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-20 |
PAY88, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
77,092 |
|
|
$ |
159,071 |
|
Accounts receivable, net of allowance of $43,071 and $16,693,
as of June 30, 2009 and December 31, 2008, respectively |
|
|
930,268 |
|
|
|
969,850 |
|
Inventories |
|
|
268,900 |
|
|
|
372,058 |
|
Prepaid expense |
|
|
92,123 |
|
|
|
189,575 |
|
Total Current Assets |
|
|
1,368,383 |
|
|
|
1,690,554 |
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net |
|
|
441,538 |
|
|
|
471,289 |
|
Other Assets: |
|
|
|
|
|
|
|
|
Website platform development |
|
|
- |
|
|
|
146,570 |
|
Total Other Assets |
|
|
- |
|
|
|
146,570 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
1,809,921 |
|
|
$ |
2,308,413 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
1,341,091 |
|
|
$ |
1,248,780 |
|
Convertible notes payable |
|
|
1,770,750 |
|
|
|
1,770,750 |
|
Derivative liabilities - current |
|
|
927,255 |
|
|
|
815,284 |
|
Loan payable - related parties |
|
|
431,407 |
|
|
|
425,067 |
|
Total Current Liabilities |
|
|
4,470,503 |
|
|
|
4,259,881 |
|
|
|
|
|
|
|
|
|
|
Long Term Liabilities: |
|
|
|
|
|
|
|
|
Derivative liabilities |
|
|
374,088 |
|
|
|
1,095,112 |
|
TOTAL LIABILITIES |
|
|
4,844,591 |
|
|
|
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 June 30, 2009 and December 31, 2008 |
|
|
- |
|
|
|
- |
|
Common stock, $0.001 par value; 100,000,000 shares authorized,
33,280,279 and 32,201,691 shares, issued and outstanding
as of June 30, 2009 and December 31, 2008 |
|
|
33,280 |
|
|
|
32,202 |
|
Additional paid-in capital |
|
|
13,732,065 |
|
|
|
13,675,643 |
|
Accumulated deficit |
|
|
(17,023,100 |
) |
|
|
(16,980,078 |
) |
Accumulated other comprehensive income |
|
|
223,085 |
|
|
|
225,653 |
|
Total Stockholders' Deficit |
|
|
(3,034,670 |
) |
|
|
(3,046,580 |
) |
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT |
|
$ |
1,809,921 |
|
|
$ |
2,308,413 |
|
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, 2009 |
|
|
June 30, 2008 |
|
|
June 30, 2009 |
|
|
June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
3,373,537 |
|
|
$ |
4,682,489 |
|
|
$ |
7,478,527 |
|
|
$ |
10,186,569 |
|
Cost of Sales |
|
|
3,358,592 |
|
|
|
4,585,734 |
|
|
|
7,413,606 |
|
|
|
9,957,718 |
|
Gross Profit |
|
|
14,945 |
|
|
|
96,755 |
|
|
|
64,921 |
|
|
|
228,851 |
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and related expenses |
|
|
103,448 |
|
|
|
94,976 |
|
|
|
206,840 |
|
|
|
188,785 |
|
Professional fees |
|
|
62,782 |
|
|
|
80,818 |
|
|
|
99,400 |
|
|
|
150,147 |
|
Selling expenses |
|
|
972 |
|
|
|
4,285 |
|
|
|
1,789 |
|
|
|
6,226 |
|
Other general and administrative expenses |
|
|
66,464 |
|
|
|
71,643 |
|
|
|
136,251 |
|
|
|
125,782 |
|
Total Operating Expenses |
|
|
233,666 |
|
|
|
251,722 |
|
|
|
444,280 |
|
|
|
470,940 |
|
Loss From Operations |
|
|
(218,721 |
) |
|
|
(154,967 |
) |
|
|
(379,359 |
) |
|
|
(242,089 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
15 |
|
|
|
586 |
|
|
|
41 |
|
|
|
1,065 |
|
Interest expense |
|
|
(56,761 |
) |
|
|
(569,162 |
) |
|
|
(113,522 |
) |
|
|
(1,153,359 |
) |
Interest expense - related parties |
|
|
(4,520 |
) |
|
|
(7,881 |
) |
|
|
(10,284 |
) |
|
|
(18,512 |
) |
Impairment loss on website platform development |
|
|
(146,400 |
) |
|
|
- |
|
|
|
(146,400 |
) |
|
|
- |
|
Gain on derivatives, net |
|
|
11,437 |
|
|
|
- |
|
|
|
609,053 |
|
|
|
- |
|
Total Other Income (Expense) |
|
|
(196,229 |
) |
|
|
(576,457 |
) |
|
|
338,888 |
|
|
|
(1,170,806 |
) |
Net Loss Before Income Tax |
|
|
(414,950 |
) |
|
|
(731,424 |
) |
|
|
(40,471 |
) |
|
|
(1,412,895 |
) |
Provision for income tax |
|
|
- |
|
|
|
2,519 |
|
|
|
2,551 |
|
|
|
6,027 |
|
Net Loss |
|
$ |
(414,950 |
) |
|
$ |
(733,943 |
) |
|
$ |
(43,022 |
) |
|
$ |
(1,418,922 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.05 |
) |
Weighted average shares outstanding - basic and diluted |
|
|
32,889,143 |
|
|
|
31,730,523 |
|
|
|
32,547,316 |
|
|
|
31,259,234 |
|
Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(414,950 |
) |
|
$ |
(733,943 |
) |
|
$ |
(43,022 |
) |
|
$ |
(1,418,922 |
) |
Other comprehensive income (loss) |
|
|
(1 |
) |
|
|
56,404 |
|
|
|
(2,568 |
) |
|
|
133,612 |
|
Comprehensive Income (Loss) |
|
$ |
(414,951 |
) |
|
$ |
(677,539 |
) |
|
$ |
(45,590 |
) |
|
$ |
(1,285,310 |
) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
PAY88, INC AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 2008 AND THE SIX MONTHS ENDED JUNE 30, 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 |
) |
Common stock issued for loan interest payment |
|
|
- |
|
|
|
- |
|
|
|
1,078,588 |
|
|
|
1,078 |
|
|
|
56,422 |
|
|
|
- |
|
|
|
- |
|
|
|
57,500 |
|
Foreign currency translation adjustment |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,568 |
) |
|
|
(2,568 |
) |
Net loss - six months ended June 30, 2009 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(43,022 |
) |
|
|
- |
|
|
|
(43,022 |
) |
Balance - June 30, 2009 (Unaudited) |
|
|
- |
|
|
$ |
- |
|
|
|
33,280,279 |
|
|
$ |
33,280 |
|
|
$ |
13,732,065 |
|
|
$ |
(17,023,100 |
) |
|
$ |
223,085 |
|
|
$ |
(3,034,670 |
) |
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 THE SIX MONTHES ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)
|
|
2009 |
|
|
2008 |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
Net income (loss) |
|
$ |
(43,022 |
) |
|
$ |
(1,418,922 |
) |
Adjustments to Reconcile Net Income (Loss) to |
|
|
|
|
|
|
|
|
Net Cash Used in Operating Activities: |
|
|
|
|
|
|
|
|
Bad debt expense |
|
|
26,979 |
|
|
|
8,090 |
|
Depreciation and amortization |
|
|
32,199 |
|
|
|
29,996 |
|
Common stock issued for repayment of accrued interest
on convertible notes payable |
|
|
57,500 |
|
|
|
- |
|
Gain on derivatives, net |
|
|
(609,053 |
) |
|
|
- |
|
Impairment loss on website platform development |
|
|
146,400 |
|
|
|
- |
|
Amortization of debt discount and cash discount |
|
|
- |
|
|
|
1,003,316 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Decrease (Increase) in accounts receivable |
|
|
13,204 |
|
|
|
(379,660 |
) |
Decrease in inventories |
|
|
103,158 |
|
|
|
89,968 |
|
Decrease in prepaid expense |
|
|
97,452 |
|
|
|
171,000 |
|
Increase in accounts payable and accrued expenses |
|
|
92,311 |
|
|
|
202,031 |
|
Net Cash Used in Operating Activities |
|
|
(82,872 |
) |
|
|
(294,181 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(3,003 |
) |
|
|
(15,792 |
) |
Net Cash Used in Investing Activities |
|
|
(3,003 |
) |
|
|
(15,792 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Proceeds from Regulation S offering |
|
|
- |
|
|
|
1,377,032 |
|
Cost of Regulation S offering |
|
|
- |
|
|
|
(332,440 |
) |
Repayment of convertible notes |
|
|
- |
|
|
|
(194,250 |
) |
Proceeds from (repayment to) short term loan - related parties |
|
|
6,340 |
|
|
|
(363,327 |
) |
Net Cash Provided by Financing Activities |
|
|
6,340 |
|
|
|
487,015 |
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash |
|
|
(2,444 |
) |
|
|
112,902 |
|
Net (Decrease) Increase in Cash and Cash Equivalents |
|
|
(81,979 |
) |
|
|
289,944 |
|
Cash and Cash Equivalents - Beginning of Period |
|
|
159,071 |
|
|
|
124,108 |
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents - End of Period |
|
$ |
77,092 |
|
|
$ |
414,052 |
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
|
|
|
|
Interest Paid |
|
$ |
- |
|
|
$ |
33,005 |
|
Income taxes paid |
|
$ |
5,104 |
|
|
$ |
3,230 |
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Non-Cash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
Common stock issued for repayment of accrued interest
on convertible notes payable |
|
$ |
57,500 |
|
|
$ |
- |
|
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 Note 11). 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.
NOTE 1 – Basis of Presentation (Continued)
Going Concern
The loss from operations was $379,359 and $242,089 for the six months ended June 30, 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 $17,023,100 at June 30, 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 June 30, 2009, the Company had a working capital deficiency of $3,102,120 and delinquency in scheduled repayments of the Convertible Notes payable, accrued interests and penalties of $2,526,581. Furthermore, the Company’s gross margin rate from its current operations was very low. It was approximately 0.9% and 2.3% for the six months ended June 30, 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 Noteholders 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 its operations for the next twelve months and beyond to address its 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.
New Accounting Pronouncements Effective January 1, 2009
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.
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.
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.
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. |
· |
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. |
· |
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. |
These standards were effective for periods ending after June 15, 2009. The adoption of these accounting standards had no material effect on our consolidated financial statements.
SFAS No. 165
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”. We adopted SFAS No. 165 for the Quarterly Report for the period ending June 30, 2009. SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before
financial statements are issued, which are referred to as subsequent events. The statement clarifies existing guidance on subsequent events, including a requirement that a public entity should evaluate subsequent events through the issue date of the financial statements, the determination of when the effects of subsequent events should be recognized in the financial statement and disclosures regarding all subsequent events. SFAS No. 165 also requires a public entity to disclose the date through which
an entity has evaluated subsequent events. We have evaluated subsequent events through the date of filing as disclosed in Note 16.
SFAS No. 166
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140,” which eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets and requires additional disclosures. SFAS
No. 166 is effective for periods beginning after November 15, 2009. The Company is evaluating the impact of SFAS No. 166 on its consolidated financial statements.
SFAS No. 167
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” which changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated and requires additional disclosures.
SFAS No. 167 is effective for periods beginning after November 15, 2009. The Company is evaluating the impact of SFAS No. 167 on its consolidated financial statements.
SFAS No. 168
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles,” which establishes the FASB Accounting Standards Codification™ (the “Codification”) as the source of authoritative US GAAP recognized
by the FASB to be applied to nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also included in the Codification as sources of authoritative US GAAP for SEC registrants. SFAS No. 168 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this rule will not affect reported results of operations, financial condition or cash flows. The Company will
implement SFAS No. 168 in its third quarter Form 10-Q by updating the previous FASB references to the Codification.
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, 2009 and for the three and six months ended June 30, 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 June 30, 2009 and the results of operations and cash flows for the three and six months ended June 30, 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 and six months ended June 30, 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.
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 25,265,810 common shares as of June 30, 2009. It was calculated from $2,526,581 of
convertible notes and accrued interest and penalties. The conversion price was at $0.10 per share, the stock’s closing price as of June 30, 2009. Diluted loss per common share for the three months ended June 30, 2009 and 2008 and for the six months ended June 30, 2009 and 2008 was the same as basic loss per share, as the effect of potentially dilutive securities were anti-dilutive.
NOTE 4 - Inventories
Inventories consist of the following:
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
Purchased game cards |
|
$ |
268,900 |
|
|
$ |
372,058 |
|
All inventories are consisted of finished products. There was no valuation allowance for inventory loss at June 30, 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 |
|
|
|
|
|
|
|
|
|
Useful Lives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office Units and Improvement |
|
|
31 |
|
|
$ |
449,409 |
|
|
$ |
449,931 |
|
Furnitures and Fixtures |
|
|
5 |
|
|
|
9,921 |
|
|
|
9,932 |
|
Office Equipment |
|
|
3 |
|
|
|
106,232 |
|
|
|
103,348 |
|
Software |
|
|
3 |
|
|
|
35,113 |
|
|
|
35,153 |
|
Automobile |
|
|
5 |
|
|
|
7,244 |
|
|
|
7,252 |
|
|
|
|
|
|
|
|
607,919 |
|
|
|
605,616 |
|
Less: Accumulated Depreciation and Amortization |
|
|
|
166,381 |
|
|
|
134,327 |
|
|
|
|
|
|
|
$ |
441,538 |
|
|
$ |
471,289 |
|
Depreciation and amortization expense was $16,190 and $14,669 for the three months ended June 30, 2009 and 2008, respectively, and $32,199 and $29,996 for the six months ended June 30, 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.
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 worked jointly in the development of a 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 June 30, 2009) to initiate the website platform project.
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 had been in testing since February 2009 and management concluded on June 30, 2009 that it was not able to meet security requirement by the Company. The management decided to abandon the application of this website platform. The carrying value of the capitalized website platform development costs totaled
$146,400 became impaired consequently during the second quarter ended June 30, 2009 and was recorded as an impairment loss on website platform development.
NOTE 7 - Convertible Debt
Convertible debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable |
|
$ |
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.
Both of the Notes bear interest at the rate of prime plus 4% per annum but not less 8% (8% per annum at June 30, 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.
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. 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 based on mutual negotiation with the two investors / Noteholders. The Company is in default on loan repayment. As of June 30, 2009, the unpaid liabilities consist of Notes principal of $1,770,750, accrued Notes interest of $290,882, accrued late payment penalty of $110,799 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.
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 June 30, 2009 and December 31, 2008 consist of the following:
|
|
June 30, 2009 |
|
|
|
|
|
|
Fair Value |
|
|
Fair Value |
|
|
|
(Unaudited) |
|
|
|
|
Benefical conversion feature |
|
$ |
927,255 |
|
|
$ |
815,284 |
|
Warrants |
|
|
374,088 |
|
|
|
1,095,112 |
|
Total derivative liabilities |
|
|
1,301,343 |
|
|
|
1,910,396 |
|
Less: current liabilities |
|
|
927,255 |
|
|
|
815,284 |
|
Long term liabilities |
|
$ |
374,088 |
|
|
$ |
1,095,112 |
|
The Company has recorded a gain on derivatives of $11,437 and $609,053 for the three and six months ended June 30, 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:
|
|
June 30, 2009 |
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
Risk-free interest rate |
|
|
2.54 |
% |
|
|
1.47 |
% |
Expected stock price volatility |
|
|
192.04 |
% |
|
|
192.04 |
% |
Expected dividend payout |
|
$ |
- |
|
|
$ |
- |
|
Expected life |
|
90 days to 3.21 years |
|
|
72 days to 3.7 years |
|
NOTE 9 - Loans Payable – Related Parties
Loans payable to related parties consist of the following:
|
|
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
Chief Executive Officer of the Company bearing interest at 5% per annum, payable on demand |
|
$ |
293,025 |
|
|
$ |
324,725 |
|
Chief Operating Officer of the Company bearing interest at 6% per annum payable on demand |
|
|
57,997 |
|
|
|
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 |
|
|
431,407 |
|
|
|
425,067 |
|
Less: current portion |
|
|
431,407 |
|
|
|
425,067 |
|
Long-term portion |
|
$ |
- |
|
|
$ |
- |
|
The notes due to the Chief Executive Officer (the “CEO”) and the Chief Operating Officer (the “COO”) are past due. The management is currently negotiating with the CEO and COO to extend the maturity date of these notes.
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.
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.
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.
On May 4, 2009, the Company issued 1,078,588 shares to two investors / Noteholders, which represented the interest payment of $57,500. The conversion price was $0.0533 per share based on mutual negotiation with the two investors / Noteholders.
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 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, June 30, 2009 |
|
|
|
4,720,000 |
|
|
|
|
|
Warrants outstanding and exercisable by price range as of June 30, 2009:
Class |
|
Number |
|
|
Average Weighted
Remaining
Contractual
Life in Yrs |
|
|
Exercise
Price |
|
|
Number |
|
|
Weighted
Average Exercise Price |
|
A |
|
|
2,310,000 |
|
|
|
3.21 |
|
|
$ |
0.75 |
|
|
|
2,310,000 |
|
|
$ |
0.75 |
|
B |
|
|
2,310,000 |
|
|
|
3.21 |
|
|
|
0.75 |
|
|
|
2,310,000 |
|
|
|
0.75 |
|
|
|
|
100,000 |
|
|
|
2.50 |
|
|
|
4.25 |
|
|
|
100,000 |
|
|
|
4.25 |
|
|
|
|
4,720,000 |
|
|
|
3.19 |
|
|
|
|
|
|
|
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:
Significant assumptions: |
|
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 $89,578 and $79,325 at June 30, 2009 and December 31, 2008, respectively.
Accrued salary payable to the CEO of the Company was $241,667 and $191,667 at June 30, 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.
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 June 30, 2009 and December 31, 2008, the Company’s uninsured cash in bank balance was $72,406 and
$153,536, respectively.
NOTE 15 - Income Taxes
The provision for income tax in the amount of $2,551 and $6,027 for the six months ended June 30, 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 before December 31, 2008. Commencing on January 1, 2009, income tax will be based on earnings before income tax.
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 June 30, 2009, the unpaid liabilities consist of Notes principal of $1,770,750, accrued Notes interest of $290,882, accrued late payment penalty of $110,799 and a mandatory
redemption penalty of $354,150 for unpaid principal balance. The Company is currently negotiating with the Convertible Noteholders 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 Noteholders.
The management has determined that all subsequent events through the date of filing have been disclosed.
F - 20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements