UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY
REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
quarter ended June 30, 2008
o TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
transition period from _____ to _____
Commission
File Number: 0-51793
PAY88,
INC.
(Exact
name of small business issuer as specified in its charter)
Nevada
(State
of incorporation)
|
20-3136572
(IRS
Employer ID Number)
|
North
Barnstead Road, Barnstead, NH 03225
(Address
of principal executive offices)
(603)
776-6044
(Issuer's
telephone number)
________________________________________________________________
(Former
name, former address and former fiscal year, if changed since last
report)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 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. Yes x No
o
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
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
|
|
Accelerated
filer o
|
Non-accelerated
filer o
|
|
Smaller
reporting
company x
|
(Do
not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
As
of
August 13, 2008, 32,089,190 shares of common stock, par value $0.001 per
share, were outstanding.
TABLE
OF CONTENTS
|
Page
|
PART
I
|
|
Item
1. Financial Statements
|
F-1
to F-17
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
4
|
Item
3 Quantitative and Qualitative Disclosures About Market
Risk
|
11
|
9Item
4 Controls and Procedures
|
12
|
|
|
PART
II
|
|
Item
1. Legal Proceedings
|
12
|
Item
IA. Risk Factors
|
12
|
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
|
12
|
Item
3. Defaults Upon Senior Securities
|
13
|
Item
4. Submission of Matters to a Vote of Security Holders
|
13
|
Item
5. Other Information
|
13
|
Item
6. Exhibits
|
13
|
PART
I
FINANCIAL
INFORMATION
Item
1. Financial
Statements.
PAY88,
INC. AND SUBSIDIARY
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
|
|
Condensed
Consolidated Balance Sheets
as of June 30, 2008 (Unaudited) and December 31, 2007
|
F-2
|
|
|
Condensed
Consolidated Statements of Operations
for the three months and six months ended June 30, 2008 and 2007
(Unaudited)
|
F-3
|
|
|
Condensed
Consolidated Statements of Stockholders’ Equity
Year ended December 31, 2007 and the six months ended June 30,
2008
(Unaudited)
|
F-4
|
|
|
Condensed
Consolidated Statements of Cash Flows
for the six months ended June 30, 2008 and 2007
(Unaudited)
|
F-5
|
|
|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
F-6
- F-17
|
PAY88,
INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
June
30,
2008
|
|
December
31,
2007
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
414,052
|
|
$
|
124,108
|
|
Accounts
receivable, net of allowance of $22,550 and $13,453,
as
of June 30, 2008 and December 31, 2007, respectively
|
|
|
927,236
|
|
|
556,623
|
|
Inventories
|
|
|
386,340
|
|
|
476,308
|
|
Prepaid
expense
|
|
|
485,674
|
|
|
656,674
|
|
Total
Current Assets
|
|
|
2,213,302
|
|
|
1,813,713
|
|
Property
and Equipment, Net
|
|
|
497,916
|
|
|
490,453
|
|
Other
Assets
|
|
|
|
|
|
|
|
Deferred
financing cost - Net
|
|
|
44,773
|
|
|
112,019
|
|
TOTAL
ASSETS
|
|
$
|
2,755,991
|
|
$
|
2,416,185
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
606,130
|
|
$
|
406,043
|
|
Convertible
notes payable, net of unamortized discount of $963,456 and
$1,667,902
as of June 30, 2008 and December 31, 2007, respectively
|
|
|
1,152,294
|
|
|
64,607
|
|
Loan
payable - related parties
|
|
|
584,179
|
|
|
947,506
|
|
Customer
advance
|
|
|
1,944
|
|
|
-
|
|
Total
Current Liabilities
|
|
|
2,344,547
|
|
|
1,418,156
|
|
|
|
|
|
|
|
|
|
Long
Term Liabilities:
|
|
|
|
|
|
|
|
Convertible
notes payable, net of unamortized discount of $0 and $231,624
as
of June 30, 2008 and December 31, 2007, respectively
|
|
|
-
|
|
|
345,867
|
|
TOTAL
LIABILITIES
|
|
|
2,344,547
|
|
|
1,764,023
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
Preferred
Stock, $0.001 par value; 5,000,000 shares authorized,
Nil
share issued and outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, $0.001 par value; 100,000,000 shares authorized,
31,786,691
shares and 30,766,667 shares, issued and outstanding
as
of June 30, 2008 and December 31, 2007, respectively
|
|
|
31,787
|
|
|
30,767
|
|
Additional
paid-in capital
|
|
|
13,196,833
|
|
|
12,153,261
|
|
Accumulated
deficit
|
|
|
(13,022,165
|
)
|
|
(11,603,243
|
)
|
Accumulated
other comprehensive income
|
|
|
204,989
|
|
|
71,377
|
|
Total
Stockholders' Equity
|
|
|
411,444
|
|
|
652,162
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
2,755,991
|
|
$
|
2,416,185
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial
statements.
|
PAY88,
INC AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
For
Three Months Ended
|
|
For
Six Months Ended
|
|
|
|
June
30, 2008
|
|
June
30, 2007
|
|
June
30, 2008
|
|
June
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
4,682,489
|
|
$
|
1,242,455
|
|
$
|
10,186,569
|
|
$
|
2,345,236
|
|
Cost
of Sales
|
|
|
4,585,734
|
|
|
1,212,400
|
|
|
9,957,718
|
|
|
2,299,774
|
|
Gross
Profit
|
|
|
96,755
|
|
|
30,055
|
|
|
228,851
|
|
|
45,462
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll
and related expenses
|
|
|
94,976
|
|
|
70,701
|
|
|
188,785
|
|
|
116,628
|
|
Professional
fees
|
|
|
80,818
|
|
|
15,228
|
|
|
150,147
|
|
|
43,586
|
|
Selling
expenses
|
|
|
4,285
|
|
|
8,797
|
|
|
6,226
|
|
|
12,609
|
|
Website
development cost
|
|
|
-
|
|
|
13,598
|
|
|
-
|
|
|
27,196
|
|
Other
general and administrative expenses
|
|
|
71,643
|
|
|
46,850
|
|
|
125,782
|
|
|
100,975
|
|
Total
Operating Expenses
|
|
|
251,722
|
|
|
155,174
|
|
|
470,940
|
|
|
300,994
|
|
Loss
From Operations
|
|
|
(154,967
|
)
|
|
(125,119
|
)
|
|
(242,089
|
)
|
|
(255,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
586
|
|
|
181
|
|
|
1,065
|
|
|
259
|
|
Interest
expense
|
|
|
(569,162
|
)
|
|
-
|
|
|
(1,153,359
|
)
|
|
-
|
|
Interest
expense - related parties
|
|
|
(7,881
|
)
|
|
(12,250
|
)
|
|
(18,512
|
)
|
|
(15,843
|
)
|
Total
Other Income (Expense)
|
|
|
(576,457
|
)
|
|
(12,069
|
)
|
|
(1,170,806
|
)
|
|
(15,584
|
)
|
Net
Loss Before Income Tax
|
|
|
(731,424
|
)
|
|
(137,188
|
)
|
|
(1,412,895
|
)
|
|
(271,116
|
)
|
Provision
for income tax
|
|
|
2,519
|
|
|
521
|
|
|
6,027
|
|
|
1,421
|
|
Net
Loss
|
|
$
|
(733,943
|
)
|
$
|
(137,709
|
)
|
$
|
(1,418,922
|
)
|
$
|
(272,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share - basic and diluted
|
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
$
|
(0.05
|
)
|
$
|
(0.03
|
)
|
Weighted
average shares outstanding - basic and diluted
|
|
|
31,730,523
|
|
|
10,100,000
|
|
|
31,259,234
|
|
|
10,100,000
|
|
Comprehensive
Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(733,943
|
)
|
$
|
(137,709
|
)
|
$
|
(1,418,922
|
)
|
$
|
(272,537
|
)
|
Other
comprehensive income
|
|
|
56,404
|
|
|
4,271
|
|
|
133,612
|
|
|
8,821
|
|
Comprehensive
Loss
|
|
$
|
(677,539
|
)
|
$
|
(133,438
|
)
|
$
|
(1,285,310
|
)
|
$
|
(263,716
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
|
PAY88,
INC AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR
ENDED DECEMBER 31, 2007 AND THE SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
|
Common
Stock
|
|
|
|
Paid
- in
|
|
Accumulated
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Income
|
|
Total
|
|
Balance
- December 31, 2006
|
|
|
5,000,000
|
|
$
|
5,000
|
|
|
10,100,000
|
|
$
|
10,100
|
|
$
|
535,596
|
|
$
|
(297,764
|
)
|
$
|
13,665
|
|
$
|
266,597
|
|
Relative
fair value of warrants and
beneficial
conversion feature
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,500,000
|
|
|
-
|
|
|
-
|
|
|
1,500,000
|
|
Common
stock issued for consulting services
|
|
|
-
|
|
|
-
|
|
|
6,666,667
|
|
|
6,667
|
|
|
10,126,665
|
|
|
-
|
|
|
-
|
|
|
10,133,332
|
|
Conversion
of Series A prefererred stocks to common stock
|
|
|
(5,000,000
|
)
|
|
(5,000
|
)
|
|
14,000,000
|
|
|
14,000
|
|
|
(9,000
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Comprehensive
Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(11,305,479
|
)
|
|
-
|
|
|
(11,305,479
|
)
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
57,712
|
|
|
57,712
|
|
Balance
- December 31, 2007
|
|
|
-
|
|
|
-
|
|
|
30,766,667
|
|
|
30,767
|
|
|
12,153,261
|
|
|
(11,603,243
|
)
|
|
71,377
|
|
|
652,162
|
|
Regulation
S offering
|
|
|
-
|
|
|
-
|
|
|
1,020,024
|
|
|
1,020
|
|
|
1,376,012
|
|
|
-
|
|
|
-
|
|
|
1,377,032
|
|
Regulation
S offering cost
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(332,440
|
)
|
|
-
|
|
|
-
|
|
|
(332,440
|
)
|
Net
loss - six months ended June 30, 2008
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,418,922
|
)
|
|
-
|
|
|
(1,418,922
|
)
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
133,612
|
|
|
133,612
|
|
Balance
- June 30, 2008 (Unaudited)
|
|
|
-
|
|
$
|
-
|
|
|
31,786,691
|
|
$
|
31,787
|
|
$
|
13,196,833
|
|
$
|
(13,022,165
|
)
|
$
|
204,989
|
|
$
|
411,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
|
PAY88,
INC AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
|
|
2008
|
|
2007
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,418,922
|
)
|
$
|
(272,537
|
)
|
Adjustments
to Reconcile Net Loss to
|
|
|
|
|
|
|
|
Net
Cash Used in Operating Activities:
|
|
|
|
|
|
|
|
Bad
debt expense
|
|
|
8,090
|
|
|
1,054
|
|
Depreciation
expense
|
|
|
29,996
|
|
|
23,108
|
|
Amortization
of deferred financing cost
|
|
|
67,246
|
|
|
-
|
|
Amortization
of debt discount and cash discount
|
|
|
936,070
|
|
|
-
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
Increase
in accounts receivable
|
|
|
(379,660
|
)
|
|
(37,030
|
)
|
(Increase)
decrease in inventories
|
|
|
89,968
|
|
|
(162,825
|
)
|
Decrease
(Increase) in prepaid expense
|
|
|
171,000
|
|
|
(296,579
|
)
|
Increase
in accounts payable
|
|
|
202,031
|
|
|
39,936
|
|
Increase
in deferred income
|
|
|
-
|
|
|
2,347
|
|
Net
Cash Used in Operating Activities
|
|
|
(294,181
|
)
|
|
(702,526
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(15,792
|
)
|
|
(19,030
|
)
|
Net
Cash Used in Investing Activities
|
|
|
(15,792
|
)
|
|
(19,030
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
Proceeds
from Regulation S offering
|
|
|
1,377,032
|
|
|
-
|
|
Net
proceeds from loans payable - other
|
|
|
-
|
|
|
148,088
|
|
Cost
of Regulation S offering
|
|
|
(332,440
|
)
|
|
-
|
|
Repayment
of convertible loan
|
|
|
(194,250
|
)
|
|
-
|
|
(Repayment)
proceeds of loans payable - related parties
|
|
|
(363,327
|
)
|
|
577,236
|
|
Net
Cash Provided by Financing Activities
|
|
|
487,015
|
|
|
725,324
|
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
|
112,902
|
|
|
(1,278
|
)
|
Net
Increase in Cash and Cash Equivalents
|
|
|
289,944
|
|
|
2,490
|
|
Cash
and Cash Equivalents - Beginning of Period
|
|
|
124,108
|
|
|
17,084
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents - End of Period
|
|
$
|
414,052
|
|
$
|
19,574
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information:
|
|
|
|
|
|
|
|
Interest
Paid
|
|
$
|
33,005
|
|
$
|
-
|
|
Income
taxes
|
|
$
|
3,230
|
|
$
|
451
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
Non
Cash Financing and Investing Activities
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial
statements.
|
PAY88,
INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1 -
Description
of Business and Basis of Presentation
Organization
The
Company was originally incorporated on March 22, 2005 under the laws of the
State of New Hampshire as Pay88, Ltd. On July 7, 2005, Pay88, Inc., a Nevada
corporation, was formed. Subsequently, the New Hampshire corporation was
merged
with and into the Nevada corporation. On September 5, 2006, Pay88, Inc.
(“Pay88”) entered into a Share Purchase Agreement (the “Share Purchase
Agreement”) with Chongqing Qianbao Technology Ltd., a limited Liability company
organized under the laws of the People’s Republic of China (“Qianbao”), Ying Bao
(“Bao”), and Chongqing Yahu Information Development Co., Ltd., a limited
liability company organized under the laws of the People’s Republic of China
(“Yahu”; and together with Bao, the “Qianbao Shareholders”). Pursuant to the
Share Purchase Agreement, Pay88 agreed to acquire Qianbao at a closing held
simultaneously therewith by purchasing from the Qianbao Shareholders all
of
their respective shares of Qianbao’s registered capital stock, which represent
100% of the issued and outstanding registered capital of Qianbao. In
consideration therefore, Pay88 agreed to issue to the Qianbao Shareholders
an
aggregate of 5,000,000 shares of Pay88 Series A Convertible Preferred Stock,
to
be allocated between the Qianbao Shareholders as follows: 4,950,000 shares
to
Yahu and 50,000 shares to Bao. Mr. Tao Fan, a brother of Mr. Guo Fan, a director
and officer of Pay88, is the Chief Executive Officer of Yahu and owns 5%
of its
issued shares of capital stock.
The
5,000,000 shares of Pay88 Series A Preferred Stock was convertible into
14,000,000 shares of Pay88 common stock (see Note8). The holders of shares
of
Series A Preferred Stock were entitled to the number of votes equal to the
number of shares of common stock into which such shares of Series A Preferred
Stock could be converted. With the issuance of the 5,000,000 shares of Pay88
Series A Preferred Stock, Qianbao’s stockholders have voting control of Pay88
(approximately 58%) and therefore the acquisition was accounted for as a
reverse
acquisition. The combination of the two companies is recorded as a
recapitalization of Qianbao pursuant to which Qianbao is treated as the
continuing entity although Pay88 is the legal acquirer. Accordingly, the
Company’s historical financial statements are those of Qianbao.
Qianbao
was incorporated on April 24, 2006 in Chongqing, China. Qianbao is currently
primarily engaged in the sale of prepaid online video game cards that allow
the
user to play online video games for designated allotted times. Qianbao
also
has undertaken steps/plans to build a
web
distribution platform to provide effective services for connecting diversified
service providers and consumer product suppliers to retailers and consumers
in
the Chinese market. However, there can be no assurance that the Company will
successfully accomplish these steps/plans and it is uncertain the Company
will
achieve a profitable level of operations from this new line of business due
to
limited resources of the Company and possible change of other economic factors
in China.
Pay88,
Inc. and Chongqing Qianbao Technology Ltd. are hereafter collectively referred
to as (the “Company”).
Consolidation
The
accompanying unaudited condensed consolidated financial statements included
the
accounts of Pay88 (Parent) and its wholly owned subsidiary (“Qianbao”). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
NOTE
1
- Basis
of
Presentation (Continued)
Going
Concern
The
Company has incurred a net loss of $733,943 and $1,418,922, which included
the
amortization of deferred financing cost and amortization of debt discount
and
cash discount of $487,169 and $1,003,316 for the three and six months ended
June
30, 2008, respectively. In addition, the Company has incurred significant
losses
and had negative cash flow from operations since April 24, 2006 (date of
inception) and has an accumulated deficit of $13,022,165 at June 30, 2008.
Substantial portions of the losses are attributable to consulting and
professional fees. Furthermore, the Company’s gross margin rate from its current
operations was very low. It was approximately 2.2% and 1.9% for the six months
ended June 30, 2008 and 2007, respectively. These factors raised substantial
doubt about the Company’s ability to continue as going concern.
There
can
be no assurance that sufficient funds will be generated during the next twelve
months or thereafter from the Company’s current operations, or that funds will
be available from external sources such as debt or equity financings or other
potential sources. The lack of additional capital could force the Company
to
curtail or cease operations and would, therefore, have a material adverse
effect
on its business. Furthermore, there can be no assurance that any such required
funds, if available, will be available on attractive terms or that they will
not
have a significant dilutive effect on the Company's existing
stockholders.
During
the six months ended June 30, 2008, the Company received net proceeds totaling
$1,044,592 from its regulation S offering after the payment of the offering
cost
of $332,440.
The
Company has undertaken further steps as part of a plan to improve operations
with the goal of sustaining our operations for the next twelve months and
beyond
to address our lack of liquidity by raising additional funds, either in the
form
of debt or equity or some combination thereof. The Company is planning to
expand
its current operations to increase its sales volume. The Company is also
seeking
for the opportunities to diversify its operations, which including other
more
profitable product lines and to improve its current gross margin. However,
there
can be no assurance that the Company can successfully accomplish these steps
and
or business plans, and it is uncertain that the Company will achieve a
profitable level of operations and be able to obtain additional financing.
There
can
be no assurance that any additional financings will be available to the Company
on satisfactory terms and conditions, if at all. In the event we are unable
to
continue as a going concern, we may elect or be required to seek protection
from
our creditors by filing a voluntary petition in bankruptcy or may be subject
to
an involuntary petition in bankruptcy. To date, management has not considered
this alternative, nor does management view it as a likely occurrence.
The
accompanying unaudited condensed consolidated financial statements do not
include any adjustments related to the recoverability or classification of
asset-carrying amounts or the amounts and classifications of liabilities
that
may result should the Company be unable to continue as a going
concern.
Reclassifications
Certain
items in these unaudited condensed consolidated financial statements have
been
reclassified to confirm to the current period’s presentation.
Recent
Accounting Pronouncements
Effective
January 1, 2008, we adopted Statement of Financial Accounting Standards ("SFAS")
No. 157, "Fair Value Measurements " ("SFAS No. 157" ) and SFAS No. 159, "The
Fair Value Option for Financial Assets and Financial Liabilities - Including
an
Amendment of FASB Statement No. 115" ("SFAS No. 159"). In February 2008,
the
Financial Accounting Standards Board (the "FASB") issued FASB Staff Position
("FSP") 157-2, "Effective
Date of FASB Statement No. 157" ("FSP
157-2), which delayed the effective date of SFAS No. 157 for all non-financial
assets and liabilities, except those that are recognized or disclosed at
fair
value in the financial statements on a recurring basis, until January 1,
2009.
We have not yet determined the impact that the implementation of FSP 157-2
will
have on our non-financial assets and liabilities which are not recognized
on a
recurring basis; however, we do not anticipate the adoption of this standard
will have a material impact on our consolidated financial position, results
of
operations or cash flows. The partial adoption of SFAS No. 157 and the adoption
of SFAS No. 159 did not have a material impact on the Company's condensed
consolidated financial statements.
In
June 2007, the Accounting Standards Executive Committee issued Statement
of
Position 07-1, "Clarification of the Scope of the Audit and Accounting Guide
Investment Companies and Accounting by Parent Companies and Equity Method
Investors for Investments in Investment Companies" ("SOP 07-1"). SOP 07-1
provides guidance for determining whether an entity is within the scope of
the
AICPA Audit and Accounting Guide Investment Companies (the "Audit Guide").
SOP
07-1 was originally determined to be effective for fiscal years beginning
on or
after December 15, 2007, however, on February 6, 2008, FASB issued a final
Staff
Position indefinitely deferring the effective date and prohibiting early
adoption of SOP 07-1 while addressing implementation issues.
In
December 2007, the FASB issued SFAS No. 141(R),"Business Combinations" ("SFAS
No. 141(R)"), which establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in an
acquiree, including the recognition and measurement of goodwill acquired
in a
business combination. SFAS No. 141(R) is effective as of the beginning of
the
first fiscal year beginning on or after December 15, 2008. Earlier adoption
is
prohibited and the Company is currently evaluating the effect, if any, that
the
adoption will have on its condensed consolidated financial position, results
of
operations or cash flows.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS No.
160"),
which will change the accounting and reporting for minority interests, which
will be recharacterized as noncontrolling interests and classified as a
component of equity within the consolidated balance sheets. SFAS No. 160
is
effective as of the beginning of the first fiscal year beginning on or after
December 15, 2008. Earlier adoption is prohibited and the Company is currently
evaluating the effect, if any, that the adoption will have on its condensed
consolidated financial position, results of operations or cash
flows.
In
December 2007, the FASB ratified the consensus in EITF Issue No. 07-1,
"Accounting for Collaborative Arrangements" (EITF 07-1). EITF 07-1 defines
collaborative arrangements and requires collaborators to present the result
of
activities for which they act as the principal on a gross basis and report
any
payments received from (made to) the other collaborators based on other
applicable authoritative accounting literature, and in the absence of other
applicable authoritative literature, on a reasonable, rational and consistent
accounting policy is to be elected. EITF 07-1 also provides for disclosures
regarding the nature and purpose of the arrangement, the entity's rights
and
obligations, the accounting policy for the arrangement and the income statement
classification and amounts arising from the agreement. EITF 07-1 will be
effective for fiscal years beginning after December 15, 2008, and will be
applied as a change in accounting principle retrospectively for all
collaborative arrangements existing as of the effective date. The Company
has
not yet evaluated the potential impact of adopting EITF 07-1 on its condensed
consolidated financial position, results of operations or cash
flows.
Recent
Accounting Pronouncements (Continued)
In
March 2008, the FASB" issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities - an amendment to FASB Statement No. 133"
("SFAS No. 161"). SFAS No. 161 is intended to improve financial standards
for
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity's financial
position, financial performance, and cash flows. Entities are required to
provide enhanced disclosures about: (a) how and why an entity uses derivative
instruments; (b) how derivative instruments and related hedged items are
accounted for under 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. It is effective for financial
statements issued for fiscal years beginning after November 15, 2008, with
early
adoption encouraged. The Company has not yet evaluated the potential impact
of
adopting SFAS No. 161 on its condensed consolidated financial position, results
of operations or cash flows.
In
April
2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets”. This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful
life of
a recognized intangible asset under SFAS No. 142, “Goodwill and Other
Intangible Assets”. The Company is required to adopt FSP 142-3 on
January 1, 2009. The guidance in FSP 142-3 for determining the
useful life of a recognized intangible asset shall be applied prospectively
to
intangible assets acquired after adoption, and the disclosure requirements
shall
be applied prospectively to all intangible assets recognized as of, and
subsequent to, adoption. The Company is currently evaluating the
impact of FSP 142-3 on its condensed consolidated financial position, results
of
operations or cash flows.
In
May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS No. 162"). SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (the GAAP hierarchy). SFAS No.
162 will become effective 60 days following the SEC's approval of the
Public Company Accounting Oversight Board amendments to
AU Section 411, "The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles." The Company does not
expect the adoption of SFAS No. 162 will have a material effect on its
condensed consolidated financial position, results of operations or cash
flows.
In
May
2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP
APB 14-1 requires the issuer of certain convertible debt instruments that
may be settled in cash (or other assets) on conversion to separately account
for
the liability (debt) and equity (conversion option) components of the instrument
in a manner that reflects the issuer's non-convertible debt borrowing
rate. FSP APB 14-1 is effective for fiscal years beginning after
December 15, 2008 on a retroactive basis. The Company is
currently evaluating the potential impact, if any, of the adoption of FSP
APB 14-1 on its condensed consolidated financial position, results of
operations or cash flows.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company's present or future
consolidated financial statements.
NOTE
2 -
Interim
Financial Statements
The
unaudited condensed consolidated financial statements as of June 30, 2008
and
for the three and six months ended June 30, 2008 and 2007 have been prepared
in
accordance with accounting principles generally accepted in the United States
of
America for interim financial information and with the instructions for
Securities and Exchange Commission (“SEC”) Form 10-Q. In the opinion of
management, the unaudited condensed consolidated financial statements have
been
prepared on the same basis as the annual financial statements and reflect
all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the financial position as of June 30, 2008 and the results
of
operations and cash flows for the periods ended June 30, 2008 and 2007. The
financial data and other information disclosed in these notes to the interim
financial statements related to these periods are unaudited. The results
for the
three and six month period ended June 30, 2008 is not necessarily indicative
of
the results to be expected for any subsequent quarter or the entire year
ending
December 31, 2008.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to the SEC’s rules and
regulations. These unaudited condensed consolidated financial statements
should
be read in conjunction with our audited consolidated financial statements
and
notes thereto for the year ended December 31, 2007, included in the Company’s
Annual Report on Form 10K filed on March 31, 2008 with SEC.
The
condensed consolidated financial statements as December 31, 2007 have been
derived from the audited consolidated financial statements at that date but
do
not include all disclosures required by the accounting principles generally
accepted in the United States of America.
NOTE
3 -
Net
Loss Per Common Share
The
Company has adopted Financial Accounting Standards Board (“FASB”) Statement
Number 128, “Earnings per Share,” (“EPS”) which requires presentation of basic
and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator
and
denominator of the basic EPS computation to the numerator and denominator
of the
diluted EPS.
Basic
loss per share is computed by dividing net loss by the weighted average number
of common shares outstanding during the period. Diluted loss per share is
computed similarly to basic loss per share except that it includes the potential
dilution that could occur if dilutive securities were converted. Diluted
loss
per common share is the same as basic loss per share, as the effect of
potentially dilutive securities (convertible debt - 2,245,000 at of March
31,
2008 and 2,115,750 at June 30, 2008 and warrants - 4,620,000, at March 31,
2008
and June 30, 2008), are anti-dilutive.
The
weighted average fully diluted shares outstanding for the three and six months
ended June 30, 2007 has been restated from 24,100,000 shares to 10,100,000
shares, which has no material impact to the fully diluted loss per share.
NOTE
4 -
Inventories
Inventories
consist of the following:
|
|
June
30,
2008
|
|
December
31,
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Purchased
game card
|
|
$
|
386,340
|
|
$
|
476,308
|
|
All
inventories are consisted of finished products. There was no valuation allowance
for inventory loss at June 30, 2008 and December 31, 2007 as most of the
purchased inventories are sold within one month.
NOTE
5 -
Property
and Equipment
Property
and equipment is summarized as follows:
|
|
Estimated
|
|
June
30,
|
|
December
31,
|
|
|
|
Useful
Lives
|
|
2008
|
|
2007
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Office
Units and Improvement
|
|
|
31
|
|
$
|
447,567
|
|
$
|
420,830
|
|
Furnitures
and Fixtures
|
|
|
5
|
|
|
9,442
|
|
|
8,878
|
|
Office
Equipment
|
|
|
3
|
|
|
100,595
|
|
|
89,987
|
|
Software
|
|
|
3
|
|
|
34,974
|
|
|
30,785
|
|
Automobile
|
|
|
5
|
|
|
7,214
|
|
|
6,783
|
|
|
|
|
|
|
|
599,792
|
|
|
557,263
|
|
Less:
Accumulated Depreciation
|
|
|
|
|
|
101,876
|
|
|
66,810
|
|
|
|
|
|
|
$
|
497,916
|
|
$
|
490,453
|
|
Depreciation
expense was $15,327 and $12,293 for the three months ended June 30, 2008
and
2007, respectively, and $29,996 and $23,108 for the six months ended June
30,
2008 and 2007, respectively.
The
Company purchased three units of office space in July 2006 in Chongqing China.
In the People’s Republic of China, land is owned by the State. The right for the
Company to use the land expires in 2037 and may be extended at that time.
Accordingly, the office units and improvement represent those costs related
to
the buildings and improvement.
NOTE
6 -
Convertible
Debt
Convertible
debt consists of the following:
|
|
June
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
Convertible
notes payable
|
|
|
|
|
|
net
of unamortized discount of $963,456
and
$1,899,526, respectively
|
|
$
|
1,152,294
|
|
$
|
410,474
|
|
Less:
current portion
|
|
|
1,152,294
|
|
|
64,607
|
|
Long
term portion due after one year
|
|
$
|
-
|
|
$
|
345,867
|
|
NOTE
6 -
Convertible
Debt
(Continued)
On
September 12, 2007, the Company entered into Subscription Agreements (the
"Subscription Agreements") with 3 investors ("Purchasers"), for the purchase
and
sale of $1,155,000 of Secured Convertible Promissory Notes of the Company
(the
“Notes”) for the aggregate purchase price of $750,000 (the “Note Financing”).
The Company received net proceeds from the issuance of the Notes of $652,237.
On
October 31, 2007, the Company entered into a Second Subscription Agreements
(the
"Subscription Agreements") with the same 3 investors ("Purchasers") dated
September 12, 2007, for the purchase and sale of $1,155,000 of Secured
Convertible Promissory Notes of the Company (the second “Notes”) for the
aggregate purchase price of $750,000 (the “Note Financing”). The Company
received net proceeds from the issuance of the Notes of $707,488.
Both
of
the Notes bear interest at the rate of prime plus 4% per annum (9% per annum
at
June 30, 2008), payable in either (a) cash equal to 110% of 8.33% of the
initial
principal amount or (b) absent any event of default, in shares of the Company’s
common stock at the lesser of (i) $1.00 per share or (ii) 80% of the average
of
the closing bid prices of the Company’s common stock for the 20 trading days
preceding the payment date at the option of the Company. Said payments commence
on March 12, 2008 and all accrued but unpaid interest and any other amounts
due
thereon is due and payable on March 12, 2009, or earlier upon acceleration
following an event of default, as defined in the Notes.
All
principal and accrued interest on the both Notes are convertible into shares
of
the Company’s common stock at the election of the Purchasers at any time at the
conversion price of $1.00 per share, subject to adjustment for certain
issuances, transactions or events that would result in “full ratchet” dilution
to the holders.
Both
Notes contained same default events which, if triggered and not timely cured
(if
curable), will result in a default interest rate of an additional 5% per
annum.
The Notes also contain antidilution provisions with respect to certain
securities issuances, including the issuances of stock for less than $1.00
per
share. In addition, the Company has to pay the Purchasers 120% plus accrued
interest of the outstanding principal amount if the Company is no longer
listed
on the Bulletin Board, sells substantially all of its assets or Guo Fan is
no
longer the Chief Executive Officer.
As
part
of the financing, the Company also issued to the Purchasers an aggregate
of
2,310,000 Class A Common Stock Purchase Warrants and 2,310,000 Class B Common
Stock Purchase Warrants. (1,155,000 Class A Common Stock Purchase Warrants
and
1,155,000 Class B Common Stock Purchase Warrants on each notes). The Class
A
Warrants are exercisable at a price of $0.81 per share at any time until
September 12, 2012 and the Class B Warrants are exercisable at a price of
$1.13
per share at any time until September 12, 2012. The warrants include a cashless
exercise provision which is triggered after March 12, 2008 as well as “full
ratchet” antidilution provisions with respect to certain securities issuances.
The
option of each Purchaser, conversion of the Notes, or exercise of the Warrants,
is subject to the restriction that such conversion or exercise, does not
result
in the Purchaser beneficially owning at any one time more that 4.99% of the
Company’s outstanding shares of common stock.
Payment
of the Notes along with the Company’s other obligations to the Purchasers is
secured by all the assets of the Company and of its wholly-owned subsidiary
Chongqinq Qianbao Technology Ltd., a limited liability company organized
under
the laws of the People’s Republic of China (“Qianbao”). Such obligations are
also secured by a pledge of all the shares the Company holds in Qianbao and
the
Company’s 13,860,000 shares of common stock which was converted from 4,950,000
shares of Series A Preferred Stock during 2007 (see Note 8), as well as personal
guaranties of Guo Fan, the Chief Executive Officer and a director of the
Company, and by Tao Fan, the Chief Executive Officer of Qianbao and Chief
Operating Officer and a director of the Company.
NOTE
6 -
Convertible
Debt
(Continued)
In
connection with the transaction, the Company agreed to prepare and file with
the
Securities and Exchange Commission within 30 days following the closing a
registration statement on Form SB-2 for the purpose of registering for resale
all of the shares of common stock underlying the Notes, If the Company fails
to
file such registration statement within such time, or if the registration
statement is not declared effective within 91 days from September 16, 2007,
the
Company must pay monthly liquidated damages in cash equal to 2% of the principal
amount of the Notes and purchase price of the Warrants. The Purchasers were
also
granted standard piggyback registration rights along with certain demand
registration rights. The registration statement on Form SB-2 was declared
effective as of October 30, 2007.
In
connection with the first and second convertible debts, the Company recorded
a
cash discount of $810,000 and deferred finance costs of $140,275. Such deferred
finance costs are being amortized over the life of the related debt. The
Company
also recorded a deferred debt discount in the amount of $1,500,000 to reflect
the beneficial conversion feature of the convertible debt and the value of
the
warrants. The beneficial conversion feature was recorded pursuant to Emerging
Issues Task Force (“EITF”) 00-27: “Application of EITF No. 98-5, Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios,
to
Certain Convertible Instruments”. In accordance with EITF 00-27, the Company
evaluated the value of the beneficial conversion feature and recorded the
amount
of $333,533 as a reduction to the carrying amount of the convertible debt
and as
an addition to paid-in capital. Additionally, the relative fair value of
the
warrants $1,166,467 was calculated and recorded as a further reduction to
the
carrying amount of the convertible debt and as addition to paid-in capital.
Unamortized amount of beneficial conversion feature and relative fair value
of
the warrants was $699,485 at June 30, 2008.
The
Company is amortizing the discounts over the term of the debt. Amortization
of
the debt and cash discount for the three and six months ended June 30, 2008
was
$455,070 and $936,069, respectively, and the amortization is reported as
a
component of interest expense. Amortization of deferred finance costs for
three
and six months ended June 30, 2008 amounted to $32,099 and $67,247,
respectively, and is reported as a component of interest expense.
The
Company commenced the repayment of notes and interests on March 19, 2008.
As of
June 30, 2008, the Company paid $227,255 in total to the note holders, such
payments representing the loan principal of $194,250, the loan interest of
$13,005 and the fee of $20,000. The unpaid notes balance is $2,115,750 at
June
30, 2008. The Company is in negotiations with the investors for the total
redemption of notes and warrants.
NOTE
7 -
Loans
Payable - Related Parties
Loans
payable to related parties consist of the following:
|
|
June
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
Chief
Executive Officer of the Company
bearing
interest at 5% per annum, payable on demand
|
|
$
|
430,725
|
|
$
|
444,725
|
|
Chief
Operating Officer of the Company
bearing
interest at 6% per annum payable on demand
|
|
|
73,069
|
|
|
422,396
|
|
Chief
Executive Officer of the Company
bearing
interest at 5% per annum, payable on August 31, 2008
|
|
|
80,385
|
|
|
80,385
|
|
Total
loan payable - related parties
|
|
|
584,179
|
|
|
947,506
|
|
Less:
current portion
|
|
|
584,179
|
|
|
947,506
|
|
Long-term
portion
|
|
$
|
-
|
|
$
|
-
|
|
NOTE
8 -
Commitments
and Contingencies
Country
Risk
As
the
Company's principal operations are conducted in the People’s Republic of China
(the “PRC”), the Company is subject to special considerations and significant
risks not typically associated with companies in North America and Western
Europe. These risks include, among others, risks associated with the political,
economic and legal environments and foreign currency exchange limitations
encountered in the PRC. The Company's results of operations may be adversely
affected by changes in the political and social conditions in the PRC, and
by
changes in governmental policies with respect to laws and regulations, among
other things.
In
addition, all of the Company's transactions undertaken in the PRC are
denominated in Chinese Yuan Renminbi (CNY), which must be converted into
other
currencies before remittance out of the PRC may be considered. Both the
conversion of CNY into foreign currencies and the remittance of foreign
currencies abroad require the approval of the PRC government.
Yahu
Agreement
On
August
3, 2005, the Company entered into a five year agreement with Chongqing Yahu
Information Limited (“Yahu”). Yahu is a Chinese corporation formed by Mr. Tao
Fan, a brother of Mr. Guo Fan, a significant stockholder, director and officer
of the Company. As a result of the Share Purchase Agreement (see Note 1)
Yahu
owns 4,950,000 shares of Pay88 Series A Preferred Stock (see Note 8),
representing approximately 53% voting control. The Agreement provides for
two
services to be provided to the Company by Yahu. The first service is the
provision of all proprietary software needed to effectuate fund transfers
business for customers between the U.S. and China. The second service to
be
provided is technical assistance in the areas of installation and future
product
support. This support includes assistance with all technical aspects of the
software as well as problem resolution and general inquiries. Both of these
services are to be provided to the Company by Yahu for a licensing fee that
is
based upon 20% of the gross fund transfer revenues. The use of the software
will
enable the Company to provide wire transfers from the U.S. to China. Although
this agreement is in force, it has been dormant and we are presently not
engaged
and or inactive in the money transfer business.
Lack
of Insurance
The
Company currently has no insurance in force for its office facilities and
operations and it cannot be certain that it can cover the risks associated
with
such lack of insurance or that it will be able to obtain and/or maintain
insurance to cover these risks at economically feasible premiums.
Employment
Agreements
Effective
February 1, 2007, the Company entered into an Employment Agreement with Mr.
Guo
Fan (“Guo’s Agreement”), which memorialized the employment of Mr. Guo Fan on a
full time basis as its Chairman, President and Chief Executive Officer. Pursuant
to Guo’s Agreement, Mr. Guo Fan will receive an annual salary of $100,000 during
the five-year term commencing on February 1, 2007. Guo’s Agreement also provides
that if Mr. Guo Fan’s employment is terminated without cause at any time within
the five year term, the Company shall pay Mr. Guo Fan his salary through
January
31, 2012.
Effective
February 1, 2007, the Company entered into an Employment Agreement with Mr.
Tao
Fan (“Tao’s Agreement”), pursuant to which Mr. Tao Fan was employed as the Chief
Operating Officer of the Company. Pursuant to Tao’s Agreement, Mr. Tao Fan will
receive an annual salary of $50,000 during the five-year term commencing
on
February 1, 2007. Tao’s Agreement also provides that if Mr. Tao Fan’s employment
is terminated without cause at any time within the five year term, the Company
shall pay Mr. Tao Fan his salary through January 31, 2012.
Employment
Agreements
(Continued)
Both
agreements provide for reimbursement of business expenses, directors’ and
officers’ insurance coverage and other additional benefits including but not
limited to pension or profit sharing plans and insurance. The Company also
agrees to defend the Executives from and against any and all lawsuits initiated
against the Company and/or the Executives.
NOTE
9 -
Stockholders’
Equity
At
inception, Qianbao was formed with two stockholders, Yahu (99%) and an
individual (1%). The initial capitalization was $362,790 of which Yahu
contributed $350,280 and the individual contributed $12,510. Subsequently,
there
was an additional capital contribution of $358,705 of which Yahu contributed
$358,420 and the individual contributed $285.
Pursuant
to the Share Purchase Agreement (see Notes 1), on September 5, 2006, 5,000,000
shares of Pay88 Series A Convertible Preferred Stock was issued to the
stockholders of Qianbao in exchange for 100% of the registered capital of
Qianbao. The 5,000,000 shares of Pay88 Series A Preferred Stock was convertible
into 14,000,000 shares of Pay88 common stock. Each share of Series A Preferred
Stock was converted into 2.8 shares of the Company’s common stock on October 3,
2007.
On
September 11, 2007, the Company issued an aggregate of 6,666,667 shares of
common stock to TVH Limited, a Netherlands Limited Company, in consideration
for
the past services rendered, and 1,333,333 to our attorney, who subsequently
returned his shares to the Company for cancellation. TVH Limited subsequently
transferred its shares to 5 individuals. These issuances were offered and
sold
in reliance upon exemptions from registration pursuant to Section 4(2) under
the
Securities Act and Rule 506 promulgated thereunder. The shares issued in
consideration for services rendered were valued at $10,133,332, based on
the
price of our stock on the date of issuance.
On
March
4, 2008, the Company has determined to raise up to $12,150,000 in capital
pursuant to a private placement held under Regulation S promulgated under
the
Securities Act of 1933, as amended (the “Act”) by offering for sale up to
9,000,000 shares of the Company’s common stock at a purchase price of $1.35 per
share. As of June 30, 2008, the Company has issued 1,020,024 shares to seventeen
subscribers and received gross proceeds of $1,377,032. The cost in connection
with this private placement totaled $332,440, representing the finder fee,
commissions and legal fees incurred and paid as of June 30, 2008.
The
Company’s Board of Directors may, without further action by the Company’s
stockholders, from time to time, direct the issuance of any authorized but
unissued or unreserved shares of preferred stock in series and at the time
of
issuance, determine the rights, preferences and limitations of each series.
The
holders of preferred stock may be entitled to receive a preference payment
in
the event of any liquidation, dissolution or winding-up of the Company before
any payment is made to the holders of the common stock. Furthermore, the
board
of directors could issue preferred stock with voting and other rights that
could
adversely affect the voting power of the holders of the common
stock.
Note
10 -
Option
and Warrants
Warrants
A
summary
of the status of the Company’s warrants is presented below:
|
|
Date
of
Issuance
|
|
Number
of
Warrants
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding,
January 1, 2007
|
|
|
|
|
|
-
|
|
$
|
-
|
|
Issued,
Class A warrants
|
|
|
9/12/2007
|
|
|
1,155,000
|
|
|
0.81
|
|
Issued,
Class B warrants
|
|
|
9/12/2007
|
|
|
1,155,000
|
|
|
1.13
|
|
Issued,
Class A warrants
|
|
|
10/31/2007
|
|
|
1,155,000
|
|
|
0.81
|
|
Issued,
Class B warrants
|
|
|
10/31/2007
|
|
|
1,155,000
|
|
|
1.13
|
|
Oustanding,
June 30, 2008 and
December
31, 2007
|
|
|
|
|
|
4,620,000
|
|
$
|
0.97
|
|
Warrants
outstanding and exercisable by price range as of June 30, 2008:
Range
of
|
|
Class
|
|
Number
|
|
Average
Weighted
Remaining
Contractual
Life
in Yrs
|
|
Exercise
Price
|
|
Number
|
|
Weighted
Average
Exercise Price
|
|
$
0.81
|
|
|
A
|
|
|
2,310,000
|
|
|
4.21
|
|
$
|
0.81
|
|
|
2,310,000
|
|
$
|
0.81
|
|
$
1.13
|
|
|
B
|
|
|
2,310,000
|
|
|
4.21
|
|
|
1.13
|
|
|
2,310,000
|
|
|
1.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,620,000
|
|
|
|
|
$
|
0.97
|
|
|
4,620,000
|
|
$
|
0.97
|
|
The
Company issued 4,620,000 warrants in connection with the sale of $2,310,000
principal convertible promissory notes. These warrants were valued at
approximately $5,334,000 of which $1,166,467 was recorded as reduction to
the
carrying amount of convertible debt as debt discount to be amortized over
the
life of the related debt.
The
fair
value of these warrants and significant assumptions used to determine the
fair
values, using a Black-Scholes option pricing model are as follows:
Significant assumptions: |
|
Risk-free interest rate at grant
date |
4.11% and 4.16% |
Expected stock price
volatility |
192.04% |
Expected dividend payout |
- |
Expected option life-years |
5 |
NOTE
11 -
Related
Party Transactions
Accounts
Payable
Accrued
interest payable related to the loans due to the officers (see Note 7) have
been
included in accounts payable, which amounted to $65,918 and $29,599 at June
30,
2008 and December 31, 2007, respectively.
Accrued
salary payable to the CEO of the Company was $141,667 and $91,667 at June
30,
2008 and December 31, 2007, respectively.
Relationships
On
February 1, 2007, the board of directors of the Company appointed Mr. Tao
Fan as
the Chief Operating Officer of the Company. Mr. Tao Fan is the Chief Executive
Officer and Chairman of the Board of Directors of Qianbao, our wholly-owned
subsidiary. Mr. Tao Fan is also the Chief Executive Officer of Yahu, a principal
shareholder of the Company. Mr. Tao Fan is the brother of Mr. Guo Fan, the
Chief
Executive Officer of the Company.
NOTE
12 -
Concentration
of Credit Risk
The
Company maintains cash balances in various banks in China. Currently, no
deposit
insurance system has been set up in China. Therefore, the Company will bear
a
risk if any of these banks become insolvent. As of June, 2008, the Company’s
uninsured cash balance was $410,856.
NOTE
13 -
Income
Taxes
The
provision for income tax in the amount of $2,519 and $521 for the three months
ended June 30, 2008 and 2007, and $6,027 and $1,421 for the six months ended
June 30, 2008 and 2007 were related to foreign income tax incurred and or
paid
to the Chinese tax agent. The Company’s income tax was assessed on the base of
13% of gross profit, which multiplied by the applicable tax brackets.
NOTE
14 -
Subsequent
Event
During
July 2008, the Company paid $110,000 to the three note holders, such payments
representing the principal payment only.
We are
currently in negotiations with the three accredited investors for the total
redemption of the notes and warrants.
During
July 2008, the Company issued 280,000 shares in the private placement under
the
Regulation S. (See Note 9) and received net proceeds of $302,400 after the
cost
deduction of approximately $75,600 . The Company issued 1,300,024 shares
and
received gross proceeds of $1,755,039 in total as of August 7, 2008. There
can
be no assurance that the Company can successfully complete its goal of selling
up to 9,000,000 shares in the private placement and it is uncertain that
the
required funds will be available to the Company on satisfactory terms and
conditions, if at all.
On
July
1, 2008, the Company entered into a six-month period consulting agreement
with
Consulting For Strategic Growth 1, Ltd (the “Consultant”), pursuant to which the
Consultant will provide the Company with investor relations/media relations
services. In consideration for such services, the Company agreed to issue
22,500
restricted shares per month for the term of six months. In addition, the
Company
will issue a three years warrant to purchase 100,000 share of common stock
at a
purchase price of $4.25 per share.
On
July
28, 2008, the Company issued a press release announcing that it will invest
approximately $1,000,000 Yuan or $150,000 USD in the Ziya Company, a Chinese
information technology company located in Hangzhou, China. The transaction
is
scheduled to close in August 2008. Qianbao and Ziya will work together in
the
development of a state-of-the-art, online gaming transaction platform to
be
utilized by Qianbao in the marketing of online prepaid game card products
throughout Chongqing and other major cities in China.
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Forward-Looking
Statements
The
following discussion should be read in conjunction with our financial
statements, which are included elsewhere in this Form 10-Q (the “Report”). This
Report contains forward-looking statements which relate to future events or
our
future financial performance. In some cases, you can identify forward-looking
statements by terminology such as “may,” “should,” “expects,” “plans,”
“anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or
the negative of these terms or other comparable terminology. These statements
are only predictions and involve known and unknown risks, uncertainties, and
other factors that may cause our or our industry’s actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied
by
these forward-looking statements.
For
a
description of such risks and uncertainties refer to our Registration Statement
on Form SB-2, and Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on October 16, 2007 and March 31, 2008, respectively. While
these forward-looking statements, and any assumptions upon which they are based,
are made in good faith and reflect our current judgment regarding the direction
of our business, actual results will almost always vary, sometimes materially,
from any estimates, predictions, projections, assumptions or other future
performance suggested herein. Except as required by applicable law, including
the securities laws of the United States, we do not intend to update any of
the
forward-looking statements to conform these statements to actual
results.
Business
Overview
Pay88
was
incorporated on March 22, 2005 under the name “Pay88, Ltd.” in the State of New
Hampshire. We subsequently decided to reincorporate in the State of Nevada
by
merging with and into Pay88, Inc., a Nevada corporation formed for such purpose
on July 7, 2005. Such merger was effectuated on August 9, 2005.
Through
our wholly-owned subsidiary, Chongqing Qianbao Technology Ltd. (“Qianbao”), a
Chinese limited liability company, we are primarily engaged in the sale of
prepaid multi player online game cards through our internet websites,
http://www.iamseller.com,
and
http://www.17logo.com.
We also
offer for sale on such websites prepaid telephone cards and over 800 software
products, including cooking and language software.
Our
History
Between
the date of our incorporation and our acquisition of Qianbao on September 6,
2006, we were focused on becoming involved in the business of facilitating
money
transfers from the United States to China. During such time period, our
operations were focused on organizational, start-up, and fund raising activities
and entering into an agreement with Chongqing Yahu Information Development
Co.,
Ltd. (“Yahu”). We never commenced our proposed business operations or generated
revenues in connection with such proposed operations.
On
September 5, 2006, we acquired Qianbao pursuant to a Share Purchase Agreement,
dated as of such date, among Pay88, Qianbao, and Qianbao’s two shareholders,
Ying Bao and Yahu. Pursuant to such Share Purchase Agreement, Pay88 agreed
to
acquire Qianbao by purchasing from Qianbao’s shareholders all of their
respective shares of Qianbao’s registered capital stock, which represented 100%
of the issued and outstanding registered capital stock of Qianbao. In
consideration thereof, Pay88 agreed to issue to the Qianbao shareholders an
aggregate of 5,000,000 shares of the Company’s Series A Convertible Preferred
Stock, to be allocated between the Qianbao shareholders as follows: 4,950,000
shares to Yahu and 50,000 shares to Ying Bao.
Our
Business
Through
our subsidiary, Qianbao, we are primarily engaged in the sale of multi player
online game cards through Qianbao's websites, www.iamseller.com,
and
www.17logo.com.
While
we also engage in the sale of prepaid telephone cards and over 800 software
products, including cooking and language software, the sale of such products
represents an insignificant percentage of our gross revenues during the quarter
ended June 30, 2008. We have decided to focus all of our resources on the
development of the multi player online game cards business, in addition to
the
development of our web distribution platform during the next 12 months. We
presently have no intention to engage in the money transfer business.
Nonetheless, we may in the future resume our plans to develop the money transfer
business, as discussed below.
Qianbao’s
Business
Qianbao
was incorporated on April 24, 2006, under the name "Chongqing Qianbao Technology
Ltd." under the laws of the People's Republic of China. Qianbao primarily
engages in the sale of prepaid multi player on line game cards on its internet
websites, http://www.iamseller.com
and
http://www.17logo.com,
as
further described below. On July 3, 2006, Qianbao purchased an office located
at
No. 78 1st Yanghe Village, Jiangbei District, Chongqing, China for a purchase
price of approximately $393,000. Such office serves as Qianbao's executive
offices. Although we own the three units of office space, the underlying land
is
owned by the People’s Republic of the State of China. Our right to use the
land expires in 2037 and may be extended at that time.
Qianbao
sells prepaid multi player online video games on its websites, www.iamseller.com
and
www.17logo.com
to
consumers or retailers visiting such websites. At present, the main products
offered for sale on our websites are online multi player prepaid game cards,
which allow the holder thereof to play, for an allotted time, online video
games. We also offer for sale on such websites prepaid telephone cards and
over
800 software products, including cooking and language software.
While
Qianbao is planning to manufacture its own multiplayer online games in the
future, Qianbao does not currently manufacture any of the products offered
for
sale on its website. Qianbao purchases such products from third-party suppliers
and resells them on its websites. Qianbao also arranges with some third-party
suppliers to make their products available for sale on Qianbao’s website, and
Qianbao earns a commission on such sales. Such commission is a percentage of
the
revenues generated from such sales. The specific amount of such percentage
is
negotiated between Qianbao and each such supplier, but generally ranges from
1%
to 5 %. We have arranged for the following companies to supply products to
be
sold on Qianbao's website: Shandong Tianfu Online Platform (supplier of game
cards); Sifang Online Distribution Platform (supplier of game cards); Chongqing
Digital World (supplier of phone cards); Chongqing E Net Chongqing Sifang
(supplier of phone cards); Chongqing Taoxing (supplier of study cards); and
Chongqing Dezheng Technology Development. No individual supplier alone is
material to our current business. Since the inception of our operations,
including during the three months ended June 30, 2008, the commission generated
from the sale of prepaid telephone cards and study cards represented an
insignificant percentage of our gross revenues.
Qianbao
has many competing companies which have financial, technical and marketing
resources significantly greater than those of Qianbao. Qianbao's major
competitors include Taoxing, Hongde, Hoyodo, Yun Web, Cobuy, Jun Web, and China
card Net. All of these competitors have been in operation for over two years,
while we began our business during 2006.
Chongqing
Taoxing - is
a
reseller of online games in China. Taoxing is now the major reseller of SNDA,
9you, World of Warcraft, Kingsoft and Century on line games. Additionaly,
Taoxing is a distributor of Net easy, and Q currency.
Hoyodo-
Chongqing
Hoyodo Technical and information Co., Ltd is the E-commerce platform of
Chongqing Tianji Net company and is a distributer of multiplayer on line
games.
Hongde
online game time card sales platform - An
online
sales platform of prepaid game cards. Customers on this platform can watch
movies online or download movies for free. This platform only sells to internet
cafes, not to personal users.
Fanxu-
Focuses
on the sales of legal software and consulting service; and also sales computer
materials and prepaid game time cards.
Tongji
online http://www.10288.com/-Involved
in the distribution and retailing of legal software, games and game timecards,
and now is generally developing its sales ways in net cafes, bookstores and
booths.
Jun
Web- An
Internet platform of digital products, engaging in B2B and B2C of E-commerce,
owns many general charging cards, and many websites.
Cobuy-
Conducts
sales of on line digital products, including but not limited to digital cards,
group buying, telecommunication, digital, flowers, underwear, auction, health
care, adornment, etc.
Yun
web- Including
the sales platform of digital products, trade platform of products, Yun web
online payment system. Searching for the localization of E-commerce,
revolutionary created an all digital E-commerce mode.
Qianbao
currently has fifty-one employees, all of whom are employed on a full-time
basis. Thirteen employees are involved in technical operations of the company,
twenty three are involved in sales and marketing, and the remainder is involved
in human resources and finances.
All
employees are employed pursuant to our standard employment contract, which
sets
forth the term of the employment, duties, compensation, and other such matters.
In addition, all of our employees are required to sign our standard
confidentiality agreement, pursuant to which they agree to maintain the
confidentiality of all proprietary information of our company. We do not believe
that any of these contracts are material to our business or
operations.
Through
our subsidiary, Qianbao, we will continue to focus over the next twelve months
on developing our internet distribution platform on Qianbao's websites and
increasing the volume of our sales of multi player online game cards on such
websites. Qianbao will continue to focus on developing its websites,
www.iamseller.com
and
www.17logo.com
and to
build other internet websites on which it will operate a distribution platform
through which we will be able to offer products for sale to consumers or
retailers visiting such websites. Qianbao will continue its efforts to arrange
for suppliers to offer for sale on such website the following products: prepaid
multiplayer online game cards, which allow the holder thereof to play, for
the
allotted time, online internet games. We also offer for sale prepaid study
cards, which allow the holder thereof to use, for the allotted time, online
software that assists in the learning of various subjects including Chinese,
English and cooking. We have formal arrangements with the following
manufacturers to supply us with products to be sold on Qianbao’s website:
Shandong Tianfu Online Platform (supplier of game cards); Golden game (supplier
of game cards); 51points (supplier of game cards); Optisp Communication
(supplier of game cards): Sifang Online Distribution Platform (supplier of
game
cards); Chongqing Taoxing (supplier of study cards); and Chongqing Dezheng
Technology Development. No individual manufacturer alone is material to our
current business. We are currently engaged in agreements with the above
mentioned suppliers. However, there is no assurance that we will be successful
in marketing and selling these products.
On
July
28, 2008, the Company issued a press release announcing that it will invest
approximately $1,000,000 Yuan or $150,000 USD in the Ziya Company, a Chinese
information technology company located in Hangzhou, China. The transaction
is
scheduled to close in August 2008. Qianbao and Ziya will work together in the
development of a state-of-the-art, online gaming transaction platform to be
utilized by Qianbao in the marketing of online prepaid game card products
throughout Chongqing and other major cities in China.
Results
of Operations
Comparison
of the Quarter Ended June 30, 2008 and 2007.
For
the
quarter ended June 30, 2008, net sales was $4,682,489, the cost of sales was
$4,585,734, and the gross profit was $96,755. In comparison, for the quarter
ended June 30, 2007, net sales was $1,242,455, the cost of sales was $1,212,400,
and the gross profit was $30,055. The revenues were derived from online product
sales, primarily, prepaid multi player online game cards, with very low gross
margin. One of the reasons we believed that net sales increased approximately
276% was as a result of the expanded games we offered and increased market
share. The cost of sales increased approximately 278% as a result of us
purchasing additional cards.
However,
if we continue to realize gross margins similar to our historical amounts,
we
will continue to have cash flow problems.
For
the
quarter ended June 30, 2008, operating expenses were $251,722. We had a loss
from operations in the amount of $154,967. The net loss during such period
was
$733,943. For the quarter ended June 30, 2007, operating expenses were $155,174.
We had a loss from operations in the amount of $125,119. The net loss during
such period was $137,709. Interest expense for the quarter ended June 30, 2008
increased as a result of the convertible debentures which became due on a
monthly basis commencing March 12, 2008. The net other expense increased by
$564,388 from $12,069 to $576,457 for the quarter ended June 30, 2007 and 2008,
respectively, as a result of the amortization of such debt.
Comparison
of the six months Ended June 30, 2008 and 2007
For
the
six months ended June 30, 2008, net sales was $10,186,569, the cost of sales
was
$9,957,718, and the gross profit was $228,851. In comparison, for the six month
ended June 30, 2007, net sales was $2,345,236, the cost of sales was $2,299,774,
and the gross profit was $45,462. The revenues were derived from online product
sales, primarily, prepaid multi player online game cards, with very low gross
margin. One of the reasons we believed that net sales increased approximately
334% was as a result of the expanded games we offered and increased market
share. The cost of sales increased approximately 333% as a result of us
purchasing additional cards.
However,
if we continue to realize gross margins similar to our historical amounts,
we
will continue to have cash flow problems.
For
the
six months ended June 30, 2008, operating expenses were $470,940. We had a
loss
from operations in the amount of $242,089. The net loss during such period
was
$1,418,922. For the six months ended June 30, 2007, operating expenses were
$300,994. We had a loss from operations in the amount of $255,532. The net
loss
during such period was $272,537. Interest expense for the six months ended
June
30, 2008 increased as a result of the convertible debentures which became due
on
a monthly basis commencing March 12, 2008. The net other expense increased
by
$1,155,222 from $15,584 to $1,170,806 for the six months ended June 30, 2007
and
2008, respectively, as a result of the amortization of such debt.
Liquidity
and Capital Resources
Our
balance sheet as of June 30, 2008, reflects assets of $2,755,991 including
deferred financing costs of $44,773.
On
March
4, 2008, the Company has determined to raise up to $12,150,000 in capital
pursuant to a private placement held under Regulation S promulgated under the
Securities Act of 1933, as amended (the “Act”) by offering for sale up to
9,000,000 shares of the Company’s common stock at a purchase price of $1.35 per
share. During
July 2008, the Company issued 280,000 shares in the private placement under
the
Regulation S and received net proceeds of $302,400 after the cost deduction
of
approximately $75,600. The Company issued 1,300,024 shares and received gross
proceeds of $1,755,039 in total as of August 7, 2008. There can be no assurance
that the Company can successfully complete its goal of selling up to 9,000,000
shares in the private placement and it is uncertain that the required funds
will
be available to the Company on satisfactory terms and conditions, if at
all.
As
of
June 30, 2008, the Company had $414,052 in cash and cash equivalents.
The
Company commenced the repayment of notes and interests on March 19, 2008. As
of
June 30, 2008, the Company paid $227,255 in total to the note holders, such
payments representing the loan principal of $194,250, the loan interest of
$13,005 and the fee of $20,000. The unpaid notes balance is $2,115,750 at June
30, 2008. The Company is in negotiations with the investors for the total
redemption of notes and warrants.
During
July 2008, the Company paid $110,000 to the three note holders, such payments
representing the principal payment only.
We are
currently in negotiations with the three accredited investors for the total
redemption of the notes and warrants.
Notwithstanding,
we anticipate generating losses and therefore we may be unable to continue
our
operations in the future. If we require additional capital, we would have to
issue debt or equity or enter into a strategic arrangement with a third party.
There can be no assurance that additional capital will be available to us.
We
currently have no agreements, arrangements or understandings with any person
to
obtain funds through bank loans, lines of credit or any other
sources.
Lack
of Insurance
The
Company currently has no insurance in force for its office facilities and
operations and it cannot be certain that it can cover the risks associated
with
such lack of insurance or that it will be able to obtain and/or maintain
insurance to cover these risks at economically feasible premiums.
Going
Concern Consideration
The
Company has incurred a net loss of $733,943 and $1,418,922, which included
the
amortization of deferred financing cost and amortization of debt discount and
cash discount of $487,169 and $1,003,316 for the three and six months ended
June
30, 2008, respectively. In addition, the Company has incurred significant losses
and had negative cash flow from operations since April 24, 2006 (date of
inception) and has an accumulated deficit of $13,022,165 at June 30, 2008.
Substantial portions of the losses are attributable to consulting and
professional fees. Furthermore, the Company’s gross margin rate from its current
operations was very low. It was approximately 2.2% and 1.9% for the six months
ended June 30, 2008 and 2007, respectively. These factors raised substantial
doubt about the Company’s ability to continue as going concern.
There
can
be no assurance that sufficient funds will be generated during the next twelve
months or thereafter from the Company’s current operations, or that the funds
will be available from external sources such as debt or equity financings or
other potential sources. The lack of additional capital could force the Company
to curtail or cease operations and would, therefore, have a material adverse
effect on its business. Furthermore, there can be no assurance that any such
required funds, if available, will be available on attractive terms or that
they
will not have a significant dilutive effect on the Company's existing
stockholders.
During
the six months ended June 30, 2008, the Company received net proceeds totaling
$1,044,592 from its regulation S offering after the payment of the offering
cost
of $332,440.
The
Company has undertaken further steps as part of a plan to improve operations
with the goal of sustaining our operations for the next twelve months and beyond
to address our lack of liquidity by raising additional funds, either in the
form
of debt or equity or some combination thereof. The Company is planning to expand
its current operations to increase its sales volume. The Company is also seeking
for the opportunities to diversify its operations, which including other more
profitable product lines and to improve its current gross margin. However,
there
can be no assurance that the Company can successfully accomplish these steps
and
or business plans, and it is uncertain that the Company will achieve a
profitable level of operations and be able to obtain additional financing.
There
can
be no assurance that any additional financings will be available to the Company
on satisfactory terms and conditions, if at all. In the event we are unable
to
continue as a going concern, we may elect or be required to seek protection
from
our creditors by filing a voluntary petition in bankruptcy or may be subject
to
an involuntary petition in bankruptcy. To date, management has not considered
this alternative, nor does management view it as a likely occurrence.
The
accompanying condensed consolidated financial statements do not include any
adjustments related to the recoverability or classification of asset-carrying
amounts or the amounts and classifications of liabilities that may result should
the Company be unable to continue as a going concern.
Critical
Accounting Policies and Estimates
Recent
Accounting Pronouncements
For
a
summary of our critical accounting policies, please refer to our Annual Report
on Form 10-K for the year ended December 31, 2007 filed with SEC on March 31,
2008 and Note 1 of Notes to unaudited Condensed Consolidated Financial
Statements under the caption “Recent Accounting Pronouncements” included in Part
I, Item 1. Financial Statements of this Form 10-Q.
Off-Balance
Sheet Arrangements
We
have
no off-balance sheet arrangements.
Item
3. Quantitative
and Qualitative Disclosures About Market Risk.
Smaller
reporting companies are not required to provide the information required by
Item
305.
Item
4. Controls
and Procedures.
Our
disclosure controls and procedures are designed to ensure that information
required to be disclosed in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within
the
time periods specified in the rules and forms of the United States Securities
and Exchange Commission. Our principal executive officer and principal financial
officer has reviewed the effectiveness of our “disclosure controls and
procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)
and 15d-15(e)) within the end of the period covered by this Quarterly Report
on
Form 10-Q and has concluded that the disclosure controls and procedures are
effective to ensure that material information relating to the Company is
recorded, processed, summarized, and reported in a timely manner. There were
no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the last day they were
evaluated by our principal executive officer and principal financial
officer.
Changes
in Internal Controls over Financial Reporting
There
have been no changes in the Company's internal control over financial reporting
during the last quarterly period covered by this report that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART
II
OTHER
INFORMATION
Item
1. Legal
Proceedings.
There
are
no pending legal proceedings to which the Company is a party or in which any
director, officer or affiliate of the Company, any owner of record or
beneficially of more than 5% of any class of voting securities of the Company,
or security holder is a party adverse to the Company or has a material interest
adverse to the Company. The Company’s property is not the subject of any pending
legal proceedings.
Item
1A. Risk
Factors
There
have been no material changes to the risks to our business described in our
Annual Report on Form 10-K for the year ended December 31, 2007 filed
with the SEC on March 31, 2008.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds.
Unregistered
Sales of Equity Securities
On
March
4, 2008, the Company has determined to raise up to $12,150,000 in capital
pursuant to a private placement held under Regulation S promulgated under the
Securities Act of 1933, as amended (the “Act”) by offering for sale up to
9,000,000 shares of the Company’s common stock at a purchase price of $1.35 per
share.
During
July 2008, the Company issued 280,000 shares in the private
placement held under Regulation S promulgated under the Securities Act of 1933
and
received net proceeds of $302,400 after the cost deduction of approximately
$75,600. The Company issued 1,300,024 shares and received gross proceeds of
$1,755,039 in total as of August 7, 2008. There can be no assurance that the
Company can successfully complete its goal of selling up to 9,000,000 shares
in
the private placement and it is uncertain that the required funds will be
available to the Company on satisfactory terms and conditions, if at
all.
On
July
1, 2008, the Company entered into a six-month period consulting agreement with
Consulting For Strategic Growth 1, Ltd (the “Consultant”), pursuant to which the
Consultant will provide the Company with investor relations/media relations
services. In consideration for such services, the Company agreed to issue 22,500
restricted shares per month for the term of six months. In addition, the Company
will issue a three years warrant to purchase 100,000 share of common stock
at a
purchase price of $4.25 per share.
Purchases
of equity securities by the issuer and affiliated
purchasers
None.
Use
of Proceeds
The
Company is currently negotiating with purchasers of its convertible notes and
warrants for the total redemption of the notes and warrants.
Item
3. Defaults
Upon Senior Securities.
None.
Item
4. Submission
of Matters to a Vote of Security Holders.
There
was
no matter submitted to a vote of security holders during the fiscal quarter
ended June
30,
2008.
Item
5. Other
Information.
None
Item
6. Exhibits
Exhibit
No.
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Description
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31.1
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Rule
13a-14(a)/15d-14(a) Certifications of Guo
Fan,
the President, Chief Executive Officer, Treasurer and Director (attached
hereto)
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32.1
|
|
Section
1350 Certifications of Guo
Fan,
the President, Chief Executive Officer, Treasurer and Director(attached
hereto)
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|
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SIGNATURES
In
accordance with to requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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PAY88,
INC. |
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Dated:
August 13, 2008 |
By: |
/s/Guo
Fan |
|
Name:
Guo Fan |
|
Title:
President,
Chief Executive Officer, Treasurer
and Director
(Principal Executive, Financial and Accounting
Officer)
|