PAY88,
INC. AND SUBSIDIARY
INDEX
TO FINANCIAL STATEMENTS
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Page
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F-1
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F-2
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F-3
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F-4
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F-5
- F-19
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PAY88, INC. AND
SUBSIDIARY
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
59,431 |
|
|
$ |
159,071 |
|
Accounts
receivable, net of allowance of $27,395 and $16,693,
as
of March 31, 2009 and December 31, 2008, respectively
|
|
|
1,004,801 |
|
|
|
969,850 |
|
Inventories
|
|
|
306,806 |
|
|
|
372,058 |
|
Prepaid
expense
|
|
|
98,098 |
|
|
|
189,575 |
|
Total
Current Assets
|
|
|
1,469,136 |
|
|
|
1,690,554 |
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, Net
|
|
|
455,160 |
|
|
|
471,289 |
|
Other
Assets:
|
|
|
|
|
|
|
|
|
Website
platform development
|
|
|
146,400 |
|
|
|
146,570 |
|
Total
Other Assets
|
|
|
146,400 |
|
|
|
146,570 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
2,070,696 |
|
|
$ |
2,308,413 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
1,279,590 |
|
|
$ |
1,248,780 |
|
Convertible
notes payable
|
|
|
1,770,750 |
|
|
|
1,770,750 |
|
Derivative
liabilities - current
|
|
|
927,526 |
|
|
|
815,284 |
|
Loan
payable - related parties
|
|
|
384,795 |
|
|
|
425,067 |
|
Total
Current Liabilities
|
|
|
4,362,661 |
|
|
|
4,259,881 |
|
|
|
|
|
|
|
|
|
|
Long
Term Liabilities:
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
|
385,254 |
|
|
|
1,095,112 |
|
TOTAL
LIABILITIES
|
|
|
4,747,915 |
|
|
|
5,354,993 |
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Stockholders'
Deficit:
|
|
|
|
|
|
|
|
|
Preferred
Stock, $0.001 par value; 5,000,000 shares authorized,no
shares
issued
and outstanding as of March 31, 2009 and December 31, 2008
|
|
|
- |
|
|
|
- |
|
Common
stock, $0.001 par value; 100,000,000 shares authorized,
32,201,691
shares, issued and outstanding
as
of March 31, 2009 andDecember 31, 2008
|
|
|
32,202 |
|
|
|
32,202 |
|
Additional
paid-in capital
|
|
|
13,675,643 |
|
|
|
13,675,643 |
|
Accumulated
deficit
|
|
|
(16,608,150 |
) |
|
|
(16,980,078 |
) |
Accumulated
other comprehensive income
|
|
|
223,086 |
|
|
|
225,653 |
|
Total
Stockholders' Deficit
|
|
|
(2,677,219 |
) |
|
|
(3,046,580 |
) |
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$ |
2,070,696 |
|
|
$ |
2,308,413 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F –
1
PAY88, INC AND
SUBSIDIARY
FOR THE THREE MONTHS ENDED
MARCH 31, 2009 AND 2008
(UNAUDITED)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$ |
4,104,990 |
|
|
$ |
5,504,080 |
|
Cost
of Sales
|
|
|
4,055,014 |
|
|
|
5,371,984 |
|
Gross
Profit
|
|
|
49,976 |
|
|
|
132,096 |
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
Payroll
and related expenses
|
|
|
103,392 |
|
|
|
93,809 |
|
Professional
fees
|
|
|
36,618 |
|
|
|
69,329 |
|
Selling
expenses
|
|
|
817 |
|
|
|
1,941 |
|
Other
general and administrative expenses
|
|
|
69,787 |
|
|
|
54,139 |
|
Total
Operating Expenses
|
|
|
210,614 |
|
|
|
219,218 |
|
Loss
From Operations
|
|
|
(160,638 |
) |
|
|
(87,122 |
) |
|
|
|
|
|
|
|
|
|
Other
Income (Expenses):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
26 |
|
|
|
479 |
|
Interest
expense
|
|
|
(56,761 |
) |
|
|
(584,197 |
) |
Interest
expense - related parties
|
|
|
(5,764 |
) |
|
|
(10,631 |
) |
Gain
on derivatives, net
|
|
|
597,616 |
|
|
|
- |
|
Total
Other Income (Expense)
|
|
|
535,117 |
|
|
|
(594,349 |
) |
Net
Income (Loss) Before Income Tax
|
|
|
374,479 |
|
|
|
(681,471 |
) |
Provision
for income tax
|
|
|
2,551 |
|
|
|
3,508 |
|
Net
Income (Loss)
|
|
$ |
371,928 |
|
|
$ |
(684,979 |
) |
|
|
|
|
|
|
|
|
|
Net
income (loss) per share - basic
|
|
$ |
0.01 |
|
|
$ |
(0.02 |
) |
Net
income (loss) per share - diluted
|
|
$ |
0.01 |
|
|
$ |
(0.02 |
) |
Weighted
average shares outstanding - basic
|
|
|
32,201,691 |
|
|
|
30,782,678 |
|
Weighted
average shares outstanding - diluted
|
|
|
57,474,891 |
|
|
|
30,782,678 |
|
Comprehensive
Income (Loss):
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
371,928 |
|
|
$ |
(684,979 |
) |
Other
comprehensive (loss) income
|
|
|
(2,567 |
) |
|
|
77,208 |
|
Comprehensive
Income (Loss):
|
|
$ |
369,361 |
|
|
$ |
(607,771 |
) |
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F –
2
PAY88, INC AND
SUBSIDIARY
FOR THE YEAR ENDED DECEMBER
31, 2008 AND THE THREE MONTHS ENDED MARCH 31, 2009
(UNAUDITED)
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Paid
- in
|
|
|
Accumulated
|
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
(Loss)
|
|
|
Total
|
|
Balance
- December 31, 2007
|
|
|
- |
|
|
$ |
- |
|
|
|
30,766,667 |
|
|
$ |
30,767 |
|
|
$ |
12,153,261 |
|
|
$ |
(11,603,243 |
) |
|
$ |
71,377 |
|
|
$ |
652,162 |
|
Regulation
S offering
|
|
|
- |
|
|
|
- |
|
|
|
1,300,024 |
|
|
|
1,300 |
|
|
|
1,753,732 |
|
|
|
- |
|
|
|
- |
|
|
|
1,755,032 |
|
Regulation
S offering cost
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(408,040 |
) |
|
|
- |
|
|
|
- |
|
|
|
(408,040 |
) |
Common
stock issued for consulting services
|
|
|
- |
|
|
|
- |
|
|
|
135,000 |
|
|
|
135 |
|
|
|
158,490 |
|
|
|
- |
|
|
|
- |
|
|
|
158,625 |
|
Relative
fair value of warrans issued for
consulting
services
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
18,200 |
|
|
|
- |
|
|
|
- |
|
|
|
18,200 |
|
Net
loss for the year
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,376,835 |
) |
|
|
- |
|
|
|
(5,376,835 |
) |
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
154,276 |
|
|
|
154,276 |
|
Balance
- December 31, 2008
|
|
|
- |
|
|
|
- |
|
|
|
32,201,691 |
|
|
|
32,202 |
|
|
|
13,675,643 |
|
|
|
(16,980,078 |
) |
|
|
225,653 |
|
|
|
(3,046,580 |
) |
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,567 |
) |
|
|
(2,567 |
) |
Net
income - three months ended March 31, 2009
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
371,928 |
|
|
|
- |
|
|
|
371,928 |
|
Balance
- March 31, 2009 (Unaudited)
|
|
|
- |
|
|
$ |
- |
|
|
|
32,201,691 |
|
|
$ |
32,202 |
|
|
$ |
13,675,643 |
|
|
$ |
(16,608,150 |
) |
|
$ |
223,086 |
|
|
$ |
(2,677,219 |
) |
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F –
3
PAY88, INC AND
SUBSIDIARY
FOR THE THE THREE MONTHES
ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
|
|
2009
|
|
|
2008
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
371,928 |
|
|
$ |
(684,979 |
) |
Adjustments
to Reconcile Net Income (Loss) to
|
|
|
|
|
|
|
|
|
Net
Cash Used in Operating Activities:
|
|
|
|
|
|
|
|
|
Bad
debt expense
|
|
|
11,303 |
|
|
|
1,143 |
|
Depreciation
and amortization
|
|
|
16,009 |
|
|
|
14,669 |
|
Gain
on derivatives, net
|
|
|
(597,616 |
) |
|
|
- |
|
Amortization
of deferred financing cost
|
|
|
- |
|
|
|
35,148 |
|
Amortization
of debt discount and cash discount
|
|
|
- |
|
|
|
480,999 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase
in accounts receivable
|
|
|
(45,653 |
) |
|
|
(369,767 |
) |
Decrease
(increase) in inventories
|
|
|
65,252 |
|
|
|
(41,263 |
) |
Decrease
in prepaid expense
|
|
|
91,477 |
|
|
|
52,023 |
|
Increase
in accounts payable and accrued expenses
|
|
|
30,810 |
|
|
|
98,859 |
|
Net
Cash Used in Operating Activities
|
|
|
(56,490 |
) |
|
|
(413,168 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
- |
|
|
|
(9,647 |
) |
Net
Cash Used in Investing Activities
|
|
|
- |
|
|
|
(9,647 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds
from Regulation S offering
|
|
|
- |
|
|
|
989,018 |
|
Cost
of Regulation S offering
|
|
|
- |
|
|
|
(237,179 |
) |
Proceeds
from investor deposits
|
|
|
- |
|
|
|
84,264 |
|
Repayment
of convertible notes
|
|
|
- |
|
|
|
(65,000 |
) |
Repayment
of loans payable - related parties
|
|
|
(40,272 |
) |
|
|
(308,143 |
) |
Net
Cash (Used in) Provided by Financing Activities
|
|
|
(40,272 |
) |
|
|
462,960 |
|
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
|
(2,878 |
) |
|
|
63,803 |
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
|
|
(99,640 |
) |
|
|
103,948 |
|
Cash
and Cash Equivalents - Beginning of Period
|
|
|
159,071 |
|
|
|
124,108 |
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents - End of Period
|
|
$ |
59,431 |
|
|
$ |
228,056 |
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow
Information:
|
|
|
|
|
|
|
|
|
Interest
Paid
|
|
$ |
- |
|
|
$ |
- |
|
Income
taxes paid
|
|
$ |
2,405 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
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.
F -
4
PAY88, INC. AND
SUBSIDIARY
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 Note 10). 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 sole wholly-owned subsidiary (“Qianbao”). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
F –
5
NOTE 1
– Basis of Presentation
(Continued)
Going
Concern
The net
loss from operations was $160,638 and $87,122 for the three months ended March
31, 2009 and 2008, respectively. The Company has had negative cash flow from
operations since April 24, 2006 (date of inception) and had an accumulated
deficit of $16,608,150 at March 31, 2009. Substantial portions of the losses are
attributable to amortization of debt discounts, consulting and professional fees
and loss on derivatives. In addition, as of March 31, 2009, the Company had a
working capital deficiency of $2,893,525 and delinquency in scheduled repayments
of the Convertible Notes payable, accrued interests and penalties of
$2,527,320. Furthermore, the Company’s gross margin rate from its
current operations was very low. It was approximately 1.2% and 2.4%
for the three months ended March 31, 2009 and 2008,
respectively. These factors raised substantial doubt about the
Company’s ability to continue as going concern.
The
Company is currently in default on the Convertible Notes and accrued interest,
which became due in full amount effective March 12, 2009. The Company is
currently negotiating with the Convertible Notes holders and or investors to
restructure its current indebtedness and extend and or modify the existing
terms. In addition, the Company’s continued existence is dependent upon
management’s ability to develop profitable operations and resolve its liquidity
problems.
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.
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
reclassifications have been made to prior year’s consolidated financial
statements and notes thereto for comparative purposes to confirm with current
year’s presentation. These reclassifications have no effect on previously
reported results of operations.
F -
6
New Accounting
Pronouncements Effective January 1, 2009
SFAS
No. 161
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133”
(“SFAS No. 161”). The new standard
is intended to improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity’s financial position, results of
operations and cash flows. The new standard also improves transparency about how
and why a company uses derivative instruments and how derivative instruments and
related hedged items are accounted for under Statement No. 133. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. We
adopted SFAS No. 161 effective on January 1, 2009 and the adoption had no
material effect on our unaudited condensed consolidated financial position,
results of operations or cash flows.
SFAS
No. 160
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No.
160”). In SFAS No. 160, the FASB established accounting and reporting standards
that require non-controlling interests to be reported as a component of equity,
changes in a parent’s ownership interest while the parent retains its
controlling interest to be accounted for as equity transactions, and any
retained non-controlling equity investment upon the deconsolidation of a
subsidiary to be initially measured at fair value. SFAS No. 160 is effective for
annual periods beginning on or after December 15, 2008. Retroactive
application of SFAS No. 160 is prohibited. We adopted SFAS No. 160 effective on
January 1, 2009 which had no material effect on our unaudited condensed
consolidated financial position, results of operations or cash flows other than
changing the description and moving the presentation of net loss attributable to
the non-controlling interest below the net loss of our condensed consolidated
statements of operations for the period from inception as the non-controlling
interest or formerly known as minority interest ceased on May 27,
2007.
EITF
No. 07-1
In
December 2007, the FASB issued EITF No. 07-1, “Accounting for Collaborative
Arrangements” (“EITF No. 07-1”). EITF No. 07-1 prescribes the accounting for
parties of a collaborative arrangement to present the results of activities for
the party acting as the principal on a gross basis and report any payments
received from (made to) other collaborators based on other applicable GAAP or,
in the absence of other applicable GAAP, based on analogy to authoritative
accounting literature or a reasonable, rational, and consistently applied
accounting policy election. Further, EITF No. 07-1 clarified the
determination of whether transactions within a collaborative arrangement are
part of a vendor-customer (or analogous) relationship subject to Issue No. 01-9,
“Accounting for Consideration Given by a Vendor to a Customer.” EITF No. 07-1 is
effective for collaborative arrangements that exist on January 1, 2009 and
application is retrospective. We adopted EITF No. 07-1 effective on
January 1, 2009 and the adoption had no material effect on our unaudited
condensed consolidated financial position, results of operations or cash
flows.
F -
7
EITF
No. 07-5
In June
2008, the FASB ratified EITF No. 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF No. 07-5”).
EITF No. 07-5 provides that an entity should use a two-step approach to evaluate
whether an equity-linked financial instrument (or embedded feature) is indexed
to its own stock, including evaluating the instrument’s contingent exercise and
settlement provisions. It also clarifies the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation. EITF No. 07-5 is effective for fiscal years
beginning after December 15, 2008. We adopted EITF No. 07-5 effective on
January 1, 2009 and the adoption had no material effect on our unaudited
condensed consolidated financial position, results of operations or cash
flows.
Recently Issued Accounting
Standards
In
January 2009, the FASB issued Financial Statement of Position (“FSP”) Issue
No. EITF No. 99-20-1, “Amendments to the Impairment Guidance of EITF
Issue No. 99-20” (“FSP EITF No. 99-20-1”). FSP EITF No. 99-20-1
amends the impairment guidance in EITF Issue No. 99-20, “Recognition of
Interest Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests that Continue to be Held by a Transferor in Securitized Financial
Assets” to achieve more consistent determination of whether an
other-than-temporary impairment has occurred. The Company adopted FSP EITF
No. 99-20-1 and it did not have a material impact on the unaudited
condensed consolidated financial statements.
In April
2009, the Financial Accounting Standards Board (“FASB”) issued the following new
accounting standards:
|
•
|
FSP
FAS 157-4, Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly , provides guidelines for making fair
value measurements more consistent with the principles presented in FASB
Statement No. 157 (“SFAS 157”), Fair Value Measurements .
FSP FAS 157-4 reaffirms what SFAS 157 states is the objective of fair
value measurement, to reflect how much an asset would be sold for in an
orderly transaction at the date of the financial statements under current
market conditions. Specifically, it reaffirms the need to use judgment to
ascertain if a formerly active market has become inactive and in
determining fair values when markets have become inactive. The Company
does not expect this pronouncement to have a material impact on its
consolidated results of operations, financial position, or cash
flows.
|
|
|
|
|
•
|
FSP
FAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial Instruments,
enhances consistency in financial reporting by increasing the frequency of
fair value disclosures. This relates to fair value disclosures for any
financial instruments that are not currently reflected on the consolidated
balance sheet at fair value. FSP FAS 107-1 and APB 28-1 now require that
fair value disclosures be made on a quarterly basis, providing qualitative
and quantitative information about fair value estimates for all those
financial instruments not measured on the balance sheet at fair value. The
Company does not expect this pronouncement to have a material impact on
its consolidated results of operations, financial position, or cash
flows.
|
|
|
|
|
•
|
FSP
FAS 115-2 and FAS 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments,
provides additional guidance designed to create greater clarity and
consistency in accounting for and presenting impairment losses on
securities. This FSP is intended to bring greater consistency to the
timing of impairment recognition and to provide greater clarity to
investors about the credit and noncredit components of impaired debt
securities that are not expected to be sold. This FSP also requires
increased and timelier disclosures sought by investors regarding expected
cash flows, credit losses, and an aging of securities with unrealized
losses. The Company does not expect this pronouncement to have a material
impact on its consolidated results of operations, financial position, or
cash flows.
|
|
|
|
F -
8
These
standards are effective for periods ending after June 15, 2009. We are
evaluating the impact that these standards will have on our consolidated
financial statements.
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 March 31, 2009 and
for the three months ended March 31, 2009 and 2008 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 March 31, 2009 and the results of
operations and cash flows for the three months ended March 31, 2009 and 2008.
The financial data and other information disclosed in the notes to the interim
financial statements related to these periods are unaudited. The results for the
three months ended March 31, 2009 is not necessarily indicative of the results
to be expected for any subsequent quarter or the entire year ending December 31,
2009.
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, 2008, included in the Company’s
Annual Report on Form 10K filed on March 30, 2009 with SEC.
The
consolidated financial statements as December 31, 2008 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 Income (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
income (loss) per share is computed by dividing net income or loss by the
weighted average number of common shares outstanding during the
period.
F -
9
Diluted
income (loss) per share is computed similarly to basic income (loss) per share
except that it includes the potential dilution that could occur if dilutive
securities were converted. The potential dilutive shares were
25,273,200 common shares as of March 31, 2009. It was calculated from $2,527,320
of convertible notes and accrued interest and penalties. The conversion price
was at $0.10 per share, the stock’s closing price as of March 31, 2009. Diluted
loss per common share as of December 31, 2008 was the same as basic loss per
share, as the effect of potentially dilutive securities (convertible debt –
$1,770,750 at December 31, 2008 warrants – 4,720,000 at December 31, 2008 and
derivative liabilities associated with the variable conversion price on the
convertible debt, accrued interest and penalties of $815,284 for convertible
shares of 9,502,150 at December 31, 2008), are anti-dilutive.
NOTE 4 -
Inventories
Inventories
consist of the following:
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
game cards
|
|
$ |
306,806 |
|
|
$ |
372,058 |
|
All
inventories are consisted of finished products. There was no valuation allowance
for inventory loss at March 31, 2009 and December 31, 2008 as most of the
purchased inventories are sold within one month.
NOTE 5 -
Property and
Equipment
Property
and equipment is summarized as follows:
|
|
Estimated
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
Useful
Lives
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Office
Units and Improvement
|
|
|
31 |
|
|
$ |
449,409 |
|
|
$ |
449,931 |
|
Furnitures
and Fixtures
|
|
|
5 |
|
|
|
9,921 |
|
|
|
9,932 |
|
Office
Equipment
|
|
|
3 |
|
|
|
103,663 |
|
|
|
103,348 |
|
Software
|
|
|
3 |
|
|
|
35,113 |
|
|
|
35,153 |
|
Automobile
|
|
|
5 |
|
|
|
7,244 |
|
|
|
7,252 |
|
|
|
|
|
|
|
|
605,350 |
|
|
|
605,616 |
|
Less:
Accumulated Depreciation
|
|
|
|
|
|
|
150,190 |
|
|
|
134,327 |
|
|
|
|
|
|
|
$ |
455,160 |
|
|
$ |
471,289 |
|
Depreciation
and amortization expense was $16,009 and $14,669 for the three months ended
March 31, 2009 and 2008, 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.
F -
10
NOTE 6 –
Website platform
development
On July
16, 2008, the Company signed a website platform development contract with Ziya
Company, a Chinese information technology company located in Hangzhou, China.
The Company and Ziya will work jointly in the development of a state-of-the-art,
online gaming transaction platform to be utilized internally by Qianbao in the
marketing of online prepaid game card products throughout Chongqing and other
major cities in China. On July 29, 2008, the Company paid Ziya Company 1,000,000
RMB, approximately $146,400 (translated as of March 31, 2009) to initiate the
website platform project. The estimated development period is for nine
months.
The
Company is applying the provisions of the American Institute of Certified Public
Accountants Statement of Position (“SOP”) No. 98-1, “Accounting for Costs of
Computer Software Developed or Obtained for Internal Use”, and the Emerging
Issues Task Force Issue (“EITF”) No. 00-02, “Accounting for Website Development
Costs”. The rules specify different stages of development and the
related accounting guidance that accompanies each stage. Purchased
third party software and related implementation costs and internal and external
costs incurred related to the application development stage are capitalized and
included in other assets under the caption of Website platform
development. Such capitalized costs will be amortized using the
straight-line method over three years of the estimated useful life after the new
platform is in use. All costs incurred in the planning stage are
expensed as incurred and those costs to be incurred in the operating stage will
be expensed as incurred.
The
website platform has been in testing stage since February 2009. We expect to
finish the testing by the end of June 2009. However, there is no assurance that
our testing will be successful.
NOTE 7 -
Convertible
Debt
Convertible
debt consists of the following:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Convertible
notes payable
|
|
|
|
|
|
|
net
of unamortized discount of $0 and
$0, respectively
|
|
$ |
1,770,750 |
|
|
$ |
1,770,750 |
|
Less:
current portion
|
|
|
1,770,750 |
|
|
|
1,770,750 |
|
Long
term portion due after one year
|
|
$ |
- |
|
|
$ |
- |
|
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.
F -
11
Both of
the Notes bear interest at the rate of prime plus 4% per annum but not less 8%
(8% per annum at March 31, 2009), 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. The
Company is in default on the Notes and accrued interest, which became due on
March 12, 2009 (See Note 16).
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 11), 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.
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.
F -
12
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 $194,017 at
December 31, 2008, which have been written off due to the default condition at
December 31, 2008.
The
Company is amortizing the discounts over the term of the debt in accordance with
EITF 00-27 quidance. Amortization of the debt and cash discount for
the years ended December 31, 2008 and 2007 was $1,676,446 and $410,474,
respectively, and the amortization is reported as a component of interest
expense. Amortization of deferred finance costs for the year ended December 31,
2008 and 2007 amounted to $107,089 and $28,256, respectively, and is reported as
a component of interest expense. An unamortized deferred finance cost of $4,930
was written off due to the default condition at December 31, 2008.
The
Company commenced the repayment of the Notes and interests on March 19, 2008. As
of March 31, 2009, the Company paid $572,255 in total to the note holders, such
payments representing the loan principal of $539,250, the loan interest of
$13,005 and the fee of $20,000. The Company is in default on loan repayment. As
of March 31, 2009, the unpaid liabilities consist of Notes principal of
$1,770,750, accrued Notes interest of $313,452, accrued late payment penalty of
$88,968 and a mandatory redemption penalty of $354,150 for unpaid principal
balance.
On
December 30, 2008, the Company entered into an amendment (the “Amendment”) with
the holders of its secured convertible promissory notes. The Amendment changed
the original fixed conversion price of $1.00 per share to the lesser of the
closing bid price of the Company’s common stock on the day prior to conversion
date or $0.80 per share, subject to further reduction as described in the
original Notes. All the other terms of the notes remain unchanged in full force
and effect. The Amendment also changed the exercise price of the Class A
warrants from the original $0.81 per share to $0.75 per share, and the exercise
price of Class B warrants from the original $1.13 per share to $0.75 per share.
Due to default on its Convertible Notes payment, the Company wrote off the
balance of unamortized beneficial conversion feature and relative fair value of
the warrants totaled $194,017 and unamortized cash discount of $29,062 at
December 31, 2008.
F -
13
NOTE 8 –
Derivative
Liabilities
The
Company is accounting for the amended variable conversion price in the
Convertible Notes, accrued and unpaid interest and penalties and the associated
warrants as derivative liabilities in accordance with SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities” and EITF 00-19 “Accounting for
Derivative Financial Instruments Indexed to and Potentially Settled in a
Company’s Own Stock” due to the fact that the conversion features have a
variable conversion price as a result of the Company’s Amendment made on the
Convertible Notes dated December 30, 2008 (see Note 7), measured at fair value
using the Black-Scholes option pricing model. The Company also determined that
the warrants did not meet the conditions for equity classification because these
instruments did not meet all of the criteria necessary for equity
classification, hence the conversion feature could result in a variable number
of shares to be issued upon conversion. This condition, which is outside of the
Company’s control, could impact the Company’s ability to maintain the
appropriate level of reserved shares in place required for the warrants. This
could result in the need for the Company to obtain approval from its
shareholders to increase its authorized share capital to accommodate the
appropriate reserves for shares issuable upon exercise of the warrants. Since
shareholder approval for this increase of authorized share capital cannot be
guaranteed, the warrants, in accordance with EITF 00-19, need to be classified
as a liability on the Company balance sheet, measured at fair value using the
Black-Scholes option pricing model.
The
Company combined all embedded features resulting from the December 30, 2008
Amendment that required bifurcation into one compound instrument that is carried
as a component of derivative liabilities. Derivative liabilities at March 31,
2009 and December 31, 2008 consist of the following:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Fair
Value
|
|
|
Fair
Value
|
|
|
|
(Unaudited)
|
|
|
|
|
Beneficial
conversion feature
|
|
$ |
927,526 |
|
|
$ |
815,284 |
|
Warrants
|
|
|
385,254 |
|
|
|
1,095,112 |
|
Total
derivative liabilities
|
|
|
1,312,780 |
|
|
|
1,910,396 |
|
Less:
current liabilities
|
|
|
927,526 |
|
|
|
815,284 |
|
Long
term liabilities
|
|
$ |
385,254 |
|
|
$ |
1,095,112 |
|
The
Company has recorded a gain on derivatives of $597,616 for the three months
ended March 31, 2009.
The
significant assumptions used in Black – Scholes Model to determine the fair
values of derivative liabilities as a result of the Amendment are as
follows:
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Risk-free
interest rate
|
|
|
1.67 |
% |
|
|
1.47 |
% |
Expected
stock price volatility
|
|
|
192.04 |
% |
|
|
192.04 |
% |
Expected
dividend payout
|
|
$ |
- |
|
|
$ |
- |
|
Expected
life
|
|
90
days to 3.46 years
|
|
|
72
days to 3.7 years
|
|
F -
14
NOTE 9 -
Loans Payable –
Related Parties
Loans
payable to related parties consist of the following:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Chief
Executive Officer of the Company bearing
interest at 5% per annum, payable on demand
|
|
$ |
294,725 |
|
|
$ |
324,725 |
|
Chief
Operating Officer of the Company bearing
interest at 6% per annum payable on demand
|
|
|
9,685 |
|
|
|
19,957 |
|
Chief
Executive Officer of the Company bearing
interest at 5% per annum, payable on demand
|
|
|
80,385 |
|
|
|
80,385 |
|
Total
loan payable - related parties
|
|
|
384,795 |
|
|
|
425,067 |
|
Less:
current portion
|
|
|
384,795 |
|
|
|
425,067 |
|
Long-term
portion
|
|
$ |
- |
|
|
$ |
- |
|
The note
due to the Chief Executive Officer (the “CEO”) is past due. The management is
currently negotiating with the CEO to extend the maturity date of this
note.
NOTE 10 -
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 1), 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.
F -
15
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.
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 11 -
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 shares 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.
F -
16
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. The Company has issued 1,300,024 shares of its common
stock during the year ended December 31, 2008, to eighteen subscribers and
received gross proceeds of $1,755,032. The cost in connection with
this private placement totaled to $408,040 for the year ended December 31, 2008,
which representing the finder fee, commissions and legal fees incurred and paid
as of December 31, 2008.
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. As of December 31, 2008, the Company has
issued 135,000 shares of its common stock to Strategic Growth 1, Ltd. The shares
issued in consideration for services rendered were valued at $158,625, based on
the closing price of the issuance date.
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. There was no shares issued during the period
from January 1, 2009 to March 31, 2009.
Note 12 -
Option and
Warrants
Warrants
A summary
of the status of the Company’s warrants is presented below:
|
Date
of
Issuance
|
|
Number
of
Warrants
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
Issued,
Class A warrants
|
9/12/2007
|
|
|
1,155,000 |
|
|
$ |
0.75 |
|
Issued,
Class B warrants
|
9/12/2007
|
|
|
1,155,000 |
|
|
$ |
0.75 |
|
Issued,
Class A warrants
|
10/31/2007
|
|
|
1,155,000 |
|
|
$ |
0.75 |
|
Issued,
Class B warrants
|
10/31/2007
|
|
|
1,155,000 |
|
|
$ |
0.75 |
|
Warrants
issued for consulting service
|
12/31/2008
|
|
|
100,000 |
|
|
$ |
4.25 |
|
Outstanding,
December 31, 2008
|
|
|
|
4,720,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
March 31, 2009
|
|
|
|
4,720,000 |
|
|
|
|
|
F -
17
Warrants
outstanding and exercisable by price range as of March 31, 2009:
|
Class
|
|
Number
|
|
Average
Weighted
Remaining
Contractual
Life
in Yrs
|
|
Exercise
Price
|
|
Number
|
|
Weighted
Average
Exercise Price
|
|
A
|
|
2,310,000
|
|
3.46
|
|
$0.75
|
|
2,310,000
|
|
$0.75
|
|
B
|
|
2,310,000
|
|
3.46
|
|
0.75
|
|
2,310,000
|
|
0.75
|
|
|
|
100,000
|
|
2.75
|
|
4.25
|
|
100,000
|
|
4.25
|
|
|
|
4,720,000
|
|
3.44
|
|
|
|
4,720,000
|
|
$0.82
|
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
Company recorded the fair value of $18,200 for 100,000 shares of Company’s
warrants issued to Strategic Growth1, Ltd. at December 31, 2008. It was recorded
as a consulting expense and an addition to Additional Paid-in
Capital.
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:
|
|
Warrants
Issued
at
09/12/2007
|
|
|
Warrants
Issued
at
10/31/2007
|
|
|
Warrants
Issued
at
12/31/2008
|
|
Risk-free
interest rate
|
|
|
4.11 |
% |
|
|
4.11 |
% |
|
|
1.47 |
% |
Expected
stock price volatility
|
|
|
192.04 |
% |
|
|
192.04 |
% |
|
|
192.04 |
% |
Expected
dividend payout
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Expected
option life-years
|
|
|
5 |
|
|
|
5 |
|
|
|
3 |
|
NOTE 13 -
Related Party
Transactions
Accounts
Payable
Accrued
interest payable related to the loans due to the officers (see Note 9) have been
included in accounts payable, which amounted to $85,058 and $79,325 at March 31,
2009 and December 31, 2008, respectively.
Accrued
salary payable to the CEO of the Company was $216,667 and $191,667 at March 31,
2009 and December 31, 2008, 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.
F -
18
NOTE 14 -
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 all
risk if any of these banks become insolvent. As of March 31, 2009 and December
31, 2008, the Company’s uninsured cash balance was $55,995 and $154,876,
respectively.
NOTE 15 -
Income
Taxes
The
provision for income tax in the amount of $2,551 and $3,508 for the three months
ended March 31, 2009 and 2008, respectively, 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 16 -
Subsequent
Events
On
October 7, 2008, the Company entered into a letter of intent agreement with
Chongqing Aomei Advertising Co., Ltd., a limited liability company organized
under the laws of the People’s Republic of China (“Aomei”), pursuant to which
the Company intends to acquire from Aomei certain assets, including,
intellectual property rights, advertising rights and client groups, in
consideration for the issuance of a certain number of shares of the Company’s
common stock to be mutually agreed upon after the Company has completed its due
diligence investigation of Aomei and its assets. Due to the current market
conditions, the Company did not take further actions as of the filing date of
this report.
The
Company is currently in default on the Convertible Notes and accrued interest,
which became due in full amount effective March 12, 2009. As of May 12, 2009,
the unpaid convertible notes payable balance is $1,770,750; unpaid accrued
interest is $330,141; and unpaid accrued penalty interest is $396,048. The
Company is currently negotiating with the Convertible Notes holders and or
investors to seek ways to resolve the default issue. However, there can be no
assurance that the Company will be successful with the negotiation with the
Convertible Notes holders.
On May 4,
2009, the Company issued 1,078,588 shares to two investors, which represented
the interest payment of $57,500. The conversion price was $0.0533 per
share.
F -
19