1
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Loan
and Security Agreement, dated as of March 27, 2009, between Silicon Valley
Bank and Betawave Corporation
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Incorporated
herein by reference to Exhibit 10.1 to the registrant’s Current Report on
Form 8-K, filed with the SEC on April 1, 2009
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31.1
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Certification
of the Principal Executive Officer pursuant to Rules 13a-14(a) and
15d-14(a)
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Filed
herewith.
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31.2
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Certification
of the Principal Financial Officer pursuant to Rules 13a-14(a) and
15d-14(a)
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Filed
herewith.
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32.1
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Certification
of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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Filed
herewith.
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32.2
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Certification
of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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Filed
herewith.
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99.1
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Press
release issued by Betawave Corporation on May 12, 2009
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Filed
herewith.
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