FILED
PURSUANT TO RULE 424(B)(3)
REGISTRATION
NO.
333-146747
PROSPECTUS
PAY88,
INC.
4,042,500
shares of Common Stock issuable pursuant to Secured Convertible Promissory
Notes
3,887,000
shares of Common Stock
The
prospectus relates to the resale by certain selling security holders of Pay88,
Inc. of up to 7,929,500 shares of our common stock in connection with the resale
of:
| · |
Up
to 2,021,250 shares
of our common stock that may be issued pursuant to secured convertible
promissory notes that were issued by us in connection with a private
placement that closed in September 2007;
|
| · |
Up
to 2,021,250 shares
of our common stock that may be issued pursuant to secured convertible
promissory notes that will be issued by us at the second closing
of the
September 2007 private placement;
and
|
| · |
3,887,000
shares of our common stock.
|
The
selling security holders may offer to sell the shares of our common stock being
offered in this prospectus at fixed prices, at prevailing market prices at
the
time of sale, at varying prices, or at negotiated prices. For a description
of
the plan of distribution of the shares, please see page 15 of this
prospectus.
Our
common stock is traded on the National Association of Securities Dealers OTC
Bulletin Board under the symbol “PAYI.” On October 15, 2007, the closing sale
price of our common stock on the OTC Bulletin Board was $1.34.
Investing
in our securities involves significant risks. See “Risk Factors” beginning on
page 6.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of the prospectus. Any representation to the contrary is a criminal
offense.
Our
offices are located at 1053 North Barnstead Road, Barnstead, NH 03225. Our
telephone number is (603) 776-6044. Our website can be found at www.pay88.com.
The
date
of the prospectus is October 31, 2007.
TABLE
OF CONTENTS
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Prospectus
Summary
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2
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Risk
Factors
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5
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Use
of Proceeds
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13
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Selling
Security Holders
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13
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Plan
of Distribution
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14
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Legal
Proceedings
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17
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Directors,
Executive Officers, Promoters and Control Persons
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17
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Security
Ownership of Certain Beneficial Owners and Management
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18
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Description
of Securities
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19
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Interest
of Named Experts and Counsel
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23
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Disclosure
of Commission Position of Indemnification for Securities Act
Liabilities
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23
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Organization
Within Last Five Years
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23
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Description
of Business
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23
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Management’s
Discussion and Analysis or Plan of Operation
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26
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Description
of Property
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30
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Certain
Relationships and Related Transactions
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31
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Market
for Common Equity and Related Stockholder Matters
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31
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Executive
Compensation
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33
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Where
You Can Find Additional Information
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34
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Financial
Statements
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F-1
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You
should rely only on the information contained in this prospectus. We have not,
and the selling security holders have not, authorized anyone to provide you
with
different information. If anyone provides you with different information, you
should not rely on it. We are not, and the selling security holders are not,
making an offer to sell these securities in any jurisdiction where the offer
or
sale is not permitted. You should assume that the information contained in
this
prospectus is accurate only as of the date on the front cover of this
prospectus. Our business, financial condition, results of operations, and
prospects may have changed since that date. In this prospectus, “Pay88,” “the
Company,” “we,” “us,” and “our” refer to Pay88, Inc., a Nevada corporation,
unless the context otherwise requires. In this prospectus, references to
“Qianbao” refers to Chongqing Qianbao Technology Ltd., our wholly owned
subsidiary.
The
following summary highlights selected information contained in this prospectus.
Because it is a summary, it does not contain all of the information you should
consider before making an investment decision. Before making an investment
decision, you should read the entire prospectus carefully, including the “Risk
Factors” section, the financial statements, and the notes to the financial
statements.
Company
Summary
Pay88,
Inc. was incorporated on March 22, 2005 under the name "Pay88, Ltd." in the
State of New Hampshire. We subsequently decided to reincorporate in the State
of
Nevada by merging with and into Pay88, Inc., a Nevada corporation formed for
such purpose on July 7, 2005. Such merger was effectuated on August 9,
2005.
Initially
we focused our business on facilitating money transfers from the United States
to China. Prior to September 2006, our operations focused on organizational,
start-up, and fund raising activities and entering into an agreement with
Chongqing Yahu Information Development Co., Ltd. to provide software to process
money transfers. However, we never commenced our proposed business operations
or
generated revenues in connection with this money transfer business. We presently
have no intention to engage in the money transfer business. Nonetheless, we
may
in the future resume our plans to develop this U.S.-China money transfer
business.
We
shifted our business focus in September, 2006 as a result of our acquisition
of
Chongqing Qianbao Technology Ltd. (“Qianbao”), a Chinese limited liability
company. Through Qianbao, we are currently engaged in the sale of prepaid
telephone and game cards through their internet website,
http://www.iamseller.com. We currently offer for sale on such website over
800
software products, including cooking and language software and prepaid game
cards for online games.
Recent
Developments
On
September 12, 2007, we entered into Subscription Agreements with 3 accredited
investors for the purchase and sale of $1,155,000 of Secured Convertible
Promissory Notes for the aggregate purchase price of $750,000. We received
net
proceeds from the issuance of the secured convertible promissory notes of
$652,237. Pursuant to the terms of the Subscription Agreements, we also issued
to these investors Class A warrants and Class B warrants that, in the aggregate,
are exercisable to purchase 2,310,000 shares of our common stock, subject to
adjustments for certain issuances and transactions. In accordance with the
terms
of the Subscription Agreements, we will issue additional secured convertible
promissory notes in the principal amount of $1,155,000 and an aggregate of
2,310,000 additional warrants on or before the fifth business day after this
registration statement containing this prospectus is declared effective by
the
Securities and Exchange Commission. We plan to use the net proceeds of the
secured convertible promissory notes (including the additional notes) to expand
our operations.
The
secured convertible promissory notes bear interest at the rate of prime plus
4%
per annum, and are payable in either cash or, absent any event of default,
in
shares of our common stock. Payments of interest and principal commence on
March
12, 2008 and all accrued but unpaid interest and any other amounts pursuant
to
the secured convertible promissory notes are due and payable on March 12, 2009
(or earlier upon acceleration following an event of default).
All
of
the principal and accrued interest on the secured convertible promissory notes
is convertible into shares of our common stock at the election of the investors
at any time at the conversion price of $1.00 per share (subject to adjustment
for certain issuances and transactions).
The
secured convertible promissory notes contain default events which, if triggered
and not timely cured (if curable), will result in a default interest rate of
an
additional 5% per annum. In addition, we have to pay the investors 120% plus
accrued interest of the outstanding principal amount if the shares of our common
stock cease to be eligible for quotation on the Bulletin Board, we sell
substantially all of our assets or Guo Fan ceases to be our Chief Executive
Officer.
The
obligations under the secured convertible promissory notes are secured by our
assets, the assets of our wholly-owned subsidiary Qianbao, a pledge of all
the
shares we hold in Qianbao and personal guaranties of our Chief Executive Officer
and our Chief Operating Officer.
We
also
issued to each investor 1,155,000 Class A Common Stock Purchase Warrants
and 1,155,000 Class B Common Stock Purchase Warrants, which are exercisable
at any time until September 12, 2012 at an exercise price of $0.81 and $1.13,
respectively. These warrants also include a cashless exercise provision which
is
triggered after March 12, 2008 as well as “full ratchet” anti-dilution
provisions with respect to certain securities issuances.
At
the
option of each investor, the conversion of the secured convertible promissory
notes or exercise of the warrants is subject to the restriction that such
conversion or exercise does not result in the investor beneficially owning
at
any one time more that 4.99% of our outstanding shares of common
stock.
We
agreed
to register for resale all
of
the shares of common stock underlying the secured convertible promissory notes.
If the registration statement we file is not declared effective within 91 days
from September 16, 2007, we must pay monthly liquidated damages in cash equal
to
2% of the principal amount of the secured convertible promissory notes and
purchase price of the warrants. We also granted the investors piggyback
registration rights along with certain demand registration rights.
Pursuant
to the Subscription Agreements, we also granted the investors a right of first
refusal with respect to proposed sales of equity or debt securities we make,
subject to certain exceptions. The right is effective until the earlier of
one
year from the effective date of the Registration Statement or the date which
the
secured convertible promissory notes are satisfied in full.
As
a
condition to the issuance of the secured convertible promissory notes, we have
entered into Lock up Agreements with Guo Fan, our Chief Executive Officer,
and
Tao Fan, our Chief Operating Officer, and three other individuals pursuant
to
which each of them has agreed not to sell any shares of our common stock prior
to 365 calendar days after the registration statement which contains this
prospectus has been declared effective, or until the secured convertible
promissory notes are no longer outstanding.
Issuance
of shares to consultants
On
September 11, 2007, we issued an aggregate of 6,666,666 shares of our common
stock to TVH Limited, a Netherlands limited company, in consideration for
services rendered, and 1,333,334 to another consultant 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.
Conversion
of Series A preferred stock into shares of common stock
On
October 3, 2007, we issued 14,000,000 shares of common stock upon conversion
of
5,000,000 shares of our Series A Convertible Preferred Stock that we issued
to
the two shareholders of Qianbao in September 2006 as consideration for the
acquisition of that company. The shares were subsequently distributed in China
to the shareholders of one of said shareholders. We were required to cause
the
conversion of our Series A Convertible Preferred Stock pursuant to the
Subscription Agreement we entered into with the investors on September 12,
2007.
As a result of the conversion of the Series A Convertible Preferred Stock into
our common stock, and the issuance to TVH Limited as described above, we now
have 30,766,666 shares issued and outstanding as of the date of this prospectus.
The issuance of our common stock upon the conversion of the Series A Preferred
Stock was exempt from registration pursuant to an exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.
Our
offices are located at 1053 North Barnstead Road, Barnstead, New Hampshire
03225. Our telephone number is (603) 776-6044. Our website can be found at
www.pay88.com.
THE
OFFERING
Key
Facts of the Offering
|
Shares
of common stock being registered
|
|
7,929,500
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| |
|
|
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Total
shares of common stock outstanding as of the date of this
prospectus
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30,766,666
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| |
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Total
proceeds raised by us from the disposition of the common stock by
the
selling security holders or their transferees
|
|
We
will receive no proceeds from the disposition of already outstanding
shares of common stock by the selling security holders or their
transferees or the disposition of the shares of common stock issuable
pursuant to the secured convertible promissory
notes.
|
Summary
Financial Data
The
following summary financial information for the fiscal year ended December
31,
2006 was taken from our audited financial statements and unaudited financial
information for the quarter ended June 30, 2007, includes balance sheet and
statement of operations data. The information contained in this table should
be
read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the financial statements and
accompanying notes included in this prospectus.
|
|
|
Pay88, Inc.
For the Period April
24, 2006 (Inception) to
December 31, 2006
|
|
Pay88,
Inc.
for the quarter ended June 30,
2007
|
|
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Statement of Operations Data:
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|
|
(unaudited)
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Net
Sales
|
|
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1,199,927
|
|
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1,242,455
|
|
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Total
Operating Expense
|
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321,436
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|
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155,174
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|
|
Loss
from Operations
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|
(294,773
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)
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(125,119
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)
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Net
Loss
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(297,764
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)
|
|
(137,709
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)
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Loss
per Share - Basic
|
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($0.03
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)
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(0.01
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)
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Loss
per Share - Diluted
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($0.01
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)
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(0.01
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)
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December
31,
2006
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|
June
30,
2007
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|
|
Balance Sheet Data:
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(unaudited)
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Working
Capital
|
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|
(140,018
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)
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|
(409,755
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)
|
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Total
Assets
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728,119
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1,232,041
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Current
Liabilities
|
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|
381,137
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1,148,744
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Total
Stockholders’ Equity
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|
|
266,597
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2,912
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking information. Forward-looking information
includes statements relating to future actions, future performance, costs and
expenses, interest rates, outcome of contingencies, financial condition, results
of operations, liquidity, business strategies, cost savings, objectives of
management, and other such matters of the Company. Forward-looking information
may be included in this prospectus or may be incorporated by reference from
other documents filed with the Securities and Exchange Commission by us. You
can
find many of these statements by looking for words including, for example,
“estimate,” “project,” “intend,” “forecast,” “anticipate,” “plan,” “planning,”
“expect,” “believe,” “will,” “will likely,” “should,” “could,” “would,” “may,”
or words or expressions of similar meaning in this prospectus or in documents
incorporated by reference in this prospectus. Except as otherwise required
under
applicable law, we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information or future
events.
We
have
based the forward-looking statements relating to our operations on management's
current expectations, estimates, and projections about us and the industry
in
which we operate. These statements are not guarantees of future performance
and
involve risks, uncertainties and assumptions that we cannot predict. In
particular, we have based many of these forward-looking statements on
assumptions about future events that may prove to be inaccurate. Accordingly,
our actual results may differ materially from those contemplated by these
forward-looking statements. Any differences could result from a variety of
factors, including, but not limited to general economic and business conditions,
competition, and other factors.
Investing
in us entails substantial risks. Factors that could cause or contribute to
differences in our actual results include those discussed in the following
section. You should consider carefully the following risk factors, together
with
all of the other information included in this prospectus. Each of these risk
factors could adversely affect our business, operating results and financial
condition, as well as adversely affect the value of our common
stock.
Risks
Relating To Our Business
Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
We
have a
limited operating history. We were organized in March 2005, and in September
2006 we acquired Chongqing Qianbao Technology Ltd. which operates a website
for
the sale of prepaid telephone cards and online video games in China. Qianbao
has
only operated that website since April 2006. Accordingly, you should consider
our future prospects in light of the risks and uncertainties experienced by
early stage companies in evolving markets such as the growing market for
Internet-based sales in China. Some of these risks and uncertainties relate
to
our ability to:
| · |
increase
awareness of our brand and the development of customer
loyalty;
|
|
·
|
respond
to competitive market conditions;
|
|
·
|
respond
to changes in regulatory environment of our business in
China;
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|
·
|
manage
risks associated with intellectual property
rights;
|
|
·
|
maintain
effective control of our costs and
expenses;
|
|
·
|
raise
sufficient capital to sustain and expand our
business;
|
|
·
|
attract,
retain and motivate qualified personnel;
and
|
|
·
|
upgrade
our technology to support additional research and development of
new
prepaid card products.
|
If
we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.
We
are dependent on third parties for the supply of pre-paid phone and game cards
that we resell and any interruption in the production and/or delivery of those
pre-paid cards or any increase in the manufacturer’s costs may have a material
adverse effect on our revenues and our results of our operations, which may
cause our stock price to decline.
Our
Chinese subsidiary, Qianbao, purchases prepaid cards from third-party suppliers
and thereafter resells them on its website. Since Qianbao does not manufacture
any of the cards that they sell and, consequently, it is dependent on the
ability of its suppliers to deliver pre-paid cards on a timely basis. Qianbao’s
suppliers may also pass on increases in their cost of producing pre-paid phone
and game cards, such as higher energy costs or higher raw material costs. If
Qianbao’s suppliers pass on those costs or cannot meet Qianbao’s needs for
prepaid cards, Qianbao’s revenues and profitability would be negatively
affected. If we experience lower revenue and/or lower profitability, our stock
price may decline as investors may perceive weakness in our business.
We
may be unable to anticipate changes in consumer preferences for prepaid
telephone cards or prepaid online video game cards, which may result in
decreased demand for our products and may negatively affect our revenues and
our
operating results.
Our
continued operation in the prepaid card market is in large part dependent on
our
ability to anticipate selling prepaid cards that appeal to the changing tastes,
spending habits and preferences of customers. If we are not able to anticipate
and identify new consumer trends and sell new products accordingly, demand
for
our products may decline and our operating results may be adversely affected.
In
addition, we may incur significant costs relating to identifying new consumer
trends and marketing new products or expanding our existing product lines in
reaction to what we perceive to be a consumer preference or demand. Such
development or marketing may not result in the level of market acceptance,
volume of sales or profitability anticipated. For example, we are seeking to
offer for sale on our website prepaid study cards, which allow the holder
thereof to use online software that assists in the learning of various subjects
including Chinese, English and cooking. However, we cannot be sure that such
a
new product will be popular with our current or potential customers, which
would
negatively affect our revenues.
If
the market for prepaid telephone cards and/or the online video game markets
in
China does not grow as we expect, our results of operations and financial
condition may be adversely affected.
We
believe that prepaid telephone cards, online video games and other prepaid
products have strong growth potential in China and, accordingly, we have
continuously focused our efforts on selling these products. If the prepaid
card
and online video game market in China does not grow as we expect, our business
may be harmed, we may need to adjust our growth strategy and our results of
operation may be adversely affected.
The
loss of senior management or key personnel or our inability to recruit
additional personnel may harm our business.
We
are
highly dependent on the senior management of Qianbao to manage our prepaid
card
and online video gaming business and operations and our key marketing personnel
for the identifying prepaid cards and Internet technologies to expand our sales
and enhance our existing products. In particular, we rely substantially on
our
chief operating officer, Mr. Tao Fan, to manage Qianbao’s operations and our
chief executive officer, Mr. Guo Fan, to manage our overall operations and
financing. We do not maintain key man life insurance on any of our senior
management or key personnel. The loss of any one of them, Mr. Tao Fan or Mr.
Guo
Fan, would have a material adverse effect on our business and operations.
Competition for senior management, marketing and technical personnel in China
is
intense and the pool of suitable candidates is limited. We may be unable to
locate a suitable replacement for any senior management or key marketing or
technical personnel that we lose. In addition, if any member of our senior
management or key marketing or technical personnel joins a competitor or forms
a
competing company, they may compete with us for customers, suppliers and/or
business partners and other key professionals and staff members of our company.
Although each of our senior management and key marketing and technical personnel
has signed a confidentiality and non-competition agreement in connection with
their employment with us, we cannot assure you that we will be able to
successfully enforce these provisions in the event of a dispute between us
and
any member of our senior management or key marketing and technical personnel.
We
compete for qualified personnel with other prepaid telephone card and online
video gaming companies, marketing firms and software and Internet companies.
Intense competition for these personnel could cause our compensation costs
to
increase significantly, which could have a material adverse effect on our
results of operations. Our future success and ability to grow our business
will
depend in part on the continued service of these individuals and our ability
to
identify, hire and retain additional qualified personnel. If we are unable
to
attract and retain qualified employees, we may be unable to meet our business
and financial goals.
We
may require additional financing in the future and our operations could be
curtailed if we are unable to obtain required additional financing when
needed.
In
the
notes to our financial statements for the year ended December 31, 2006 and
for
the quarter ended June 30, 2007 both disclosed going concern issues.
Additionally, our registered independent auditors have a going concern exception
to its audit report, dated March 27, 2007, regarding our financial statements
for the 2006 fiscal year. Consequently, we will need to obtain additional debt
or equity financing to fund operations and to execute our business plan.
Additional equity may result in dilution to the holders of our outstanding
shares of capital stock. Additional debt financing may include conditions that
would restrict our freedom to operate our business, such as conditions that:
|
·
|
limit
our ability to pay dividends or require us to seek consent for the
payment
of dividends;
|
|
·
|
increase
our vulnerability to general adverse economic and industry
conditions;
|
| |
|
|
·
|
require
us to dedicate a portion of our cash flow from operations to payments
on
our debt,
thereby
reducing the availability of our cash flow to fund capital expenditures,
working
capital
and other general corporate purposes; and
|
| |
|
|
·
|
limit
our flexibility in planning for, or reacting to, changes in our business
and our industry.
|
We
cannot
guarantee that we will be able to obtain any additional financing on terms
that
are acceptable to us, or at all.
We
derive all of our revenues from sales in China and any downturn in the Chinese
economy could have a material adverse effect on our business and financial
condition.
All
of
our revenues are generated from sales in China. We anticipate that revenues
from
sales of our products in China will continue to represent a substantial
proportion of our total revenues in the near future. Any significant decline
in
the condition of China economy could, among other things, adversely affect
consumer buying power and discourage consumption of our products, which in
turn
would have a material adverse effect on our revenues and profitability.
Our
largest stockholder has significant influence over our management and affairs
and could exercise this influence against your best interests.
At
October 15, 2007, Mr. Guo Fan, our Chairman, Chief Executive Officer and our
largest stockholder, beneficially owned approximately 24.7% of our outstanding
shares of common stock, and our other executive officers and directors
collectively beneficially owned an additional 4.5% of our outstanding shares
of
common stock. As a result, pursuant to our By-laws and applicable laws and
regulations, our controlling shareholder and our other executive officers and
directors are able to exercise significant influence over our Company,
including, but not limited to, any stockholder approvals for the election of
our
directors and, indirectly, the selection of our senior management, the amount
of
dividend payments, if any, our annual budget, increases or decreases in our
share capital, new securities issuance, mergers and acquisitions and any
amendments to our By-laws. Furthermore, this concentration of ownership may
delay or prevent a change of control or discourage a potential acquirer from
making a tender offer or otherwise attempting to obtain control of us, which
could decrease the market price of our shares.
If
we
fail to develop and maintain an effective system of internal controls, we may
not be able to accurately report our financial results or prevent fraud; as
a
result, current and potential shareholders could lose confidence in our
financial reports, which could harm our business and the trading price of our
common stock.
Effective
internal controls are necessary for us to provide reliable financial reports
and
effectively prevent fraud. Section 404 of the Sarbanes-Oxley Act of 2002
requires us to evaluate and report on our internal controls over financial
reporting and have our independent registered public accounting firm annually
attest to our evaluation, as well as issue their own opinion on our internal
controls over financial reporting, beginning with our Annual Report on Form
10-KSB for the fiscal year ended December 31, 2008. We plan to prepare for
compliance with Section 404 by strengthening, assessing and testing our system
of internal controls to provide the basis for our report. The process of
strengthening our internal controls and complying with Section 404 is expensive
and time consuming, and requires significant management attention. We cannot
be
certain that the measures we will undertake will ensure that we will maintain
adequate controls over our financial processes and reporting in the future.
Furthermore, if we are able to rapidly grow our business, the internal controls
that we will need will become more complex, and significantly more resources
will be required to ensure our internal controls remain effective. Failure
to
implement required controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to fail to meet
our
reporting obligations. If we or our auditors discover a material weakness in
our
internal controls, the disclosure of that fact, even if the weakness is quickly
remedied, could diminish investors’ confidence in our financial statements and
harm our stock price. In addition, non-compliance with Section 404 could subject
us to a variety of administrative sanctions, including the suspension of
trading, ineligibility for listing on one of the Nasdaq Stock Markets or
national securities exchanges, and the inability of registered broker-dealers
to
make a market in our common stock, which would further reduce our stock price.
Risks
Relating To Conducting Business in China
Substantially
all of our assets and operations are located in China, and substantially all
of
our revenue is sourced from China. Accordingly, our results of operations and
financial position are subject to a significant degree to economic, political
and legal developments in China, including the following risks:
Changes
in the political and economic policies of China government could have a material
adverse effect on our operations.
Our
business operations may be adversely affected by the political and economic
environment in China. China has operated as a socialist state since 1949 and
is
controlled by the Communist Party of China. As such, the economy of China
differs from the economies of most developed countries in many respects,
including, but not limited to:
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structure
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capital
re-investment
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government
involvement
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·
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allocation
of resources
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level
of development
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control
of foreign exchange
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growth
rate
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rate
of inflation
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In
recent
years, however, the government has introduced measures aimed at creating a
“socialist market economy” and policies have been implemented to allow business
enterprises greater autonomy in their operations. Nonetheless, a substantial
portion of productive assets in China is still owned by Chinese government.
Changes in the political leadership of China may have a significant affect
on
laws and policies related to the current economic reforms program, other
policies affecting business and the general political, economic and social
environment in China, including the introduction of measures to control
inflation, changes in the rate or method of taxation, the imposition of
additional restrictions on currency conversion and remittances abroad,
regulation of the Internet and foreign investment. Moreover, economic reforms
and growth in China have been more successful in certain provinces in China
than
in others, and the continuation or increases of such disparities could affect
the political or social stability in China.
Although
we believe the economic reform and the macroeconomic measures adopted by the
Chinese government have had a positive effect on the economic development in
China, the future direction of these economic reforms is uncertain and the
uncertainty may decrease the attractiveness of our company as an investment,
which may in turn materially adversely affect the price at which our stock
trades.
Social
conditions in China could have a material adverse effect on our operations
as
the Chinese government continues to exert substantial influence over the manner
in which we must conduct our business activities.
China
only recently has permitted provincial and local economic autonomy and private
economic activities. The Chinese government has exercised and continues to
exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to operate in China may
be
adversely affected by changes in Chinese laws and regulations, including those
relating to taxation, import and export tariffs, regulation of the Internet,
protection of intellectual property and other matters. We believe our operations
in China are in compliance, in all material respects, with all applicable legal
and regulatory requirements. However, the central or local governments may
impose new, stricter regulations or interpretations of existing regulations
that
would require additional expenditures and efforts on our part to ensure our
compliance with such regulations or interpretations. If the Chinese government
or local municipalities limit our ability to market and sell our products in
China or to finance and operate our business in China, our business could be
adversely affected.
Recent
regulatory reforms in China may limit our ability as an offshore company
controlled by the People’s Republic of China residents to acquire additional
companies or businesses in China, which could hinder our ability to expand
in
China and adversely affect our long-term profitability.
Our
long-term business plan may include an acquisition strategy to increase the
number or types of products we offer, increase our Web site capabilities,
strengthen our sources of supply or broaden our geographic reach. Recent Chinese
government regulations relating to acquisitions of Chinese companies by foreign
entities controlled by Chinese residents may limit our ability to acquire
Chinese companies and adversely affect the implementation of our strategy as
well as our business and prospects.
On
August
8, 2006, China Ministry of Commerce, the State Assets Supervision and
Administration of Commerce, the State Administration of Taxation, the State
Administration of Industry and Commerce, the China Securities Regulatory
Commission and the State Administration of Foreign Exchange jointly promulgated
a new rule entitled “Provisions Regarding Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors” (the “M&A Rules”), which became effective
on September 8, 2006, relating to acquisitions by foreign investors of
businesses and entities in China. The M&A Rules provide the basic framework
in China for the approval and registration of acquisitions of domestic
enterprises in China by foreign investors.
In
general, the M&A Rules provide that if an offshore company controlled by
Chinese residents intends to acquire or take control of a Chinese company,
such
acquisition or transaction will be subject to strict examination by the relevant
foreign exchange authorities. The M&A Rules also state that the approval of
the relevant foreign exchange authorities is required for any sale or transfer
by China residents of a Chinese company’s assets or equity interests to foreign
entities, such as us, for equity interests or assets of the foreign entities.
The
M&A Rules also stress the necessity of protecting national economic security
in China in the context of foreign acquisitions of domestic enterprises. Foreign
investors must comply with comprehensive reporting requirements in connection
with acquisitions of domestic companies in key industrial sectors that may
affect the security of the “national economy” or in connection with acquisitions
of domestic companies holding well-known trademarks or traditional brands in
China. Failure to comply with such reporting requirements that cause, or may
cause, significant impact on national economic security may be terminated by
the
relevant ministries or be subject to other measures as are deemed necessary
to
mitigate any adverse impact.
Our
business operations or future strategy could be adversely affected by the
interpretations of the M&A Rules. For example, if we decide to acquire a
Chinese company, we cannot assure you that we or the owners of such company,
as
the case may be, will be able to complete the necessary approvals, filings
and
registrations for the acquisition. This may restrict our ability to implement
our acquisition strategy and adversely affect our business and prospects.
Further
movements in exchange rates may have a material adverse effect on our financial
condition and results of operations.
At
present, almost all of our sales are denominated in Renminbi. Since 1994, the
conversion of the Renminbi into foreign currencies has been based on rates
set
by the People’s Bank of China, and the exchange rate for the conversion of the
Renminbi to U.S. dollars had generally been stable. However, starting from
July
21, 2005, the Chinese government moved the Renminbi to a managed floating
exchange rate regime based on market supply and demand with reference to a
basket of currencies. As a result, the Renminbi is no longer directly pegged
to
the U.S. dollar. On October 15, 2007, the exchange rate of the U.S. dollar
against the Renminbi was RMB 7.51 per
U.S.
dollar. The exchange rate may become volatile, the Renminbi may be revalued
further against the U.S. dollar or other currencies or the Renminbi may be
permitted to enter into a full or limited free float, which may result in an
appreciation or depreciation in the value of the Renminbi against the U.S.
dollar or other currencies, any of which could have a material adverse effect
on
our financial condition and results of operations.
Governmental
control of currency conversion may affect the ability of our company to obtain
working capital from our subsidiaries located in China and the value of your
investment.
China’s
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency outside of China.
We currently receive all of our revenues in Renminbi. Under our current
structure, our income is primarily derived from payments from Qianbao. Shortages
in the availability of foreign currency may restrict the ability of Qianbao
to
remit sufficient foreign currency to pay dividends or other payments to us,
or
otherwise satisfy its foreign currency denominated obligations. Under existing
Chinese foreign exchange regulations, payments of current account items,
including profit distributions, interest payments and expenditures from
trade-related transactions, can be made in foreign currencies without prior
approval from China State Administration of Foreign Exchange by complying with
certain procedural requirements. However, approval from appropriate government
authorities is required in those cases in which Renminbi is to be converted
into
foreign currency and remitted out of China to pay capital expenses, such as
the
repayment of bank loans denominated in foreign currencies. China’s government
also may at its discretion restrict access in the future to foreign currencies
for current account transactions. If the foreign exchange control system
prevents us from obtaining sufficient foreign currency to satisfy our currency
demands, we may not be able to pay dividends in foreign currencies to our
shareholders.
Qianbao
is subject to restrictions on making payments to us, which could adversely
affect our cash flow and our ability to pay the noteholders and dividends on
our
capital stock.
We
are a
company incorporated in the State of Nevada and do not have any assets or
conduct any business operations other than through our operating subsidiary
in
China. As a result, we will rely entirely on payments or dividends from Qianbao
for our cash flow to fund the payments pursuant to the secured convertible
notes
and our corporate overhead and regulatory obligations. The Chinese government
imposes controls on the conversion of Renminbi into foreign currencies and
the
remittance of currencies out of China. As a result, we may experience
difficulties in completing the administrative procedures necessary to obtain
and
remit foreign currency. Further, if Qianbao incurs debt of its own, the
instruments governing such debt may restrict such subsidiary’s ability to make
payments to us. If we are unable to receive all of the funds we require for
our
operations from Qianbao, we may not have sufficient cash flow to fund our
indebtedness, corporate overhead and regulatory obligations in the United
States. We may be unable to pay dividends on our shares of capital stock.
Uncertainties
with respect to the Chinese legal system could adversely affect our ability
to
enforce our legal rights.
We
conduct our business primarily through Qianbao, our subsidiary in China. Our
operations in China are governed by Chinese laws and regulations. We are
generally subject to laws and regulations applicable to foreign investments
in
China and, in particular, laws applicable to wholly foreign-owned enterprises.
China legal system is based on written statutes. Prior court decisions may
be
cited for reference but have limited precedential value.
Since
1979, Chinese legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
China has not developed a fully-integrated legal system and recently-enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, China legal system is based
in
part on government policies and internal rules (some of which are not published
on a timely basis or at all) that may have a retroactive effect. As a result,
we
may not be aware of our violation of these policies and rules until some time
after the violation. The uncertainties regarding such regulations and policies
present risks that may affect our ability to achieve our business objectives.
If
we are unable to enforce any legal rights we may have under our contracts or
otherwise, our ability to compete with other companies in our industry could
be
materially and adversely affected. In addition, any litigation in China may
be
protracted and result in substantial costs and diversion of resources and
management attention.
It
may be difficult to effect service of process upon us or our directors or senior
management who live in China or to enforce any judgments obtained from
non-Chinese courts.
Our
operations are conducted and our assets are located within China. In addition,
a
majority of our directors and all of our senior management personnel reside
in
China, where all of their assets are located. You may experience difficulties
in
effecting service of process upon us, our directors or our senior management
as
it may not be possible to effect such service of process outside China. In
addition, China does not have treaties with the United States and many other
countries providing for reciprocal recognition and enforcement of court
judgments. Therefore, recognition and enforcement in China of judgments of
a
court in the United States or certain other jurisdictions may be difficult
or
impossible.
Recent
amendments to the corporate income tax law in China may increase the income
taxes payable by our operating subsidiary located in China, which could
adversely affect our profitability.
On
March 16, 2007, the National People’s Congress of China adopted a new
corporate income tax law in its fifth plenary session. The new corporate income
tax law unifies the application scope, tax rate, tax deduction and preferential
policy for both domestic and foreign-invested enterprises. The new corporate
income tax law will be effective on January 1, 2008. According to the new
corporate income tax law, the applicable income tax rate for our operating
subsidiary is subject to change. As the implementation detail has not yet been
announced, we cannot be sure of the potential impact of such new corporate
income tax law on our financial position or operating results.
Risk
Relating to an Investment in Our Securities
Our
common stock is thinly traded and you may be unable to sell at or near “ask”
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
We
cannot
predict the extent to which an active public market for our common stock will
develop or be sustained. However, we do not rule out the possibility of applying
for listing on the Nasdaq Global Market or other exchanges. Our common stock
has
historically been sporadically or “thinly-traded” on the “Over-the-Counter
Bulletin Board,” meaning that the number of persons interested in purchasing our
common stock at or near bid prices at any given time may be relatively small
or
nonexistent. This situation is attributable to a number of factors, including
the fact that we are a small company which is relatively unknown to stock
analysts, stock brokers, institutional investors and others in the investment
community that generate or influence sales volume, and that even if we came
to
the attention of such persons, they tend to be risk-adverse and would be
reluctant to follow an unproven company such as ours or purchase or recommend
the purchase of our shares until such time as we become more seasoned and
viable. As a consequence of this lack of liquidity, the trading of relatively
small quantities of shares by our stockholders may disproportionately influence
the price of our common stock in either direction. The price for our shares
could, for example, decline precipitously in the event a large number of shares
of our common stock is sold on the market without commensurate demand, as
compared to a seasoned issuer that could better absorb those sales without
adverse impact on its share price. We cannot give you any assurance that a
broader or more active public trading market for our common stock will develop
or be sustained.
The
market price for our stock may be volatile and subject to wide fluctuations,
which may adversely affect the price at which you can sell our
shares.
The
market price for our stock may be volatile and subject to wide fluctuations
in
response to factors including the following:
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actual
or anticipated fluctuations in our quarterly operations
results;
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changes
in financial estimates by securities research
analysts;
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changes
in the economic performance or market valuations of other Internet
companies offering prepaid telephone cards and/or online video
games;
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announcements
by us or our competitors of new products, acquisitions, strategic
partnerships, joint ventures or capital
commitments;
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addition
or departure of key personnel;
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·
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fluctuations
of exchange rates between the Renminbi and the U.S.
dollar;
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intellectual
property litigation; and
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general
economic or political conditions in China.
|
In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our stock.
Future
sales of shares of our common stock may decrease the price for such shares.
On
October 4, 2007, we issued 14,000,000 shares of our common stock upon the
conversion of 5,000,000 shares of Series A Convertible Preferred Stock. Although
we are not registering those shares for resale, commencing on October 4, 2008,
these shares will become eligible for sale on the Over-the-Counter Bulletin
Board, under Rule 144 promulgated under the Securities Act of 1933. In addition,
we are registering for resale under this prospectus, up to 7,929,500 shares
of
common stock, which may be sold at any time. We are also required to register
for resale additional shares of our common stock or shares that are issuable
upon exercise of warrants issued to the selling security holders. Once such
shares are registered, they can be freely sold in the public market. If any
of
our stockholders either individually or in the aggregate cause a large number
of
securities to be sold in the public market, or if the market perceives that
these holders intend to sell a large number of securities, such sales or
anticipated sales could result in a substantial reduction in the trading price
of shares of our common stock and could also impede our ability to raise future
capital.
Our
common shares are subject to the "Penny Stock" Rules of the SEC and the trading
market in our securities is limited, which makes transactions in our stock
cumbersome and may reduce the value of an investment in our
stock.
The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the
definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions.
For
any transaction involving a penny stock, unless exempt, the rules
require:
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that
a broker or dealer approve a person's account for transactions
in penny
stocks; and
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· |
the
broker or dealer receive from the investor a written agreement
to the
transaction, setting forth the identity and quantity of the penny
stock to
be purchased.
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In
order
to approve a person's account for transactions in penny stocks, the broker
or
dealer must:
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· |
obtain
financial information and investment experience objectives of the
person;
and
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· |
make
a reasonable determination that the transactions in penny stocks
are
suitable for that person and the person has sufficient knowledge
and
experience in financial matters to be capable of evaluating the
risks of
transactions in penny stocks.
|
The
broker or dealer must also deliver, prior to any transaction in a penny stock,
a
disclosure schedule prescribed by the Commission relating to the penny stock
market, which, in highlight form:
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· |
sets
forth the basis on which the broker or dealer made the suitability
determination; and
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· |
that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
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Generally,
brokers may be less willing to execute transactions in securities subject to
the
"penny stock" rules. This may make it more difficult for investors to dispose
of
our Common shares and cause a decline in the market value of our
stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both
the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account
and
information on the limited market in penny stocks. Accordingly, all of the
foregoing reduces the ability of a shareholder to sell our shares which may
reduce the market price of our stock.
State
securities laws may limit secondary trading, which may restrict the states
in
which and conditions under which you can sell the shares offered by this
prospectus.
Secondary
trading in common stock sold in this offering will not be possible in any state
until the common stock is qualified for sale under the applicable securities
laws of the state or there is confirmation that an exemption, such
as
listing
in certain recognized securities manuals, is available for secondary trading
in
the state. If we fail to register or qualify, or to obtain or verify an
exemption for the secondary trading of, the common stock in any particular
state, the common stock could not be offered or sold to, or purchased by, a
resident of that state. In the event that a significant number of states refuse
to permit secondary trading in our common stock, the liquidity for the common
stock could be significantly impacted thus causing you to realize a loss on
your
investment.
Because
we do not intend to pay any cash dividends on our common stock, our stockholders
will not be able to receive a return on their shares unless they sell
them.
We
intend
to retain any future earnings to finance the development and expansion of our
business. We do not anticipate paying any cash dividends on our common stock
in
the foreseeable future. Unless we pay dividends, our stockholders will not
be
able to receive a return on their shares unless they sell them. There is no
assurance that stockholders will be able to sell shares when
desired.
We
will
not receive any proceeds from the disposition of the shares of common stock
by
the selling security holders or their transferees.
We
are
registering the following shares of our common stock that (i) may be issued
pursuant to secured convertible promissory notes that were issued by us in
connection with a private placement that closed in September 2007; (ii) may
be
issued pursuant to secured promissory notes that will be issued to the selling
security holders indicated below within 5 business days after the Registration
Statement containing this prospectus is declared effective by the Securities
and
Exchange Commission; and (iii) were transferred to the persons indicated below
from a certain consultant engaged by us. Beneficial ownership is determined
in
accordance with Rule 13d-3(d) promulgated by the Commission under the Securities
Exchange Act of 1934. Unless otherwise noted, each person or group identified
possesses sole voting and investment power with respect to the shares, subject
to community property laws where applicable. Each of the selling security
holders (i) purchased the securities covered by this prospectus in the ordinary
course of business, and (ii) at the time of purchase of such securities, the
selling security holder had no agreement or understanding, directly or
indirectly, with any person to distribute such securities. Other than the costs
of preparing this prospectus and a registration fee to the SEC, we are not
paying any costs relating to the sales by the selling security holders. None
of
the selling security holders is a registered broker-dealer or an affiliate
of a
registered broker-dealer.
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Selling Security Holder
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Common Stock
Beneficially
Owned
Before Offering
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Shares of Common
Stock Being
Offered in the
Offering
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Common Stock
Beneficially
Owned After
Offering
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Percent
After
Offering
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|
Alpha
Capital Anstalt
Pradafant
7
9490
Furstentums
Vaduz,
Lichtenstein
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3,003,000
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(1)(2)
|
1,751,750
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(3)
|
1,251,250
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3.91
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%
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Whalehaven
Capital Fund Limited
c/o
FWS Capital Ltd.
3rd
Floor, 14 Par-Laville Road
Hamilton,
Bermuda HM08
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3,003,000
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(1)(3)
|
1,751,750
|
(3)
|
1,251,250
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|
3.91
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%
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|
|
|
|
|
|
|
|
|
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|
Osher
Capital Partners LLC
5
Sansberry Lane
Spring
Valley, NY 10977
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924,000
|
(1)(4)
|
539,000
|
(3)
|
385,000
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|
1.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliezer
Oppenheimer
12/3
Zoltist
Jerusalem,
Israel
|
|
1,333,334
|
(5)(6)
|
1,333,334
|
|
—0—
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natan
Birnack
28
Mizrahi St.
Jerusalem,
Israel
|
|
1,220,333
|
(6)
|
1,220,333
|
|
—0—
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yehezkel
Klohr
13
Sadigura St.
Jerusalem,
Israel
|
|
1,333,333
|
(6)
|
1,333,333
|
|
—0—
|
|
*
|
|
* Less
than
1.0%
| (1) |
Includes
shares of common stock that are issuable to the selling security
holders
following the conversion of interest and/or principal of secured
convertible promissory notes held by the selling security holders,
and
that were purchased in the private placement that closed in September
2007, and the secured convertible promissory notes to be issued to
the
selling security holders on the second closing of the private placement,
scheduled to occur on the 5 business day after the registration statement
containing this prospectus is declared effective by the Securities
and
Exchange Commission, or our payment of the interest and/or principal
of
the secured convertible promissory notes held by the selling security
holder with shares of our common stock and shares of common stock
issuable
upon the exercise of warrants issued in the private placement that
closed
in September 2007.
|
| (2) |
The
shares beneficially owned by Alpha Capital Anstalt (“Alpha Capital”)
before the offering include (a) 500,500 shares of common stock issuable
to
Alpha Capital pursuant to the conversion of interest and/or principal
of
secured convertible promissory notes held by Alpha Capital or our
payment
of the interest and/or principal of the secured convertible promissory
notes held by Alpha Capital; (b) warrants exercisable to purchase
1,001,000 shares of common stock; Also included are shares of common
stock
issuable to Alpha Capital pursuant to notes and warrants that will
be
issued to Alpha Capital at a second closing for the September 2007
private
placement. This second closing is required to occur within five business
days after the registration statement containing this prospectus
is
declared effective by the SEC. At this second closing, Alpha Capital
will
purchase (a) secured convertible promissory notes convertible into
500,500
shares of common stock and (b) warrants exercisable to purchase 1,001,000
shares of common stock. Konrad Ackerman is a director of Alpha Capital
and
has the voting and investment power of the shares of our Common stock
owned by Alpha Capital.
|
| (3) |
The
shares being offered by the selling security holder is equal
to 175% of
the shares issued and issuable upon conversion of the secured
convertible
promissory notes held by the selling security
holder.
|
| (4) |
The
shares beneficially owned by Whalehaven Capital Fund Limited
(“Whalehaven”) before the offering includes (a) 500,500 shares of common
stock issuable to Whalehave pursuant to the conversion of interest
and/or
principal of secured convertible promissory notes held by Whalehaven
or
our payment of the interest and/or principal of the secured convertible
promissory notes held by Whalehaven; (b) warrants exercisable to
purchase
1,001,000 shares of common stock; Also included are shares of common
stock
issuable to Whalehaven pursuant to notes and warrants that will be
issued
to Whalehaven at a second closing for the September 2007 private
placement. This second closing is required to occur within five business
days after the registration statement containing this prospectus
is
declared effective by the SEC. At this second closing, Whalehaven
will
purchase (a) secured convertible promissory notes convertible into
500,500
shares of common stock and (b) warrants exercisable to purchase 1,001,000
shares of common stock. Brian Mazella is the President of Whalehaven
and
has the voting and investment power of the shares of our Common stock
owned by Whalehaven.
|
| (5) |
The
shares beneficially owned by Osher Capital Partners LLC (the “Osher”)
before the offering includes (a) 154,000 shares of common stock issuable
to Osher pursuant to the conversion of interest and/or principal
of
secured convertible promissory notes held by Osher or our payment
of the
interest and/or principal of the secured convertible promissory notes
held
by Osher; (b) warrants exercisable to purchase 308,000 shares of
common
stock; Also included are shares of common stock issuable to Osher
pursuant
to notes and warrants that will be issued to Osher at a second closing for
the September 2007 private placement. This second closing is required
to
occur within five business days after the registration statement
containing this prospectus is declared effective by the SEC. At this
second closing, Osher will purchase (a) secured convertible promissory
notes convertible into 154,000 shares of common stock and (b) warrants
exercisable to purchase 308,000 shares of common stock. Yisroel Kluger
is
the President of Osher and has the voting and investment power of
the
shares of our Common stock owned by Osher.
|
| (6) |
Mr.
Oppenheimer is subject to a lock-up agreement with pursuant to
which he
agreed not to sell any shares of our common stock prior to 365
calendar
days after the registration statement which contains this prospectus
has
been declared effective, or until the secured convertible promissory
notes
are no longer
outstanding.
|
| (7) |
The
selling security holder received the shares from TVH Limited,
a
consultant, who received an aggregate of 6,666,666 shares from
us in
consideration for services
provided.
|
The
selling security holders, which as used herein includes donees, pledgees,
transferees, or other successors-in-interest selling shares of common stock
or
interests in shares of common stock received after the date of this prospectus
from a selling security holder as a gift, pledge, partnership distribution,
or
other transfer, may, from time to time, sell, transfer, or otherwise dispose
of
any or all of their shares of common stock or interests in shares of common
stock on any stock exchange, market, or trading facility on which the shares
are
traded or in private transactions. These dispositions may be at fixed prices,
at
prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale,
or at
negotiated prices.
If
any of
the selling security holders would be identified as a registered broker-dealer
in the selling security holders table above is an “underwriter” within the
meaning of Section 2(11) of the Securities Act of 1933 in connection with the
resale of our securities under this prospectus. Any commissions received by
such
selling security holders and any profit on the resale of the shares of our
common stock (including the shares of common stock issuable upon the exercise
of
the warrants) sold by such security holders while acting as principals will
be
deemed to be underwriting discounts or commissions. Because it is deemed to
be
an underwriter within the meaning of Section 2(11) of the Securities Act of
1933, the selling security holders that are identified as a registered
broker-dealer in the selling security holders table will be subject to
prospectus deliver requirements under the Securities Act.
The
selling security holders may use any one or more of the following methods when
disposing of shares or interests therein:
| |
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
| |
·
|
block
trades in which the broker-dealer will attempt to sell the shares
as
agent, but may position and resell a portion of the block as principal
to
facilitate the transaction;
|
| |
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
| |
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
| |
·
|
privately
negotiated transactions;
|
| |
·
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
|
| |
·
|
broker-dealers
may agree with the selling security holders to sell a specified number
of
such shares at a stipulated price per
share;
|
| |
·
|
a
combination of any such methods of sale;
and
|
| |
·
|
any
other method permitted pursuant to applicable
law.
|
The
selling security holders may, from time to time, pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if
they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock, from time to time, under
this prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act amending the list of selling
security holders to include the pledgee, transferee or other successors in
interest as selling security holders under this prospectus. The selling security
holders also may transfer the shares of common stock in other circumstances,
in
which case the transferees, pledgees, or other successors in interest will
be
the selling beneficial owners for purposes of this prospectus.
In
connection with the sale of our common stock or interests therein, the selling
security holders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
security holders may also sell shares of our common stock short and deliver
these securities to close out their short positions, or loan or pledge the
common stock to broker-dealers that in turn may sell these securities. The
selling security holders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities that require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
aggregate proceeds to the selling security holders from the sale of the common
stock offered by them will be the purchase price of the common stock less
discounts or commissions, if any. Each of the selling security holders reserves
the right to accept and, together with their agents from time to time, to
reject, in whole or in part, any proposed purchase of common stock to be made
directly or through agents. We will not receive any of the proceeds from this
offering. Upon any exercise of the warrants by payment of cash, however, we
will
receive the exercise price of the warrants.
The
selling security holders also may resell all or a portion of the shares in
open
market transactions in reliance upon Rule 144 under the Securities Act of 1933,
provided that they meet the criteria and conform to the requirements of that
rule.
The
selling security holders and any underwriters, broker-dealers, or agents that
participate in the sale of the common stock or interests therein may be
“underwriters” within the meaning of Section 2(11) of the Securities Act. Any
discounts, commissions, concessions, or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the Securities Act.
Selling security holders who are “underwriters” within the meaning of Section
2(11) of the Securities Act will be subject to the prospectus delivery
requirements of the Securities Act.
To
the
extent required, the shares of our common stock to be sold, the names of the
selling security holders, the respective purchase prices and public offering
prices, the names of any agents, dealer or underwriter, any applicable
commissions or discounts with respect to a particular offer will be set forth
in
an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this
prospectus.
In
order
to comply with the securities laws of some states, if applicable, the common
stock may be sold in these jurisdictions only through registered or licensed
brokers or dealers. In addition, in some states the common stock may not be
sold
unless it has been registered or qualified for sale or an exemption from
registration or qualification requirements is available and is complied
with.
We
have
advised the selling security holders that the anti-manipulation rules of
Regulation M under the Exchange Act may apply to sales of shares in the market
and to the activities of the selling security holders and their affiliates.
In
addition, we will make copies of this prospectus (as it may be supplemented
or
amended from time to time) available to the selling security holders for the
purpose of satisfying the prospectus delivery requirements of the Securities
Act. The selling security holders may indemnify any broker-dealer that
participates in transactions involving the sale of the shares against certain
liabilities, including liabilities arising under the Securities
Act.
We
have
agreed to indemnify the selling security holders who are the noteholders against
liabilities, including liabilities under the Securities Act and state securities
laws, relating to the registration of the shares offered by this
prospectus.
We
have
agreed with the selling security holders who are the noteholders to keep the
registration statement of which this prospectus constitutes a part effective
until the earlier of (1) such time as all of the shares covered by this
prospectus have been disposed of pursuant to and in accordance with the
registration statement or (2) the date on which the shares may be sold pursuant
to Rule 144(k) of the Securities Act.
Penny
Stock Regulations
You
should note that our stock is a penny stock. The Securities and Exchange
Commission has adopted Rule 15g-9, which generally defines “penny stock” to be
any equity security that has a market price (as defined) less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
exceptions. Our securities are covered by the penny-stock rules, which impose
additional sales-practice requirements on broker-dealers that sell to persons
other than established customers and “accredited investors.” The term
“accredited investor” refers generally to institutions with assets in excess of
$5,000,000 or individuals with a net worth in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 jointly with their spouse. The penny-stock
rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized-risk disclosure
document in a form prepared by the SEC that provides information about penny
stocks and the nature and level of risks in the penny-stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer’s account. The bid and offer
quotations, and the broker-dealer and salesperson compensation information,
must
be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customer’s
confirmation. In addition, the penny-stock rules require that, prior to a
transaction in a penny stock not otherwise exempt from these rules, the
broker-dealer must make a special written determination that the penny stock
is
a suitable investment for the purchaser and receive the purchaser’s written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for the stock
that is subject to these penny-stock rules. Consequently, these penny-stock
rules may affect the ability of broker-dealers to trade our securities. We
believe that the penny-stock rules discourage investor interest in and limit
the
marketability of our common stock.
Blue
Sky Restrictions on Resale
If
a
selling security holder wants to sell shares of our common stock under this
prospectus in the United States, the selling security holders will also need
to
comply with state securities laws, also known as “Blue Sky laws,” with regard to
secondary sales. All states offer a variety of exemption from registration
for
secondary sales. Many states, for example, have an exemption for secondary
trading of securities registered under Section 12(g) of the Securities Exchange
Act of 1934 or for securities of issuers that publish continuous disclosure
of
financial and non-financial information in a recognized securities manual,
such
as Standard & Poor’s. The broker for a selling security holder will be able
to advise a selling security holder as to which states our common stock is
exempt from registration with that state for secondary sales.
Any
person who purchases shares of our common stock from a selling security holder
under this prospectus who then wants to sell such shares will also have to
comply with Blue Sky laws regarding secondary sales.
We
are
not currently a party in any legal proceedings.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
Directors,
Executive Officers, Promoters, and Control Persons
Each
of
our directors serves for a term of one year or until the successor is elected
at
our annual shareholders' meeting and is qualified, subject to removal by our
shareholders. Each officer serves, at the pleasure of our board of directors,
for a term of one year and until the successor is elected at the annual meeting
of the board of directors and is qualified.
Set
forth
below is the name, age and present principal occupation or employment, and
material occupations, positions, offices or employments for the past five years
of our current directors and executive officers.
|
Name
|
|
Age
|
|
Positions
and Offices Held
|
|
Guo
Fan
|
|
29
|
|
Chairman,
President, CEO, CFO and Director
|
|
Tao
Fan
|
|
35
|
|
Chief
Operating Officer, and Director
|
|
Gordon
Preston
|
|
64
|
|
Director,
Secretary
|
|
Shiqing
Fu
|
|
43
|
|
Director
|
Mr.
Guo Fan
has been
our Chairman, President, CEO and CFO since our incorporation. Since January
2004, Mr. Fan has been the Internet Operations Senior Consultant for ChongQing
Junfang Science Technology, a private computer software company located in
Chongqing, China. In this role, Mr. Fan had developed operating and financial
policies and procedures for the company. From January 2000 through August 2003
Mr. Fan was an officer of Hampstead Players Inc., a company involved in
traveling theater productions. From September 2003 through March 2005, he was
the manager of New Hampshire Fireworks Inc., a major distributor of Chinese
fireworks. Mr. Fan received his Associate in Science Degree from the New
Hampshire Technical Institute (NHTI) in August 1998.
Mr.
Tao Fan
has been
our chief operating officer since February 1, 2007 and has been a director
since
April 5, 2007. He 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 Chongqing Yahu Information Development Co., Ltd. (“Yahu”).
Prior to the acquisition of Qianbao by us, Yahu was the principal shareholder
of
Qianbao. Over the past five years, Mr. Tao Fan has served as a senior
operations consultant for several Chinese corporations. These
corporations include but are not limited to Chongqing Wanguo Shareholding
Co., Ltd., Chongqing Ice Water Ltd., and Chongqing Shuanggui Industrial Garden
Ltd. Mr. Tao Fan studied in China Northern Industrial University from 1991
to 1993, majoring in English and Information Technology
Mr.
Gordon Preston
has been
a Director and our secretary since our incorporation. Mr. Preston is a
mechanical engineer with a broad international work experience. Since 2003,
Mr.
Preston was Elected Selectman Barnstead, New Hampshire for a three year term.
Mr. Preston is focusing his efforts in this capacity on helping the community
develop and implement an economic recovery plan. From May 1992 through 2000
he
served as Marketing Director of Precious Metal Industries Ltd. In this position,
Mr. Preston was responsible for dealing with refinery contracts throughout
the
Soviet Union and Eastern Europe. In 2000 he established Hampstead Stage Co.
in
New Hampshire, a non-profit company engaged in traveling theater production.
Gordon initially obtained Degree in Mechanical Engineering (HND) in the United
Kingdom at Derby University in 1961.
Ms.
Shiqing Fu
has been
a director of Pay88 since September 5, 2006. Ms. Fu is a licensed accountant
practicing in Chongqing, China. From 2001 until February 2004, Ms. Fu served
as
Vice General Manager of Chongqing Deheng Securities Ltd., where she was
responsible for the day to day operations. In February 2004 Ms. Fu assumed
her
current position of General Manager of Chongqing Jiarun Accounting Office Ltd.,
where her role has been to manage operations of the company.
There
are
no family relationships among any of the officers and directors, except that
Mr.
Tao Fan and Mr. Guo Fan are brothers.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table lists, as of October 15, 2007, the number of shares of common
stock beneficially owned by (i) each person or entity known to us to be the
beneficial owner of more than 5% of the outstanding common stock; (ii) each
of
our officers and directors; and (iii) all officers and directors as a group.
Information relating to beneficial ownership of common stock by our principal
shareholders and management is based upon information furnished by each person
using "beneficial ownership" concepts under the rules of the Securities and
Exchange Commission. Under these rules, a person is deemed to be a beneficial
owner of a security if that person has or shares voting power, which includes
the power to vote or direct the voting of the security, or investment power,
which includes the power to vote or direct the voting of the security. The
person is also deemed to be a beneficial owner of any security of which that
person has a right to acquire beneficial ownership within 60 days. Under the
Securities and Exchange Commission rules, more than one person may be deemed
to
be a beneficial owner of the same securities, and a person may be deemed to
be a
beneficial owner of securities as to which he or she may not have any pecuniary
beneficial interest. Except as noted below, each person has sole voting and
investment power.
The
percentages below are calculated based on 30,766,666 shares of our common stock
issued and outstanding as of October 15, 2007. Except for the warrants and
secured convertible promissory notes issued in the private placement that closed
in September 2007, we do not have any other outstanding options, warrants or
other securities exercisable for or convertible into shares of our common
stock.
|
Name of Beneficial Owner
|
|
Number of Shares
and Nature
of Beneficial
Ownership
|
|
Percent of Common
Stock
Outstanding
|
|
|
Guo
Fan
c/o
Pay88, Inc.
1053
North Barnstead Road
Barnstead,
NH 03225
|
|
7,600,000
|
|
24.7
|
%
|
| |
|
|
|
|
|
|
Tao
Fan
c/o
Chongqing Qinbao Technology Ltd.
No.
78 1st
Yanghe Village
Jiangbei
District, Chongqing
China
|
|
1,393,000
|
|
4.5
|
%
|
| |
|
|
|
|
|
|
Gordon
Preston
c/o
Pay88, Inc.
1053
North Barnstead Road
Barnstead,
NH 03225
|
|
0
|
|
*
|
|
| |
|
|
|
|
|
|
Shiqing
Fu
c/o
Chongqing Qinbao Technology Ltd.
No.
78 1st
Yanghe Village
Jiangbei
District, Chongqing
China
|
|
270,000
|
|
*
|
|
| |
|
|
|
|
|
|
All
directors and executive officers as a group (four persons)
|
|
8,293,000
|
|
29.2
|
%
|
*
Less
than one percent.
DESCRIPTION
OF SECURITIES
Security
Holders
At
October 15, 2007, there were 30,766,666 shares of common stock outstanding
which
were held by 570 stockholders of record.
Transfer
Agent
We
have
appointed Island Stock Transfer, with offices at 100 Second Avenue South, Suite
104N, St. Petersburg, Florida 33701, phone number (727) 289-0010, as transfer
agent for our shares of common stock. The transfer agent is responsible for
all
record-keeping and administrative functions in connection with the common
shares.
Dividends
Dividends,
if any, will be contingent upon our revenues and earnings, if any, and capital
requirements and financial conditions. The payment of dividends, if any, will
be
within the discretion of the Board of Directors. We presently intend to retain
all earnings, if any, and accordingly the Board of Directors does not anticipate
declaring any dividends prior to a business combination.
The
following description of our capital stock is a summary and is qualified in
its
entirety by the provisions of our Articles of Incorporation which has been
previously filed by us as an exhibit to our registration statement on Form
SB-2,
Commission File No. 333-129018, filed on October 14, 2005.
Common
Stock
We
are
authorized to issue 100,000,000 common stock with par value of $.001 per share,
of which 30,766,666 shares are issued and outstanding as of October 15, 2007.
Holders of shares of our common stock are entitled to one vote per share on
all
matters to be voted upon by the stockholders generally. The holders of shares
of
common stock have no preemptive, conversion, subscription or cumulative voting
rights. Each holder of the Company's common stock is entitled to one vote for
each share held of record on all matters submitted to the vote of stockholders,
including the election of directors.
Subject
to the rights of holders of shares of Preferred Stock in the future, if any,
holders of our common stock are entitled to share equally on a per share basis
in such dividends as may be declared by our Board of Directors out of
funds
legally available therefore. There are presently no plans to pay dividends
with
respect to our common stock. Upon our liquidation, dissolution or winding up,
after payment of creditors and the holders of any of our shares of Preferred
Stock, if any, our assets will be divided pro rata on a per share basis among
the holders of our common stock. The common stock is not subject to any
liability for further assessments.
Preferred
Stock
We
are
authorized to issue 5,000,000 shares of preferred stock. Our board of directors
has the right, without shareholder approval, to issue preferred shares with
rights superior to the rights of the holders of shares of common stock. As
a
result, shares of preferred stock could be issued quickly and easily, negatively
affecting the rights of holders of common stock and could be issued with terms
calculated to delay or prevent a change in control or make removal of management
more difficult. Because we may issue up to 5,000,000 shares of preferred stock
in order to raise capital for our operations, your ownership interest may be
diluted which results in your percentage of ownership in us decreasing.
On
September 5, 2005, we filed a Certificate of Designation that fixed the
designation, powers, preferences, and rights for 5,000,000 shares of Series
A
Convertible Preferred Stock. The holders of the Series A Convertible Preferred
Stock are entitled to receive dividends, on as converted basis, when and as
paid
to the holders of the common stock. Each share of our Series A Convertible
Preferred Stock is convertible into 2.8 shares of our common stock. The
conversion ratio of the Series A Convertible Preferred Stock will be
proportionately adjusted in the event of stock split, reverse stock split,
stock
dividend, a capital reclassification, reorganization or otherwise.
In
the
event that we wind up our operations, dissolve or liquidate, the holders of
the
Series A Convertible Preferred Stock will have first priority to the
distribution of assets over the common stock, including a preference payment
of
$0.01 per share plus payment of all accumulated but unpaid dividends and
distributions.
The
holders of shares of Series A Convertible Preferred Stock are entitled to vote
together with the holders of the common stock, as a single class, upon all
matters submitted to holders of common stock for a vote. Each share of Series
A
Convertible Preferred Stock will carry a number of votes equal to the number
of
shares of common stock issuable as if converted at the record date.
On
September 5, 2006, 4,950,000 shares of Series A Convertible Preferred Stock
were
issued to Chongqing
Yahu Information Development Co., Ltd. and
50,000 shares of Series A Convertible Preferred Stock to Ying Bao. On October
3,
2007, all 5,000,000 shares of Series A Convertible Preferred Stock were
converted into an aggregate of 14,000,000 shares of our common stock. There
are
currently no shares of Series A Convertible Preferred Stock issued and
outstanding.
On
October 3, 2007, Pay88 issued 14,000,000 shares of common stock upon conversion
of 5,000,000 shares of our Series A Convertible Preferred Stock that we issued
to Chongqing Yahu Information Development Co and Mr. Ying Bao. We were required
to cause the conversion of our Series A Convertible Preferred Stock pursuant
to
the Subscription Agreement we entered into with the investors on September
12,
2007. As a result of Chongqing Yahu Information Development Co., conversion
of
the Series A Preferred Stock and subsequent distribution of such shares to
its
shareholders, Mr. Tao Fan, our Chief Operating Officer and a director, received
an additional 700,000 shares of our common stock. The issuance of our common
stock upon the conversion of the Series A Preferred Stock was exempt from
registration pursuant to an exemption from registration provided by Section
4(2)
of the Securities Act of 1933, as amended.
Class
A Warrants and Class B Warrants
On
September 12, 2007, we entered into Subscription Agreements with 3 accredited
investors, pursuant to which we issued to these investors Class A warrants
and
Class B warrants that, in the aggregate, are exercisable to purchase 4,620,000
shares of our common stock, subject to adjustments for certain issuances and
transactions
Set
forth
below is information concerning the Class A and Class B warrants.
Exercise
Price and Term. The
Class
A warrants and the Class B warrants are exercisable, without any vesting, until
September 12, 2012. The Class A warrants are exercisable to purchase shares
of
our common stock at an exercise price of $0.81, and the Class B warrants are
exercisable to purchase shares of our common stock at an exercise price of
$1.13.
Cashless
Exercise.
On and
after March 12, 2008, if there is not an effective registration statement
covering the resale of the shares of common stock underlying the Class A
warrants and the Class B warrants, then the Class A warrants and the Class
B
warrants may be exercised using a cashless exercise procedure.
Transferability.
The
Class A warrants and the Class B warrants are transferable subject to compliance
with applicable securities laws.
Adjustments.
The
exercise price and the number of shares of common stock issuable upon the
exercise of the Class A warrants and the Class B warrants are subject to
adjustments in the event of a stock split, reverse stock split,
reclassifications of our common stock or stock dividend. In such event, the
exercise price and the number of shares of our common stock issuable upon the
exercise of each Class A warrant and Class B warrant will be adjusted by us
so
that the number of shares of our common stock that the holder of the Class
A
warrants and the Class B warrants would have received if such holder had
exercised his or her Class A warrants and Class B warrants on the record date
fixed for such subdivisions, combinations, reclassifications or stock
dividend.
Subsequent
Equity Sales.
In the
event that we sell or offer to sell our common stock at price per share less
than the exercise price of the Class A warrants or the Class B warrants
(“Dilutive Issuance”), then the (i) exercise price of the Class A warrant and/or
the Class B warrant (as the case may be) will be reduced to the price at which
we offered the stock in the Dilutive Issuance. Additionally, the number of
shares issuable upon the exercise of the Class A warrants and/or the Class
B
warrants (as the case may be) will be proportionately increased so that we
will
still receive the same aggregate proceeds from the exercise of the Class A
warrants and/or the Class B warrants (as the case may be) after the exercise
price reduction as we would have received prior to the exercise price
adjustment.
Merger,
Asset Sale, Etc. If
we
effect any merger, consolidation, any sale of all or substantially all of our
assets or if any tender offer or exchange offer is completed pursuant to which
our stockholders are permitted to tender or exchange their shares for other
securities, cash or property, or we consummate a stock purchase or other
business combination that results in the acquisition of more than the 50% of
our
outstanding shares of common stock of if any "person" or "group" becomes the
"beneficial owner", directly or indirectly, of 50% of the outstanding shares
of
our common stock or we effect any reclassification of our common stock or any
compulsory share exchange pursuant to which our common stock is effectively
converted into or exchanged for other securities, cash or property, then, the
holders of the Class A warrants and the Class B warrants will have the right
to
receive the consideration they would have received in such transaction had
they
exercised their Class A warrants and Class B warrant as of the date on which
our
stockholders became entitled to receive the consideration for such transaction.
In the event of any all cash transaction, an issuer tender offer or a
transaction involving an entity that acquirer is not traded on an exchange
or on
a Nasdaq market, then the holders of the Class A warrants and the Class B
warrants, will be entitled to receive cash equal to the value of the Class
A
warrants and Class B warrants as determined using the Black-Scholes option
pricing formula.
Dissolution.
In the
event we dissolve following the transfer of all or substantially all of out
properties or assets, then, prior to such dissolution, we will deliver, at
our
expense, the stock and other securities and property (including cash, where
applicable) receivable by the holder of the Class A warrants and Class B
warrants after the effective date of such dissolution, to a bank or trust
company having its principal office in New York, NY, as trustee for the
holder of the Class A warrants and Class B warrants. Such property shall be
delivered to the holders of the Class A warrants and Class B warrants only
upon
payment of the exercise price of the Class A warrants and Class B
warrants.
Registration.
We have
agreed to register for resale, at our expense, the shares of common stock
underlying the Class A warrants and the Class B warrants. We are subject to
a
penalty of 2% of the aggregate amount invested by the holders of the Class
A
warrants and Class B warrants for each 30-day period or pro rata for any portion
following certain non-registration events. We must keep this resale registration
statement effective for a period of two (2) years.
Holder
of any Class A warrants and Class B warrants Not a Stockholder.
The
Class
A warrants and the Class B warrants do not confer upon the holders any voting,
dividends or other rights as our stockholders.
Secured
Convertible Promissory Notes
Maturity
Date.
All
accrued but unpaid interest and any other amounts due of secured convertible
promissory notes are due and payable on March 12, 2009 (or earlier upon
acceleration following an event of default)
Interest
Rate.
The
Notes bear interest at the rate of prime plus 4% per annum, payable in either
(a) cash equal to 110% of 8.33% of the initial principal amount of the Note
or
(b) absent any event of default, in shares of our common stock at the lesser
of
(i) $1.00 per share or (ii) 80% of the average of the closing bid prices of
our
common stock for the 20 trading days preceding the payment date. 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
Conversion.
All
of
the principal and accrued interest on the secured convertible promissory notes
is convertible into shares of our common stock at the election of the investors,
at any time, at the conversion price of $1.00 per share (subject to adjustment
for certain issuances, transactions or events).
Interest
Payments and Penalties.
Payments
of interest and principal commence on March 12, 2008. The secured convertible
promissory notes contain default events which, if triggered and not timely
cured
(if curable), will result in a default interest rate of an additional 5% per
annum. In addition, we have to pay the investors 120% plus accrued interest
of
the outstanding principal amount if the shares of our common stock cease to
be
eligible for quotation on the Bulletin Board, we sell substantially all of
our
assets or Guo Fan ceases to be our Chief Executive Officer. In the event the
closing price of our common stock for the ten trading days preceding the due
date for interest payments is equal to or greater than 200% of the conversion
price of the secured convertible promissory notes, then the Company may not
elect to pay the corresponding monthly amount with cash but must instead pay
with shares of common stock valued at the fixed conversion price.
Security.
The
obligations under the secured convertible promissory notes are secured by our
assets, the assets of our wholly-owned subsidiary Qianbao, a pledge of all
the
shares we hold in Qianbao and personal guaranties of Guo Fan, our Chief
Executive Officer, and Tan Fan, our Chief Operating Officer.
Registration.
We have
agreed to register for resale, at our expense, the shares of common stock
underlying the secured convertible promissory notes as well as the shares of
common stock that we may issue in payment of interest. We are subject to a
penalty of 2% of the aggregate amount invested by the holders of the secured
convertible promissory notes for each 30-day period or pro rata for any portion
following certain non-registration events. We must keep this resale registration
statement effective for a period of two (2) years.
Redemption.
If we
are prohibited from issuing shares of common stock or if there is an event
of
default under the secured convertible promissory note, or we have a change
of
control or we liquidate, then, at the election of each note holder, we must
pay
120% of the accrued interest multiplied by the outstanding principal amount
of
such investor’s secured convertible promissory note. Upon receipt of the
mandatory redemption payment, such investor’s note will be deemed paid. For
purposes of the redemption, a “change of control” means that we no longer have a
class of stock listed, we become a subsidiary of another entity, Mr. Guo Fan
is
not our President and CEO or we sell substantially all of our
assets.
Conversion
Limitation.
No
holder may convert (including a mandatory conversion) on any date that amount
of
the principal of the secured convertible promissory note or interest that would
result in the holder and its affiliates having a beneficial ownership of more
than 4.99% of the outstanding shares of our common stock on such conversion
date. Beneficial ownership is determined in accordance with Section 13(d) of
the
Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder.
The holder of a secured convertible promissory note may waive the conversion
limitation described above, in whole or in part, upon and effective after 61
days prior written notice to us to increase such percentage to up to
9.99%.
Adjustments.
The
conversion price of the secured convertible promissory notes and the number
and
kind of shares or other securities to be issued upon conversion are subject
to
adjustment from time to time upon the happening of certain events as
follows:
Merger,
Sale of Assets, etc.
If we
effect any merger, consolidation, any sale of all or substantially all of our
assets or if any tender offer or exchange offer is completed pursuant to which
our stockholders are permitted to tender or exchange their shares for other
securities, cash or property, or we consummate a stock purchase or other
business combination that results in the acquisition of more than the 50% of
our
outstanding shares of common stock of if any "person" or "group" becomes the
"beneficial owner", directly or indirectly, of 50% of the outstanding shares
of
our common stock or we effect any reclassification of our common stock or any
compulsory share exchange pursuant to which our common stock is effectively
converted into or exchanged for other securities, cash or property, then the
holders of the secured convertible promissory notes will have the right to
receive the consideration they would have received in such transaction had
they
converted the outstanding principal and accrued but unpaid interest of their
secured convertible promissory notes as of the date on which our stockholders
became entitled to receive the consideration for such transaction.
Reclassification,
etc.
If we,
by reclassification or otherwise, change our common stock into the same or
a
different number of securities of any class or classes, then the holders of
the
secured convertible promissory notes will have the right to receive the adjusted
number of securities they would have received in such transaction had they
converted the outstanding principal and accrued but unpaid interest of their
secured convertible promissory notes as of the date on which our stockholders
became entitled to receive such adjusted number of securities for such
transaction.
Stock
Splits, Combinations and Dividends.
The
conversion price and the number of shares of common stock issuable upon the
conversion of the secured convertible promissory notes are subject to
adjustments in the event of a stock split, reverse stock split,
reclassifications of our common stock or stock dividend. In such event, the
conversion price will be proportionately reduced in case of subdivision of
shares of our common stock or a stock dividend or proportionately increased
in
the case of combination of shares of our common stock.
Subsequent
Equity Sales.
In the
event that we sell or offer to sell our common stock at price per share less
than the conversion price of the secured convertible promissory note (“Dilutive
Issuance”), then the conversion price of the secured convertible promissory
notes will be reduced to the price at which we offered the stock in the Dilutive
Issuance.
We
will
issue additional secured convertible promissory notes in the principal amount
of
$1,155,000 and an aggregate of 2,310,000 additional warrants on or before the
fifth business day after this registration statement containing this prospectus
is declared effective by the Securities and Exchange Commission. We plan to
use
the net proceeds of the secured convertible promissory notes (including the
additional notes) to expand our operations.
INTEREST
OF NAMED EXPERTS AND COUNSEL
No
expert
or counsel named in this prospectus as having prepared or certified any part
of
this prospectus or having given an opinion upon the validity of the securities
being registered or upon other legal matters in connection with the registration
or offering of the common stock was employed on a contingency basis, or had,
or
is to receive, in connection with the offering, a substantial interest, direct
or indirect, in the registrant or any of its parents or subsidiaries. Nor was
any such person connected with the registrant or any of its parents or
subsidiaries as a promoter, managing or principal underwriter, voting trustee,
director, officer, or employee.
The
consolidated financial statements of Pay88, Inc. and subsidiary for the period
of April 24, 2006 (inception) to December 31, 2006 have been included herein
and
in the prospectus in reliance upon the report of Wolinetz,
Lafazan & Company, P.C.,
an
independent registered public accounting firm, appearing elsewhere herein,
given
upon the authority of said firm as experts in accounting and
auditing.
Certain
legal matters in connection with this offering and Registration Statement are
being passed upon by the law firm David Lubin & Associates, PLLC, Valley
Stream, New York.
DISCLOSURE
OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Our
Articles of Incorporation, as amended, eliminate a director’s personal liability
to the fullest extent permitted by Article
78 of the Nevada Revised Statutes.
The
elimination of personal liability does not eliminate a director’s duty of care.
Moreover, the provisions do not to claims against a director for violations
of
certain laws, including federal securities laws.
Our
Articles of Incorporation, as amended, also contains provisions to indemnify
the
directors, officers, employees or other agents to the fullest extent permitted
by Article 78 of the Nevada Revised Statutes. These provisions may have the
practical effect in certain cases of eliminating the ability of shareholders
to
collect monetary damages from directors and officers. We believe that these
provisions will assist us in attracting or retaining qualified individuals
to
serve as directors and officers.
Our
By-laws provide to the fullest extent permitted by law, our directors or
officers, former directors and officers, and persons who act at our request
as a
director or officer of a body corporate of which we are a shareholder or
creditor shall be indemnified by us. We believe that the indemnification
provisions in our By-laws are necessary to attract and retain qualified persons
as directors and officers.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
(the
"Act" or "Securities Act") may be permitted to directors, officers or persons
controlling us pursuant to the foregoing provisions, or otherwise, we have
been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
ORGANIZATION
WITHIN LAST FIVE YEARS
We
were
incorporated on March 22, 2005 under the name "Pay88, Ltd." in the State of
New
Hampshire. We subsequently decided to reincorporate in the State of Nevada
by
merging with and into Pay88, Inc., a Nevada corporation formed for such purpose
on July 7, 2005. Such merger was effectuated on August 9, 2005. Through our
wholly owned subsidiary, Chongqing Qianbao Technology Ltd. , a Chinese limited
liability company, our wholly owned subsidiary, we are currently engaged in
the
sale of prepaid telephone and game cards through its internet website,
http://www.iamseller.com. We currently offer for sale on such website over
800
software products, including cooking and language software and prepaid game
cards for online games, as further described below.
Our
History
Prior
to
our acquisition of Chongqing Qianbao Technology Ltd., a Chinese limited
liability company, on September 6, 2006, our business focus was to assist the
large population of Chinese expatriates within the United States seeking to
wire
transfer money to China. During such time period, our operations were focused
on
organizational, start-up, and fund raising activities and entering into an
agreement with Chongqing Yahu Information Development Co., Ltd., as described
below. We never commenced our proposed business operations or generated revenues
in connection with such proposed operations. We presently have no intention
to
engage in the money transfer business. Nonetheless, we may in the future resume
our plans to develop this U.S.-China money transfer business.
In
furtherance of our intentions to enter into the money transfer business between
the U.S. and China, on August 3, 2005, we entered into a five year Licensing
and Service Agreement
with
Chongqing Yahu Information Development Co., Ltd. Pursuant to such agreement,
Chongqing Yahu Information Development Co., Ltd. agreed to provide the system
software to us. Mr. Tao Fan, a brother of Mr. Guo Fan, a director and officer
of
Pay88, is the Chief Executive Officer of Chongqing Yahu Information Development
Co., Ltd. and owns 5% of its issued shares of capital stock. Chongqing Yahu
Information Development Co., Ltd. is a member of CECA (China Electronic Commerce
Association), which is a nationwide organization in the electronic commerce
field in China. Chongqing Yahu Information Development Co., Ltd. has over 650
commercial users and over 250,000 individual users. The agreement provides
for
two types of services services to be provided to us by Chongqing Yahu
Information Development Co., Ltd. The first type of service is the provision
of
all proprietary software needed to effectuate fund transfers between the United
States 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
us by Chongqing Yahu Information Development Co., Ltd. for a licensing fee
that
is based upon 20% of the gross fund transfer revenues. The fee is payable on
a
quarterly basis. The use of the software will enable us to provide wire
transfers from the United States to China.
On
September 5, 2006, we acquired Qianbao pursuant to a Share Purchase Agreement,
dated as of such date, among Pay88, Qianbao, and Qianbao’s two shareholders,
Ying Bao and Chongqing Yahu Information Development Co., Ltd. Pursuant to such
Share Purchase Agreement, Pay88 agreed to acquire Qianbao at a closing held
simultaneously therewith by purchasing from Qianbao’s shareholders all of their
respective shares of Qianbao’s registered capital stock, which represented 100%
of the issued and outstanding registered capital stock of Qianbao. In
consideration therefor, Pay88 agreed to issue to the Qianbao shareholders an
aggregate of 5,000,000 shares of the Company’s Series A Convertible Preferred
Stock, to be allocated between the Qianbao shareholders as follows: 4,950,000
shares to Chongqing Yahu Information Development Co., Ltd. and 50,000 shares
to
Ying Bao. Mr. Tao Fan, a brother of Mr. Guo Fan, a director and officer of
Pay88, is the Chief Executive Officer of Chongqing Yahu Information Development
Co., Ltd. and owns 5% of its issued shares of capital stock.
On
October 3, 2007, we issued 14,000,000 shares of common stock upon conversion
of
5,000,000 shares of our Series A Convertible Preferred Stock that we issued
to
Chongqing Yahu Information Development Co and Mr. Ying Bao. We were required
to
cause the conversion of our Series A Convertible Preferred Stock pursuant to
the
Subscription Agreement we entered into with the investors on September 12,
2007
and Ms. Shiqing Fu, a director, received 270,000 shares of our common stock.
As
a result of Chongqing Yahu Information Development Co., conversion of the Series
A Preferred Stock and subsequent distribution of such shares to its
shareholders, Mr. Tao Fan, our Chief Operating Officer and a director, received
an additional 700,000 shares of our common stock. The issuance of our common
stock upon the conversion of the Series A Preferred Stock was exempt from
registration pursuant to an exemption from registration provided by Section
4(2)
of the Securities Act of 1933, as amended.
Qianbao
was incorporated on April 24, 2006, under the name "Chongqing Qianbao Technology
Ltd." under the laws of the People's Republic of China. Qianbao engages in
the
sale of prepaid telephone and game cards on its internet website, www.iamseller.com,
as
further described below. On July 3, 2006, Qianbao purchased an office located
at
No. 78 1st Yanghe Village, Jiangbei District, Chongqing, China for a purchase
price of approximately $393,000. Such office serves as Qianbao's executive
offices. Although we own the three units of office space, the underlying land
is
owned by the People’s Republic of the State of China. Our right to use the land
expires in 2037 and may be extended at that time.
Our
Business
Through
our wholly-owned subsidiary, Qianbao, we are currently engaged in the sale
of
prepaid telephone and game cards through Qianbao's website, www.iamseller.com.
We have determined to focus all of our resources on the development of such
business, in addition to the development of our web distribution platform.
We
presently have no intention to engage in the money transfer business.
Nonetheless, we may in the future resume our plans to develop the money transfer
business, as discussed below.
Qianbao’s
Business
Qianbao
sells prepaid telephone cards and prepaid online video games on its website,
www.iamseller.com, to consumers or retailers visiting such website. At present,
the main products offered for sale on such website include the following:
prepaid game cards, which allow the holder thereof to play online video games
for the designated allotted time; and prepaid telephone calling cards. We also
hope to add for sale on such website prepaid study cards, which allow the holder
thereof to use online software that assists in the learning of various subjects
including Chinese, English and cooking.
Qianbao
does not manufacture any of the products offered for sale on its website.
Qianbao purchases such products from third-party suppliers and thereafter
resells them on Qianbao’s website. Qianbao also has oral agreements with some
third-party suppliers to make their products available for sale on Qianbao’s
website, and Qianbao earns a commission on such sales. Such commission is a
percentage of the revenues generated from such sales. The specific amount of
such percentage is negotiated between Qianbao and each such supplier, but
generally ranges from 1% to5 %. We have oral agreements with following companies
to supply products to be sold on Qianbao's website: Shandong Tianfu Online
Platform (supplier of game cards); Sifang Online Distribution Platform (supplier
of game cards); Chongqing Digital World (supplier of phone cards); Chongqing
E
Net Chongqing Sifang (supplier of phone cards); Chongqing Taoxing (supplier
of
study cards); and Chongqing Dezheng Technology Development. We have no formal
agreements with any of these companies.
In
April
2007, we entered into a Sales Area Distributor Agreement with Chongqing Telecom
Value-Added Service Center (“CTVAC”) for the distribution and direct sale of
Rainbow Island digital online game cards. Pursuant to our agreement with CTAVC,
we will purchase the game cards at a discounted rate of 30% of the book value
of
the digital cards and then resell them on Qianbao’s website.
Qianbao
currently has 48 employees, all of whom are employed on a full-time basis.
Twenty employees are involved in technical operations of the company, twenty
are
involved in sales and marketing, and eight are involved in human resources
and
finances. Our employees have no long term commitment to the Company. All
employees are employed pursuant to our standard employment contract, which
sets
forth the term of the employment, duties, compensation, and other such matters.
In addition, all of our employees are required to sign our standard
confidentiality agreement, pursuant to which they agree to maintain the
confidentiality of all proprietary information of our company. We do not believe
that any of these contracts are material to our business or
operations.
Chinese
Online Multiplayer Game Industry
The
prepaid game cards has helped to advance the online multiplayer game industry
and address an industry wide problem, piracy. In China, games were being pirated
as quickly as they were being released to market. In order to address this
problem in an effective and profitable manner, game companies dropped the price
of the game software package and created the pay to play system. In order to
play, players have to buy pre-paid cards from retail kiosks, internet cafes
or
more recently, online. With the card, a player can open an account at the game’s
website and enter a special access code. The prepaid card would enable a player
to play for a specific amount of time.
Pursuant
to the Statistical Survey on Internet Development in China 2007, it is expected
that given the rapid development of internet usuage and broadband penetration
in
China, Chinese online multiplayer game industry will be one of the fastest
growing industry in the world. At present, china is number 2 in the global
online multiplayer game market and the trend shows that the numbers will
continue to rise indicating that online game market has tremendous growth
potential.
Chinese
Telecom Industry
According
to the Statistical Survey Report on Internet Development in China 2007,
in
recent
years China has emerged as the world’s fastest growing telecom market with 388
million cell-phone users. Of those 388 million users, 200 million are pre-paid
subscribers. The prepaid system is preferred by many because of its simple
to
use formula. The consumer doesn’t have to worry about connection fees, getting
tied into long term contracts, or monthly fees and the prepaid phone card also
tend to have more competitive rates.
Pay88
distributes the prepaid phone cards for all major Chinese Telecom companies
including China Mobile, China Unicom and China Telecom.
Competition
in Multiplayer Game Time
Qianbao
has many competitors which have financial, technical and marketing resources
significantly greater than those of Qianbao. Qianbao's major competitors include
Yun Web, Cobuy, Star software, Jun Web, 17173, China card Net and gotogame.
All
of these competitors have been in operation for over two years, while we began
our business this year.
Our
annual report is required to contain audited financial statements. We are not
required to deliver an annual report to security holders and will not
automatically deliver a copy of the annual report to our security holders unless
a request is made for such delivery.
We
file
current, quarterly and annual reports with the SEC on forms 8-K, 10-QSB, and
10-KSB. The SEC maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC at http://www.sec.gov. Copies of such material
can
be obtained from the public reference section of the SEC at prescribed rates.
Statements contained in this prospectus as to the contents of any contract
or
other document filed as an exhibit to the registration statement are not
necessarily complete and in each instance reference is made to the copy of
the
document filed as an exhibit to the registration statement, each statement
made
in this prospectus relating to such documents being qualified in all respect
by
such reference.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Forward-Looking
Statements
The
following discussion should be read in conjunction with our financial
statements, which are included elsewhere in this prospectus. We and our
representatives may, from time to time, make written or verbal forward-looking
statements, including statements contained in our filings with the United States
Securities and Exchange Commission and in our reports to shareholders.
Generally, the inclusion of the words “believe”, “expect”, “intend”, “estimate”,
“anticipate”, “will”, and similar expressions or the converse thereof, identify
statements that constitute “forward-looking statements”.
These
forward-looking statements are subject to uncertainties and other factors that
could cause actual results to differ materially from such statements as a result
of a number of risks and uncertainties including: (a) those risks and
uncertainties related to general economic conditions, (b) whether we are able
to
manage our planned growth efficiently and operate profitable operations, (c)
whether we are able to generate sufficient revenues or obtain financing to
sustain and grow our operations, and (d) whether we are able to successfully
fulfill our primary requirements for cash.
For
the quarter ended June 30, 2007
Overview
Pay88
was
incorporated on March 22, 2005 under the name “Pay88, Ltd.” in the State of New
Hampshire. We subsequently reincorporated in the State of Nevada by merging
with
and into our wholly-owned subsidiary, Pay88, Inc., a Nevada corporation formed
for such purpose on July 7, 2005. Such merger was effectuated on August 9,
2005.
From the date of our incorporation until September 6, 2006, we were focused
on
becoming involved in the business of facilitating money transfers from the
United States to China. We never commenced our proposed business operations
or
generated revenues in connection with such proposed operations.
On
September 5, 2006, we acquired our wholly-owned subsidiary, Chongqing Qianbao
Technology Ltd. (“Qianbao”), a limited liability company organized on April 24,
2006 under the laws of the People's Republic of China. Such acquisition was
consummated pursuant to a Share Purchase Agreement, dated as of September 5,
2006, among Pay88, Qianbao, and Qianbao’s two shareholders, Ying Bao and
Chongqing Yahu Information Development Co., Ltd. Pursuant to such Share Purchase
Agreement, Pay88 acquired Qianbao by purchasing from Qianbao’s shareholders all
of their respective shares of Qianbao’s registered capital stock, which
represented 100% of the issued and outstanding registered capital stock of
Qianbao. In consideration therefor, Pay88 issued to the Qianbao shareholders
an
aggregate of 5,000,000 shares of the Company’s Series A Convertible Preferred
Stock, to be allocated between the Qianbao shareholders as follows: 4,950,000
shares to Chongqing Yahu Information Development Co., Ltd. and 50,000 shares
to
Ying Bao. Mr. Tao Fan, a brother of Mr. Guo Fan, a director and officer of
Pay88, is the Chief Executive Officer of Chongqing Yahu Information Development
Co., Ltd. and owns 5% of its issued shares of capital stock.
Through
Qianbao, we are currently engaged in the sale of prepaid telephone and game
cards through its internet website, http://www.iamseller.com. Prepaid game
cards
allow the holder thereof to play online video games for the designated allotted
time. Prepaid telephone cards allow the holder thereof to make telephone calls
for the designated allotted time. Such products are sold to consumers or
retailers visiting such website. We also hope to add for sale on such website
prepaid study cards, which allow the holder thereof to use online software
that
assists in the learning of various subjects including Chinese, English and
cooking.
Qianbao
does not manufacture any of the products offered for sale on its website.
Qianbao purchases such products from third-party suppliers and thereafter
resells them on Qianbao’s website. A small portion of Qianbao's revenues is
derived from commissions earned by Qianbao in connection with the sales of
certain products of third-party suppliers sold on Qianbao's website. Such
commission is a percentage of the revenues generated from such sales. The
specific amount of such percentage is negotiated between Qianbao and each such
supplier, but generally ranges from 1% to 5%.
Although
Qianbao is a subsidiary of Pay88, the acquisition of Qianbao by Pay88 that
was
consummated on September 5, 2006 has been treated for financial reporting
purposes as a reverse merger. This means that Qianbao is the continuing entity
for financial reporting purposes.
Plan
of Operation
Through
our subsidiary, Qianbao, we will focus on developing its website,
www.iamseller.com, increase sales on such website, and build other internet
websites on which Qianbao will operate a distribution platform through which
we
will be able to offer products for sale to consumers or retailers visiting
such
websites. Qianbao will continue its efforts to arrange for suppliers to offer
for sale on such website the following products: prepaid game cards, which
allow
the holder thereof to play online internet games for the designated allotted
time; prepaid calling cards; and study cards, which allow the holder thereof
to
use online software that assists in the learning of various subjects including
Chinese, English and cooking. Qianbao is in the process of arranging for the
following companies to supply products to be sold on Qianbao's website: Shandong
Tianfu Online Platform (supplier of game cards); Sifang Online Distribution
Platform (supplier of game cards); Chongqing Digital World (supplier of phone
cards); Chongqing E Net Chongqing Sifang (supplier of phone cards); Chongqing
Taoxing (supplier of study cards); and Chongqing Dezheng Technology Development.
We have not entered into any agreements with any of such suppliers. However,
there is no assurance that we will be successful at marketing and selling these
products, developing the distribution platform or any other of our
objectives.
During
the quarter ended June 30, 2007 gross revenue was $1,242,455, the cost of sales
was $1,212,400, and the gross profit was $30,055. If we continue to realize
gross margins similar to our historical amounts, we will continue to have cash
flow problems. The revenues were derived from online product sales of prepaid
game and telephone cards. We had no revenues during the quarter ended June
30,
2006.
Total
operating expenses were $155,174. We had a loss from operations in the amount
of
$125,119. The net loss during such period was $137,709.
The
Company has funded its cash needs since inception with revenues generated from
operations, related-party loans, and funds available from the initial and
subsequent capitalizations of Qianbao. During the six months ended June 30,
2007, the Company received net loans totaling $725,324 primarily from its
officers. As of June 30, 2007, our Company had $19,574 in cash on a consolidated
basis. We believe that such funds will not be sufficient to effectuate our
plans
with respect to the business of Qianbao over the next twelve months. There
can
be no assurance that we will generate sufficient cash flows to fund operations.
We have no lines of credit or other financing arrangements as of June 30, 2007.
Accordingly, we may have to continue to rely on borrowings from our officers
as
we have done historically. Since any earnings, if realized, are anticipated
to
be reinvested in operations, cash dividends are not expected to be paid in
the
foreseeable future.
On
September 12, 2007, we entered into Subscription Agreements with 3 accredited
investors for the purchase and sale of $1,155,000 of Secured Convertible
Promissory Notes for the aggregate purchase price of $750,000. We received
net
proceeds from the issuance of the secured convertible promissory notes of
$652,237. Pursuant to the terms of the Subscription Agreements, we also issued
to these investors Class A warrants and Class B warrants that, in the aggregate,
are exercisable to purchase 2,310,000 shares of our common stock, subject to
adjustments for certain issuances and transactions. In accordance with the
terms
of the Subscription Agreements, we will issue additional secured convertible
promissory notes in the principal amount of $1,155,000 and an aggregate of
2,310,000 additional warrants on or before the fifth business day after this
registration statement containing this prospectus is declared effective by
the
Securities and Exchange Commission. We plan to use the net proceeds of the
secured convertible promissory notes (including the additional notes) to expand
our operations.
We
have
no current plans for the purchase or sale of any significant amounts of plant
or
equipment.
We
have
no current plans to make any significant changes in the number of employees.
Lack
of Insurance
The
Company currently has no insurance in force for its office facilities and
operations and it cannot be certain that it can cover the risks associated
with
such lack of insurance or that it will be able to obtain and/or maintain
insurance to cover these risks at economically feasible premiums.
Going
Concern
The
Company incurred a net loss of $272,537 for the six months ended June 30, 2007.
In addition, the Company had a working capital deficiency of $409,755 at June
30, 2007. These factors raise substantial doubt about the Company's ability
to
continue as a going concern.
There
can
be no assurance that sufficient funds will be generated during the next year
or
thereafter from operations, or that funds will be available from external
sources such as debt or equity financings or other potential sources. The lack
of additional capital could force the Company to curtail or cease operations
and
would, therefore, have a material adverse effect on its business. Furthermore,
there can be no assurance that any such required funds, if available, will
be
available on attractive terms or that they will not have a significant dilutive
effect on the Company's existing stockholders.
During
the six months ended June 30, 2007, the Company received net loans totaling
$725,324 from its officers and shareholders.
The
Company is attempting 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 attempting to expand its game card and phone card sales and provide
additional internet services. There can be no assurances that the Company will
be able to raise the additional funds it requires and/or achieve its business
goals.
Our
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.
Off-Balance
Sheet Arrangements
None.
For
the year ended December 31, 2006
The
following discussion should be read in conjunction with our audited financial
statements and notes thereto included in this prospectus. All information
presented below is based on our fiscal year ended December 31, 2006. Although
Qianbao is a subsidiary of Pay88, the acquisition of Qianbao by Pay88 that
was
consummated on September 5, 2006 has been treated as a reverse merger of
Qianbao. This means that Qianbao is the continuing entity for financial
reporting purposes.
Plan
of Operation
Through
our subsidiary, Qianbao, we will continue to focus over the next twelve months
on developing our internet distribution platform on Qianbao's website and
increasing the volume of our sales of products on such website. Qianbao will
continue to focus on developing its website, www.iamseller.com, and to build
other internet websites on which it will operate a distribution platform through
which we will be able to offer products for sale to consumers or retailers
visiting such websites. Qianbao will continue to its efforts to arrange for
suppliers to offer for sale on such website the following products: prepaid
game
cards, which allow the holder thereof to play online internet games for the
designated allotted time; prepaid calling cards; and study cards, which allow
the holder thereof to use online software that assists in the learning of
various subjects including Chinese, English and cooking. Qianbao is in the
process of arranging for the following companies to supply products to be sold
on Qianbao's website: Shandong Tianfu Online Platform (supplier of game cards);
Sifang Online Distribution Platform (supplier of game cards); Chongqing Digital
World (supplier of phone cards); Chongqing E Net Chongqing Sifang (supplier
of
phone cards); Chongqing Taoxing (supplier of study cards); and Chongqing Dezheng
Technology Development. We have not entered into any agreements with any of
such
suppliers. However, there is no assurance that we will be successful at
marketing and selling these products, developing the distribution platform
and
any other of our objectives.
As
of
December 31, 2006, Pay88 had $17,084 in cash. We believe that such funds will
not be sufficient to effectuate our plans with respect to the business of
Qianbao over the next twelve months. If Qianbao's internet distribution platform
is developed, we will need to seek additional capital for the purpose of
financing our marketing efforts.
We
may
also seek additional capital for the purpose of financing our plans with respect
to our anticipated money transfer business. When and if we decide to resume
our
plans with respect to our money transfer business, we expect to incur a minimum
of $250,000 in expenses in order to effectuate such plans. We estimate that
this
will be comprised mostly of professional fees including; $50,000 towards the
procurement of the required regulatory licenses, $75,000 towards the planning
of
a comprehensive marketing campaign and $25,000 towards addressing technological
infrastructure concerns. Additionally, $100,000 will be needed for general
overhead expenses such as for salaries, corporate legal and accounting fees,
office overhead and general working capital. Accordingly, we will have to raise
the funds to pay for these expenses.
There
can
be no assurance that additional capital will be available to us. Although we
generally intend to raise additional funds, we have no specific plans,
understandings or agreements with respect to such an offering, and we have
given
no contemplation with respect to the securities to be offered or any other
issue
with respect to any offering. We may seek to raise the required capital by
other
means. We will have to issue debt or equity or enter into a strategic
arrangement with a third party. We currently have no agreements, arrangements
or
understandings with any person to obtain funds through bank loans, lines of
credit or any other sources. Since we have no such arrangements or plans
currently in effect, our inability to raise funds for a marketing program will
have a severe negative impact on our ability to remain a viable company.
Results
of Operations
For
the
period from April 24, 2006 (inception) to December 31, 2006 gross revenue was
$1,199,927, the cost of sales was $1,173,264, and the gross profit was $26,663.
If we continue to realize gross margins similar to our historical amounts,
we
will continue to have cash flow problems. The revenues were derived from online
product sales of prepaid game and telephone cards. Operating expenses were
$321,436. We had a loss from operations in the amount of $294,773. The net
loss
during such period was $297,764.
Liquidity
and Capital Resources
Cash
flow
used in operations for the period from April 24, 2006 (inception) to December
31, 2006 was $427,901.
The
Company had a working capital deficiency of $140,018 at December 31, 2006,
and
has funded its cash needs since inception with revenues generated from
operations, related-party loans, and funds available from the initial and
subsequent capitalizations of Qianbao. There can be no assurance that we will
generate sufficient cash flows to fund operations. We have no lines of credit
or
other financing arrangements as of December 31, 2006. Accordingly, we may have
to continue to rely on borrowings from our officers as we have done
historically. Since any earnings, if realized, are anticipated to be reinvested
in operations, cash dividends are not expected to be paid in the foreseeable
future.
We
have
no current plans for the purchase or sale of any significant amounts of plant
or
equipment.
We
have
no current plans to make any significant changes in the number of employees.
Lack
of Insurance
The
Company currently has no insurance in force for its office facilities and
operations and it cannot be certain that it can cover the risks associated
with
such lack of insurance or that it will be able to obtain and/or maintain
insurance to cover these risks at economically feasible premiums.
Going
Concern
The
Company incurred a net loss of $297,764 for the period April 24, 2006
(inception) to December 31, 2006. In addition, the Company had a working capital
deficiency of $140,018 at December 31, 2006. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
Recent
Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board issued FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes” (“Interpretation No. 48”).
Interpretation No. 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS No.
109, “Accounting for Income Taxes.” Interpretation No. 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. Interpretation No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. Interpretation No. 48 is effective beginning January
1, 2007. The Company believes that the adoption of Interpretation No. 48 will
not have a material impact on its financial statements.
Off
Balance Sheet Arrangements
None
We
currently maintain our executive offices, which consist of approximately 100
square feet at 1053 North Barnstead Road, Center Barnstead, NH 03225 in space
provided to us by Gordon Preston, a director and Secretary of Pay88. We
currently are recognizing a lease expense of $200 per month for this space.
We
believe that our current office space will be adequate for the foreseeable
future.
Qianbao
maintains its executive offices at No. 78 1st Yanghe Village, Jiangbei District,
Chongqing, China, which consists of approximately 6,845 square feet. Such office
was purchased by Qianbao on July 3, 2006, for a purchase price of approximately
$393,000. Although we own the three units of office space, the underlying land
is owned by the People’s Republic of the State of China. Our right to use
the land expires in 2037 and may be extended at that time.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Currently,
we utilize space in New Hampshire that is provided to us by Mr. Gordon Preston,
a director and our Secretary, for a rental fee of $200 per month.
Through
June 30, 2007, Guo Fan, our Chief Executive Officer, President, Chief Financial
Officer, Chairman and a Director, lent us an aggregate of $529,278, of which
$448,893 was pursuant to oral agreements with the company and the balance of
$80,385 was pursuant to a note. Pursuant to the oral agreements, the $448,893
bears interest at the rate of 5% per annum and are payable on demand. On August
31, 2005, Guo Fan lent us $80,385, and in consideration for such loan, we issued
to Mr. Fan a promissory note. Said amount bears interest at the rate of 5%
per
annum and principal and interest are due and payable on August 31, 2008.
As
of
June 30, 2007, Tao Fan, our Chief Operating Officer who is Guo Fan’s brother,
advanced us funds in the amount of $416,164 pursuant to oral agreements. The
advances bear interest at the rate of 2% and are payable on demand.
On
August
3, 2005, we entered into a five year agreement with Chongqing Yahu Information
Development Co., Ltd. Mr. Tao Fan, our Chief Operating Officer and a brother
of
Mr. Guo Fan, our Chief Executive Officer, President, Chairman, and director,
is
the Chief Executive Officer of Chongqing Yahu Information Development Co.,
Ltd.
and Mr. Tao Fan owns 5% of its issued shares of capital stock. The agreement
provides for two services to be provided to us by Chongqing Yahu Information
Development Co., Ltd. The first service is the provision of all proprietary
software needed to effectuate fund transfers between the United States 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. Chongqing Yahu Information Development Co., Ltd. provides both of
these services to us for a licensing fee that is based upon 20% of the gross
fund transfer revenues. The fee is payable on a quarterly basis. The use of
the
software will enable us to provide wire transfers from the United States to
China.
On
September 5, 2006, we entered into a Share Purchase Agreement with Qianbao,
Chongqing Yahu Information Development Co., Ltd., and Ying Bao. Pursuant to
the
Share Purchase Agreement, we agreed to acquire Qianbao at a closing held
simultaneously by purchasing from Chongqing Yahu Information Development Co.,
Ltd. and Ying Bao all of their respective shares of Qianbao's registered
capital, which represented 100% of the issued and outstanding share capital
of
Qianbao. In consideration for all of Qianbao’s registered shares, we agreed to
issue to shares of our Series A Convertible Preferred Stock as follows:
4,950,000 shares to Chongqing Yahu Information Development Co., Ltd. and 50,000
shares to Ying Bao. Mr. Tao Fan, our Chief Operating Officer and a brother
of
Mr. Guo Fan, a director and officer of Pay88, is the Chief Executive Officer
of
Chongqing Yahu Information Development Co., Ltd. and owns 5% of its issued
shares of capital stock.
On
October 4, 2007, we issued 14,000,000 shares of common stock upon conversion
of
5,000,000 shares of our Series A Convertible Preferred Stock that we issued
to
Chongqing Yahu Information Development Co., Ltd. and Ying Bao, the shareholders
of Qianbao, as consideration for the acquisition of that company. We were
required to cause the conversion of our Series A Convertible Preferred Stock
pursuant to the Subscription Agreement we entered into with 3 accredited
investors on September 12, 2007. The issuance of our common stock upon the
conversion of the Series A Preferred Stock was exempt from registration pursuant
to an exemption from registration provided by Section 4(2) of the Securities
Act
of 1933, as amended.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock has been trading on the over-the-counter Bulletin Board under
the
symbol “PAYI” since March 8, 2006. The table below sets forth the range of
quarterly high and low closing bids for Pour common stock since March 8, 2006
when a quote was first obtained on the over-the-counter Bulletin Board. The
quotations below reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions:
|
Year
|
|
Quarter
Ended
|
|
High
|
|
Low
|
|
2006
|
|
December
31
|
|
$3.35
|
|
$3.25
|
|
|
|
September
30
|
|
$3.25
|
|
$3.25
|
|
|
|
June
30
|
|
N/A
|
|
N/A
|
|
|
|
March
31 (from March 8)
|
|
N/A
|
|
N/A
|
|
2007
|
|
|
|
|
|
|
| |
|
September
30
|
|
$1.65
|
|
$1.65
|
| |
|
June
30
|
|
$2.65
|
|
$2.50
|
| |
|
March
31
|
|
No
data
|
|
No
data
|
Holders
On
October 15, 2007, there were approximately 570 holders of record of our common
stock.
Dividends
We
have
not declared or paid any cash dividends on our common stock nor do we anticipate
paying any in the foreseeable future. Furthermore, we expect to retain any
future earnings to finance its operations and expansion. The payment of cash
dividends in the future will be at the discretion of our Board of Directors
and
will depend upon our earnings levels, capital requirements, any restrictive
loan
covenants and other factors the Board considers relevant.
Securities
authorized for issuance under equity compensation plans
We
do not
have any equity compensation plans.
Recent
Sales of Unregistered Securities
On
September 5, 2006, we issued an aggregate of 5,000,000 shares of our Series
A
Convertible Preferred Stock to the stockholders of Qianbao, allocated as
follows: 4,950,000 shares to Chongqing Yahu Information Development Co., Ltd.;
and 50,000 shares to Ying Bao. These shares were issued pursuant to the Share
Purchase Agreement, dated September 5, 2006, among Pay88, Qianbao, and the
stockholders of Qianbao. In consideration for such securities, the stockholders
of Qianbao conveyed to us all of their shares of the registered capital of
Qianbao. Each share of Series A Preferred Stock is convertible, at the option
of
the holder thereof, into 2.8 shares of our common stock. The holders of shares
of Series A Convertible Preferred Stock are entitled to vote together with
the
holders of our common stock, as a single class, upon all matters submitted
to
holders of common stock for a vote. Each share of Series A Convertible Preferred
Stock will carry a number of votes equal to the number of shares of common
stock
issuable as if converted at the record date. Such securities were issued under
Section 4(2) of the Securities Act of 1933, as amended and/or Regulation D
promulgated by the Securities and Exchange Commission thereunder.
On
September 12, 2007, we entered into Subscription Agreements with 3 accredited
investors for the purchase and sale of $1,155,000 of Secured Convertible
Promissory Notes for the aggregate purchase price of $750,000. We received
net
proceeds from the issuance of the secured convertible promissory notes of
$652,237. Pursuant to the terms of the Subscription Agreements, we also issued
to these investors Class A warrants and Class B warrants that, in the aggregate,
are exercisable to purchase 2,310,000 shares of our common stock, subject to
adjustments for certain issuances and transactions. In accordance with the
terms
of the Subscription Agreements, we will issue additional secured convertible
promissory notes in the principal amount of $1,155,000 and the issuance
of an aggregate of 2,310,000 additional warrants on or before the fifth
business day after this registration statement containing this prospectus is
declared effective by the Securities and Exchange Commission.
The
secured convertible promissory notes bear interest at the rate of prime plus
4%
per annum, and are payable in either cash or, absent any event of default,
in
shares of our common stock. Payments of interest and principal commence on
March
12, 2008 and all accrued but unpaid interest and any other amounts due pursuant
to the secured convertible promissory notes are due and payable on March 12,
2009 (or earlier upon acceleration following an event of default).
All
of
the principal and accrued interest on the secured convertible promissory notes
is convertible into shares of our common stock at the election of the investors
at any time at the conversion price of $1.00 per share (subject to adjustment
for certain issuances, transactions or events).
The
secured convertible promissory notes contain default events which, if triggered
and not timely cured (if curable), will result in a default interest rate of
an
additional 5% per annum. In addition, we have to pay the investors 120% plus
accrued interest of the outstanding principal amount if the shares of our common
stock cease to be eligible for quotation on the Bulletin Board, we sell
substantially all of our assets or Guo Fan ceases to be our Chief Executive
Officer.
We
also
issued to each holder 1,155,000 Class A Common Stock Purchase Warrants
and 1,155,000 Class B Common Stock Purchase Warrants, which are exercisable
at any time until September 12, 2012 at an exercise price of $0.81 and $1.13,
respectively. These warrants also include a cashless exercise provision which
is
triggered after March 12, 2008 as well as “full ratchet” anti-dilution
provisions with respect to certain securities issuances.
The
secured convertible promissory notes and the warrants were offered and sold
in
reliance upon exemptions from registration pursuant to Section 4(2) under the
Securities Act and Rule 506 promulgated thereunder, as a transaction by us
(as
the issuer) not involving a public offering.
On
October 4, 2007, we issued an aggregate of 6,666,666 shares of common stock
to
TVH Limited, a Netherlands limited company in consideration for consulting
services rendered in connection with the September 2007 private placement and
1,333,334 shares to another consultant who subsequently returned his shares
to
us for cancellation. 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.
Summary
Compensation
During
the period from our incorporation on March 22, 2005, through December 31, 2006,
Guo Fan was our President, Chief Executive Officer, Chairman, and Director.
During such period, Mr. Fan did not receive any compensation for his services.
Additionally, during such period, none of our other officers earned compensation
exceeding $100,000 per year.
We
have
no pension, health, annuity, bonus, insurance, equity incentive, non-equity
incentive, stock options, profit sharing or similar benefit plans. No stock
options or stock appreciation rights were granted to any of our directors or
executive officers during the period from the date of our incorporation on
March
22, 2005 through December 31, 2006.
Effective
February 1, 2007, we entered into an Employment Agreement with Mr. Guo Fan,
under which Guo will continue to serve as our Chairman, President and Chief
Executive Officer. Under such agreement, Guo will receive an annual salary
of
$100,000 during the five-year term commencing on February 1, 2007. Such
agreement also provides that if Guo’s employment is terminated without cause at
any time within the five year term, we will pay Guo his salary through January
31, 2012.
Effective
February 1, 2007, we entered into an Employment Agreement with Mr. Tao Fan,
under which Tao will be employed as our Chief Operating Officer. Such agreement
provides that Tao will receive an annual salary of $50,000 during the five-year
term. The agreement also provides that if Tao’s employment is terminated without
cause at any time within the five year term commencing on February 1, 2007,
we
will pay Tao his salary through January 31, 2012.
Outstanding
Equity Awards
As
of
December 31, 2006, none of our directors or executive officers held unexercised
options, stock that had not vested, or equity incentive plan
awards.
Compensation
of Directors
During
the period from March 22, 2005 to December 31, 2006, no director received any
type of compensation from Pay88. No arrangements are presently in place
regarding compensation to directors for their services as directors or for
committee participation or special assignments. We have not granted any stock
options to any of our officers, directors, or any other persons, but we may
grant such options in the future.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Wolinetz,
Lafazan & Company, P.C. is our auditor. There have not been any changes in
or disagreements with accountants on accounting and financial disclosure or
any
other matter.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We
file
current, quarterly and annual reports with the SEC on forms 8-K, 10-QSB, and
10-KSB. The SEC maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC at http://www.sec.gov. Copies of such material
can
be obtained from the public reference section of the SEC at prescribed rates.
Statements contained in this prospectus as to the contents of any contract
or
other document filed as an exhibit to the registration statement are not
necessarily complete and in each instance reference is made to the copy of
the
document filed as an exhibit to the registration statement, each statement
made
in this prospectus relating to such documents being qualified in all respect
by
such reference.
PAY88,
INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED BALANCE SHEET
JUNE
30, 2007
(Unaudited)
|
ASSETS
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
19,574
|
|
|
Accounts
Receivable, Net of Allowances of $2,268
|
|
|
88,450
|
|
|
Inventories
|
|
|
288,630
|
|
|
Deposits
on Inventories
|
|
|
331,555
|
|
|
Prepaid
Expenses
|
|
|
10,780
|
|
| |
|
|
|
|
|
Total
Current Assets
|
|
|
738,989
|
|
| |
|
|
|
|
|
Property
and Equipment, Net
|
|
|
493,052
|
|
| |
|
|
|
|
|
Total
Assets
|
|
$
|
1,232,041
|
|
| |
|
|
|
|
| |
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
| |
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
133,252
|
|
|
Deferred
Income
|
|
|
2,347
|
|
|
Loans
Payable - Related Party
|
|
|
865,057
|
|
|
Loans
Payable - Other
|
|
|
148,088
|
|
| |
|
|
|
|
|
Total
Current Liabilities
|
|
|
1,148,744
|
|
| |
|
|
|
|
|
Long-Term
Debt:
|
|
|
|
|
|
Note
Payable - Related Party
|
|
|
80,385
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
1,229,129
|
|
| |
|
|
|
|
|
Commitments
and Contingencies:
|
|
|
|
|
| |
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
Preferred
Stock, $.001 par value; 5,000,000 shares authorized, 5,000,000
shares
issued and outstanding; liquidation preference, $.01 per
share
|
|
|
5,000
|
|
|
Common
Stock, $.001 par value; 100,000,000 shares authorized, 10,100,000
shares
issued and outstanding
|
|
|
10,100
|
|
|
Additional
Paid-In Capital
|
|
|
535,627
|
|
|
Accumulated
Deficit
|
|
|
(
570,301
|
)
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
22,486
|
|
| |
|
|
|
|
|
Total
Stockholders’ Equity
|
|
|
2,912
|
|
| |
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
1,232,041
|
|
The
accompanying notes are an integral part of these financial
statements.
PAY88,
INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
| |
|
|
|
|
|
For
the Period
|
|
| |
|
For
the Six
|
|
For
the Three
|
|
April
24, 2006
|
|
| |
|
Months
Ended
|
|
Months
Ended
|
|
(Inception)
To
|
|
| |
|
June
30, 2007
|
|
June
30, 2007
|
|
June
30, 2006
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Sales-Net
|
|
$
|
2,345,236
|
|
$
|
1,242,455
|
|
$
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
2,299,774
|
|
|
1,212,400
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
45,462
|
|
|
30,055
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Selling
Expenses
|
|
|
12,609
|
|
|
8,797
|
|
|
—
|
|
|
Salaries
and Related Costs
|
|
|
116,628
|
|
|
70,701
|
|
|
10,397
|
|
|
Website
Development Costs
|
|
|
27,196
|
|
|
13,598
|
|
|
—
|
|
|
Professional
Fees
|
|
|
43,586
|
|
|
15,228
|
|
|
40,101
|
|
|
Other
General and Administrative Expense
|
|
|
100,975
|
|
|
46,850
|
|
|
1,049
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
300,994
|
|
|
155,174
|
|
|
51,547
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(
255,532
|
)
|
|
(
125,119
|
)
|
|
(
51,547
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense - Related Party
|
|
|
(
15,843
|
)
|
|
(
12,250
|
)
|
|
—
|
|
|
Interest
Income
|
|
|
259
|
|
|
181
|
|
|
251
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
Other Income (Expense)
|
|
|
(
15,584
|
)
|
|
(
12,069
|
)
|
|
251
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Loss
before Provision for Income Tax
|
|
|
(
271,116
|
)
|
|
(
137,188
|
)
|
|
(
51,296
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Tax
|
|
|
1,421
|
|
|
521
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(
272,537
|
)
|
$
|
(
137,709
|
)
|
$
|
(
51,296
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
Basic
Loss Per Common Share
|
|
$
|
(
0.03
|
)
|
$
|
(
0.01
|
)
|
$
|
(
0.01
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Basic Common
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
10,100,000
|
|
|
10,100,000
|
|
|
10,100,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Fully
Diluted Loss Per Share
|
|
$
|
(
0.01
|
)
|
$
|
(
0.01
|
)
|
$
|
(
0.00
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Fully Diluted
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
|
24,100,000
|
|
|
24,100,000
|
|
|
24,100,000
|
|
The
accompanying notes are an integral part of these financial
statements.
PAY88,
INC.AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
| |
|
|
|
For
the Period
|
|
| |
|
For
the Six
|
|
April
24, 2006
|
|
| |
|
Months
Ended
|
|
(Inception)
To
|
|
| |
|
June
30, 2007
|
|
June
30, 2006
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(
272,537
|
)
|
$
|
(
51,296
|
)
|
|
Adjustments
to Reconcile Net Loss to
|
|
|
|
|
|
|
|
|
Net
Cash (Used) by Operating Activities
|
|
|
|
|
|
|
|
|
Allowance
for Bad Debts
|
|
|
1,054
|
|
|
—
|
|
|
Depreciation
and Amortization
|
|
|
23,108
|
|
|
147
|
|
|
Changes
in Assets and Liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
in Accounts Receivable
|
|
|
(
37,030
|
)
|
|
—
|
|
|
(Increase)
in Inventories
|
|
|
(
162,825
|
)
|
|
—
|
|
|
(Increase)
in Deposits on Inventories
|
|
|
(
331,555
|
)
|
|
—
|
|
|
Decrease
in Prepaid Expenses
|
|
|
34,976
|
|
|
—
|
|
|
Increase
in Accounts Payable
|
|
|
39,936
|
|
|
46,565
|
|
|
Increase
in Deferred Income
|
|
|
2,347
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
Net
Cash (Used) by Operating Activities
|
|
|
(
702,526
|
)
|
|
(
4,584
|
)
|
| |
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
|
(
19,030
|
)
|
|
(
362,967
|
)
|
| |
|
|
|
|
|
|
|
|
Net
Cash (Used) by Investing Activities
|
|
|
(
19,030
|
)
|
|
(
362,967
|
)
|
| |
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net
Proceeds from Loans Payable - Related Party
|
|
|
577,236
|
|
|
—
|
|
|
Net
Proceeds from Loans Payable - Other
|
|
|
148,088
|
|
|
—
|
|
|
Proceeds
of Registered Capital Contribution
|
|
|
—
|
|
|
362,790
|
|
|
Proceeds
of Additional Paid-In Capital Contribution
|
|
|
—
|
|
|
358,705
|
|
| |
|
|
|
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
|
725,324
|
|
|
721,495
|
|
| |
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
|
(
1,278
|
)
|
|
(
167
|
)
|
| |
|
|
|
|
|
|
|
|
Net
Increase in Cash and Cash Equivalents
|
|
|
2,490
|
|
|
353,777
|
|
| |
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents - Beginning of Period
|
|
|
17,084
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents - End of Period
|
|
$
|
19,574
|
|
$
|
353,777
|
|
| |
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest
Paid
|
|
$
|
—
|
|
$
|
—
|
|
|
Income
Taxes Paid
|
|
$
|
451
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these financial
statements.
PAY88,
INC. AND SUBSIDIARY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 is convertible into
14,000,000 shares of Pay88 common stock. The holders of shares of Series A
Preferred Stock are 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.
Qianbao
was incorporated on April 24, 2006 in Chongqing, China. Qianbao is currently
primarily engaged in the sale of prepaid online video game cards and prepaid
telephone cards that allow the user to play online video games for designated
allotted times. Qianbao also
intends 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.
Pay88,
Inc. and Chongqing Qianbao Technology Ltd. are hereafter collectively referred
to as “the Company”.
Condensed
Financial Statements
In
the
opinion of the Company’s management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
only
normal recurring adjustments) necessary to present fairly the information
set
forth therein. These financial statements are condensed and therefore do
not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements.
Results
of operations for interim periods are not necessarily indicative of the
results
of operations for a full year.
PAY88,
INC. AND SUBSIDIARY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1
- Basis
of Presentation (Continued)
Consolidation
The
accompanying unaudited condensed consolidated financial statements included
the
accounts of Pay88 (Parent) and its wholly owned subsidiary (“Qianbao”). All
significant intercompany accounts and transactions have been eliminated
in
consolidation.
Going
Concern
The
Company incurred a net loss of $272,537 for the six months ended June 30,
2007.
In addition, the Company had a working capital deficiency of $409,755 at
June
30, 2007. These factors raise substantial doubt about the Company's ability
to
continue as a going concern.
There
can
be no assurance that sufficient funds will be generated during the next
year or
thereafter from operations, or that funds will be available from external
sources such as debt or equity financings or other potential sources. The
lack
of additional capital could force the Company to curtail or cease operations
and
would, therefore, have a material adverse effect on its business. Furthermore,
there can be no assurance that any such required funds, if available, will
be
available on attractive terms or that they will not have a significant
dilutive
effect on the Company's existing stockholders.
During
the six months ended June 30, 2007, the Company received net loans totaling
$725,324 from its officers and shareholders.
The
Company is attempting 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 attempting to expand its game card and phone card sales and
provide
additional internet services. There can be no assurances that the Company
will
be able to raise the additional funds it requires and/or achieve its business
goals.
The
accompanying condensed consolidated financial statements do not include
any
adjustments related to the recoverability or classification of asset-carrying
amounts or the amounts and classifications of liabilities that may result
should
the Company be unable to continue as a going concern.
NOTE
2 -
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising costs amounted to $2,957 for
the six
months ended June 30, 2007.
NOTE
3
- Net
Loss Per Common Share
Basic
loss per share is computed by dividing net loss by the weighted average
number
of common shares outstanding during the period. The common stock issued
and
outstanding with respect to the pre-merger Pay88 stockholders has been
included
since April 24, 2006.
Diluted
loss per share is computed similarly to basic loss per share except that
it
includes the potential dilution that could occur if dilutive securities
were
converted. Accordingly, dilutive loss per share includes the conversion
of
5,000,000 shares of Pay88 Series A Convertible Preferred Stock into 14,000,000
shares of Pay88 common stock.
PAY88,
INC. AND SUBSIDIARY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 -
Property
and Equipment
Property
and equipment is summarized as follows:
|
|
|
|
|
|
|
Estimated
Useful Lives
|
|
|
Office
Units and Improvements
|
|
$
|
403,363
|
|
|
31
Years
|
|
|
Furniture
and Fixtures
|
|
|
7,944
|
|
|
5
Years
|
|
|
Office
Equipment
|
|
|
87,388
|
|
|
3
Years
|
|
|
Software
|
|
|
27,128
|
|
|
3
Years
|
|
|
Automobile
|
|
|
6,502
|
|
|
5
Years
|
|
| |
|
|
532,325
|
|
|
|
|
|
Less:
Accumulated Depreciation
|
|
|
39,273
|
|
|
|
|
| |
|
$
|
493,052
|
|
|
|
|
Depreciation
expense was $23,108 for the six months ended June 30, 2007.
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.
NOTE
5 -
Loans
Payable - Related Parties
Loans
payable to related parties consist of the following:
|
Loans
payable to the Company’s Chief Executive Officer,bearing interest at 5%
per annum and payable on demand
|
|
$
|
448,893
|
|
| |
|
|
|
|
|
Loans
payable to the Company’s Chief Operating Officer,bearing interest at 2%
per annum and payable on demand
|
|
|
416,164
|
|
| |
|
|
|
|
|
|
|
|
$
865,057
|
|
NOTE
6
-Loans
Payable - Other
Loans
payable to others consist of the following:
|
Loan
payable, bearing interest at 2.5% per month, due on December 31,
2007.
|
|
$
|
131,400
|
|
| |
|
|
|
|
|
Loan
payable on demand, non-interest bearing
|
|
|
16,688
|
|
| |
|
$
|
148,088
|
|
PAY88,
INC. AND SUBSIDIARY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7
- Note
Payable - Related Party
Note
payable to the Company’s Chief Executive Officer in the amount of $80,385 bears
interest at 5% per annum and is payable on August 31, 2008.
Maturities
of this long-term debt are as follows:
|
During
the Year Ending December
31,
|
|
|
|
|
|
2007
|
|
$
|
—
|
|
|
2008
|
|
|
80,385
|
|
| |
|
|
|
|
| |
|
$
|
80,385
|
|
NOTE
8
- Commitments
and Contingencies
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, 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 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 fee is payable
on a
quarterly basis. 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 presently have no intention to engage 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.
PAY88,
INC. AND SUBSIDIARY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8
- Commitments
and Contingencies (continued)
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
9
- Stockholders’
Equity
At
inception, Qianbao was formed with two stockholders, Yahu (99%) and an
individual (1%). The initial capitalization was $362,790 of which Yahu
contributed $350,280 and the individual contributed $12,510. Subsequently,
there
was an additional capital contribution of $358,705 of which Yahu contributed
$358,420 and the individual contributed $285.
Pursuant
to the Share Purchase Agreement (see Note 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 is convertible
into 14,000,000 shares of Pay88 common stock. The holders of shares of
Series A
Preferred Stock are 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.
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.
PAY88,
INC. AND SUBSIDIARY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10
-Related
Party Transactions
Rent
The
Company rents office space in New Hampshire owned by an officer of the
Company
for $200 per month on a month to month basis. Rent expense amounted to
$1,200
for the six months ended June 30, 2007.
Accounts
Payable
Included
in accounts payable at June 30, 2007 is accrued interest payable amounting
to
$26,201 on a note and loans payable (see Notes 4 and 5) to two officers
and
significant stockholders and rent payable to an officer amounting to
$5,200.
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
11 -
Concentration
of Credit Risk
The
Company maintains cash balances in various banks in China. Currently, no
deposit
insurance system has been set up in China. Therefore, the Company will
bear a
risk if any of these banks become insolvent. As of June 30, 2007, the Company’s
uninsured cash balance was $19,574.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Stockholders
Pay88,
Inc. (A Nevada Corporation)
We
have
audited the accompanying consolidated balance sheet of Pay88, Inc. and
Subsidiary (“the Company”) as of December 31, 2006 and the related consolidated
statements of operations, stockholders’ equity and cash flows for the period
April 24, 2006 (inception) to December 31, 2006. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. The Company is not required
to
have, nor were we engaged to perform, an audit of its internal control
over
financial reporting. Our audit included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. Also, an audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of the Company at December
31,
2006, and the results of their operations and their cash flows for the
period
April 24, 2006 (inception) to December 31, 2006 in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming
the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred a net loss
for the
period April 24, 2006 (inception) to December 31, 2006 and as of December
31,
2006, had a working capital deficiency. These factors raise substantial
doubt
about the Company’s ability to continue as a going concern. Management’s plans
regarding those matters are also described in Note 1. The consolidated
financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
WOLINETZ,
LAFAZAN & COMPANY, P.C.
Rockville
Centre, New York
March
27,
2007
|
PAY88,
INC. AND SUBSIDIARY
|
|
|
CONSOLIDATED
BALANCE SHEET
|
|
|
DECEMBER
31, 2006
|
|
| |
|
|
|
| |
|
|
|
|
ASSETS
|
|
|
Current
Assets:
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
17,084
|
|
|
Accounts
Receivable, Net of Allowances of $1,214
|
|
|
52,474
|
|
|
Inventories
|
|
|
125,805
|
|
|
Prepaid
Expenses
|
|
|
45,756
|
|
| |
|
|
|
|
|
Total
Current Assets
|
|
|
241,119
|
|
| |
|
|
|
|
|
Property
and Equipment, Net
|
|
|
487,000
|
|
| |
|
|
|
|
|
Total
Assets
|
|
$
|
728,119
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
Current
Liabilities:
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
93,316
|
|
|
Loans
Payable - Related Parties
|
|
|
287,821
|
|
| |
|
|
|
|
|
Total
Current Liabilities
|
|
|
381,137
|
|
| |
|
|
|
|
|
Long-Term
Debt:
|
|
|
|
|
|
Note
Payable - Related Party
|
|
|
80,385
|
|
| |
|
|
|
|
|
Total
Liabilities
|
|
|
461,522
|
|
| |
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
Preferred
Stock, $.001 par value; 5,000,000 shares authorized,
|
|
|
|
|
|
5,000,000
shares issued and outstanding; liquidation preference,
|
|
|
|
|
|
$.01
per share
|
|
|
5,000
|
|
|
Common
Stock, $.001 par value; 100,000,000 shares authorized,
|
|
|
|
|
|
10,100,000
shares issued and outstanding
|
|
|
10,100
|
|
|
Additional
Paid-In Capital
|
|
|
535,596
|
|
|
Accumulated
Deficit
|
|
|
(297,764
|
)
|
|
Accumulated
Other Comprehensive Income
|
|
|
13,665
|
|
|
Total
Stockholders’ Equity
|
|
|
266,597
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
728,119
|
|
The
accompanying notes are an integral part of these financial
statements.
PAY88,
INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF OPERATIONS
FOR
THE PERIOD APRIL 24, 2006 (INCEPTION) TO DECEMBER 31, 2006
|
Sales
- Net
|
|
|
|
|
| |
|
|
|
|
|
Cost
of Sales
|
|
|
1,173,264
|
|
| |
|
|
|
|
|
Gross
Profit
|
|
|
26,663 |
|
| |
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
Selling
Expenses
|
|
|
25,733 |
|
|
Salaries
and Related Costs
|
|
|
54,145 |
|
|
Website
Development Costs
|
|
|
18,049 |
|
|
Professional
Fees
|
|
|
150,420 |
|
|
General
and Administrative Expenses
|
|
|
73,089 |
|
| |
|
|
|
|
|
Total
Operating Expenses
|
|
|
321,436 |
|
| |
|
|
|
|
|
Loss
from Operations
|
|
|
(294,773
|
)
|
| |
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
Interest
Expense - Related Parties
|
|
|
(3,657
|
)
|
|
Interest
Income
|
|
|
666 |
|
| |
|
|
|
|
|
Total
Other Income (Expense)
|
|
|
(2,991
|
)
|
| |
|
|
|
|
|
Net
Loss
|
|
$
|
(297,764)
|
|
| |
|
|
|
|
|
Basic
Loss Per Common Share
|
|
$
|
(0.03
|
)
|
| |
|
|
|
|
|
Weighted
Average Common Shares Outstanding - Basic
|
|
|
10,090,040
|
|
| |
|
|
|
|
|
Diluted
Loss Per Common Share
|
|
$
|
(0.01
|
)
|
| |
|
|
|
|
|
Weighted
Average Common Shares Outstanding - Diluted
|
|
|
24,090,040
|
|
The
accompanying notes are an integral part of these financial
statements.
|
PAY88,
INC. AND
SUBSIDIARY
|
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’
EQUITY
|
|
FOR
THE PERIOD APRIL 24, 2006 (INCEPTION) TO DECEMBER 31,
2006
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
| |
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Other |
|
|
|
| |
|
Preferred
Stock
|
|
Common
Stock
|
|
Paid-In
|
|
Accumulated
|
|
Comprehensive |
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Income
|
|
Total
|
|
|
Balance
- April 24, 2006
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Initial Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
Qianbao
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
362,790
|
|
|
-
|
|
|
-
|
|
|
362,790
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Additional Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
Qianbao
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
358,705
|
|
|
-
|
|
|
-
|
|
|
358,705
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Recapitalization
|
|
|
-
|
|
|
-
|
|
|
10,000,000
|
|
|
10,000
|
|
|
(183,299
|
)
|
|
-
|
|
|
-
|
|
|
(173,299
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Preferred Stock in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Connection
with Recapitalization
|
|
|
5,000,000
|
|
|
5,000
|
|
|
-
|
|
|
-
|
|
|
(
5,000
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of 100,000 Shares of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock for Services
|
|
|
-
|
|
|
-
|
|
|
100,000
|
|
|
100
|
|
|
2,400
|
|
|
-
|
|
|
-
|
|
|
2,500
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) for the Period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(297,764
|
)
|
|
-
|
|
|
(297,764
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
13,665
|
|
|
13,665
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Comprehensive Loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(284,099
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2006
|
|
|
5,000,000
|
|
$
|
5,000
|
|
|
10,100,000
|
|
$
|
10,100
|
|
$
|
535,596
|
|
$
|
(297,764
|
)
|
$
|
13,665
|
|
$
|
266,597
|
|
The
accompanying notes are an integral part of these financial statements
.
|
PAY88,
INC. AND SUBSIDIARY
|
|
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
FOR
THE PERIOD APRIL 24, 2006 (INCEPTION) TO DECEMBER 31,
2006
|
| |
|
|
|
| |
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
Net
Loss
|
|
$
|
(297,764
|
)
|
|
Adjustments
to Reconcile Net Loss to
|
|
|
|
|
|
Net
Cash (Used) by Operating Activities:
|
|
|
|
|
|
Allowance
for Bad Debts
|
|
|
1,214
|
|
|
Depreciation
|
|
|
16,165
|
|
|
Common
Stock Issued for Services
|
|
|
2,500
|
|
|
Changes
in Assets and Liabilities:
|
|
|
|
|
|
(Increase)
in Accounts Receivable
|
|
|
(53,688
|
)
|
|
(Increase)
in Inventories
|
|
|
(125,805
|
)
|
|
(Increase)
in Prepaid Expenses
|
|
|
(45,756
|
)
|
|
Increase
in Accounts Payable
|
|
|
75,233
|
|
| |
|
|
|
|
|
Net
Cash (Used) by Operating Activities
|
|
|
(427,901
|
)
|
| |
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
Capital
Expenditures
|
|
|
(503,165
|
)
|
|
Effect
of Recapitalization
|
|
|
1,209
|
|
| |
|
|
|
|
|
Net
Cash (Used) by Investing Activities
|
|
|
(501,956
|
)
|
| |
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
Proceeds
from Issuance of Registered Capital Stock
|
|
|
721,495
|
|
|
Proceeds
from Loans Payable - Related Parties
|
|
|
211,781
|
|
| |
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
|
|
933,276
|
|
| |
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
|
13,665
|
|
| |
|
|
|
|
|
Net
Increase in Cash and Cash Equivalents
|
|
|
17,084
|
|
| |
|
|
|
|
|
Cash
and Cash Equivalents - Beginning of Period
|
|
|
-
|
|
| |
|
|
|
|
|
Cash
and Cash Equivalents - End of Period
|
|
$
|
17,084
|
|
| |
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
Interest
Paid
|
|
$
|
-
|
|
|
Income
Taxes Paid
|
|
$
|
-
|
|
| |
|
|
|
|
|
Supplemental
Disclosure of Non-Cash Financing Activities:
|
|
|
|
|
|
Preferred
Stock Issued in Connection with Recapitalization
|
|
$
|
5,000
|
|
The
accompanying notes are an integral part of these financial
statements.
PAY88,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| 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 stock 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 is convertible into
14,000,000 shares of Pay88 common stock. The holders of shares of Series
A
Preferred Stock are 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. The consolidated
financial statements include the operations of Qianbao from April 24, 2006
(inception) to December 31, 2006, and the operations of Pay88 from September
6,
2006 to December 31, 2006.
Qianbao
was incorporated on April 24, 2006 in Chongqing, China. Qianbao is currently
primarily engaged in the sale of prepaid telephone cards and prepaid online
video game cards that allow the user to play online video games for designated
allotted times. Qianbao also
intends 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.
Pay88,
Inc. and Chongqing Qianbao Technology Ltd. are hereafter collectively referred
to as “the Company”.
Going
Concern
The
Company incurred a net loss of $297,764 for the period April 24, 2006
(inception) to December 31, 2006. In addition, the Company had a working
capital
deficiency of $140,018 at December 31, 2006. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
PAY88,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE
1 - |
Basis
of Presentation (Continued)
|
Going
Concern
(Continued)
There
can
be no assurance that sufficient funds will be generated during the next year
or
thereafter from operations or that funds will be available from external
sources
such as debt or equity financings or other potential sources. The lack of
additional capital could force the Company to curtail or cease operations
and
would, therefore, have a material adverse effect on its business. Furthermore,
there can be no assurance that any such required funds, if available, will
be
available on attractive terms or that they will not have a significant dilutive
effect on the Company's existing stockholders.
During
the period April 24, 2006 (inception) to December 31, 2006, the Company relied
heavily for its financing needs on two of its officers and significant
stockholders. In addition, the Company obtained financing through the sale
of
registered capital shares of Qianbao.
During
the period April 24, 2006 (inception) to December 31, 2006 the
Company:
| · |
Received
approximately $212,000 in advances from two of its officers and
significant stockholders;
|
| · |
Received
approximately $721,000 from the initial and subsequent investments
in
connection with the founding of
Qianbao.
|
The
Company is attempting 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 attempting to expand its game card and phone card sales and provide
additional internet services. There can be no assurances that the Company
will
be able to raise the additional funds it requires and/or achieve its business
goals.
The
accompanying 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.
| NOTE
2 - |
Summary
of Significant Accounting Policies
|
Principals
of Consolidation
The
accompanying consolidated financial statements included the accounts of Pay88
(Parent) and its wholly owned subsidiary (“Qianbao”). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with a maturity
of
three months or less to be cash equivalents.
PAY88,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE
2 - |
Summary
of Significant Accounting Policies
(Continued)
|
Inventories
Inventories
consist primarily of purchased game and phone cards. Inventories are carried
at
the lower of cost or market using the first-in, first-out method.
Property
and Equipment
Property
and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related
assets.
Revenue
Recognition
For
revenue from product sales, the Company recognizes revenue in accordance
with
Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB No. 104”), which
superseded Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial
Statements” (“SAB No. 101”). SAB No. 104 requires that four basic criteria must
be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists, (2) delivery has occurred; (3) the selling price is fixed
and determinable; and (4) collectibility is reasonably assured. Determination
of
criteria (3) and (4) are based on management’s judgment regarding the fixed
nature of the selling prices of the products delivered and the collectibility
of
those amounts. Provisions for discounts and rebates to customers, estimated
returns and allowances, and other adjustments are provided for in the same
period the related sales are recorded. The Company recognized a bad debt
provision of $1,214 for the period ended December 31, 2006.
Advertising
Costs
Advertising
costs are expensed as incurred. Adverting costs amounted to $19,773 for the
period ended December 31, 2006.
Research
and Development
Research
and development costs are expensed as incurred.
Website
Development Costs
Website
development costs are expensed as incurred.
Income
Taxes
The
Company accounts for income taxes using the asset and liability method described
in SFAS No. 109, “Accounting For Income Taxes”, the objective of which is to
establish deferred tax assets and liabilities for the temporary differences
between the financial reporting and the tax bases of the Company’s assets and
liabilities at enacted tax rates expected to be in effect when such amounts
are
realized or settled. A valuation allowance related to deferred tax assets
is
recorded when it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
PAY88,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE
2 - |
Summary
of Significant Accounting Policies
(Continued)
|
Foreign
Currency Translation
The
financial statements of the Company are translated pursuant to Statement
of
Financial Accounting Standards (SFAS) No. 52 - “Foreign Currency Translation.”
Qianbao is located and operated in China. The Chinese Yuan is the functional
currency. The financial statements of Qianbao is translated to U.S. dollars
using month-end rates of exchange for assets and liabilities, and average
rates
of exchange for revenues, costs and expenses. Translation gains and losses
are
deferred and recorded in accumulated other comprehensive income as a component
of stockholders’ equity.
Use
of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Net
Loss Per Common Share
Basic
loss per share is computed by dividing net loss by the weighted average number
of common shares outstanding during the period. The common stock issued and
outstanding with respect to the pre-merger Pay88 stockholders has been included
since April 24, 2006.
Diluted
loss per share is computed similarly to basic loss per share except that
it
includes the potential dilution that could occur if dilutive securities were
converted. Accordingly, dilutive loss per share includes the conversion of
5,000,000 shares of Pay88 Series A Convertible Preferred Stock into 14,000,000
shares of Pay88 common stock.
Fair
Value of Financial Instruments
The
carrying amounts of the Company’s cash, accounts receivable, accounts payable,
and notes and loans payable approximate fair value because of the immediate
or
short-term maturity of these financial instruments.
Recently
Issued Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board issued FASB Interpretation
No.
48, “Accounting for Uncertainty in Income Taxes” (“Interpretation No. 48”).
Interpretation No. 48 clarifies the accounting for uncertainty in income
taxes
recognized in an enterprise’s financial statements in accordance with SFAS No.
109, “Accounting for Income Taxes.” Interpretation No. 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. Interpretation No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. Interpretation No. 48 is effective beginning January
1, 2007. The Company believes that the adoption of Interpretation No. 48
will
not have a material impact on its financial statements.
PAY88,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE
3 - |
Property
and Equipment
|
Property
and equipment is summarized as follows:
| |
|
|
|
Estimated
Useful
|
|
| |
|
|
|
Lives
|
|
|
Office
Units and Improvements
|
|
$
|
393,233
|
|
|
31Years
|
|
|
Furniture
and Fixtures
|
|
|
7,745
|
|
|
5
Years
|
|
|
Office
Equipment
|
|
|
78,856
|
|
|
3
Years
|
|
|
Software
|
|
|
16,992
|
|
|
3
Years
|
|
|
Automobile
|
|
|
6,339
|
|
|
5
Years
|
|
| |
|
|
503,165
|
|
|
|
|
|
Less:
Accumulated Depreciation
|
|
|
16,165
|
|
|
|
|
| |
|
$
|
487,000
|
|
|
|
|
Depreciation
expense was $16,165 for the period ended December 31, 2006.
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.
| NOTE
4 - |
Loans
Payable - Related Parties
|
|
Loans
payable to related parties consist of the following:
|
|
|
|
| |
|
|
|
| Loans
payable to the Company’s Chief
Executive Officer, |
|
|
|
|
bearing
interest at 5% per annum and payable on demand
|
|
$
|
130,006
|
|
| |
|
|
|
|
|
Loans
payable to the Company’s Chief Operating Officer,
|
|
|
|
|
|
bearing
interest at 2% per annum and payable on demand
|
|
|
157,815
|
|
| |
|
$
|
287,821
|
|
| NOTE
5 - |
Note
Payable - Related Party
|
Note
payable to the Company’s Chief Executive Officer in the amount of $80,385 bears
interest at 5% per annum and is payable on August 31, 2008.
|
Maturities
of this long-term debt are as follows:
|
|
|
|
|
During
the Year Ending
|
|
|
|
|
December
31,
|
|
|
|
|
2007
|
|
$
|
-
|
|
|
2008
|
|
|
80,385
|
|
| |
|
$
|
80,385
|
|
PAY88,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE
6 - |
Commitments
and Contingencies
|
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, 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 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
fee is payable on a quarterly basis. 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 presently have no intention
to
engage 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.
| NOTE
7 - |
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 Note 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 shares
of
Qianbao. The 5,000,000 shares of Pay88 Series A Preferred Stock is convertible
into 14,000,000 shares of Pay88 common stock. The holders of shares of Series
A
Preferred Stock are 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.
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.
PAY88,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE
8 - |
Related
Party Transactions
|
Rent
The
Company rents office space in New Hampshire owned by an officer of the Company
for $200 per month on a month to month basis. Rent expense amounted to $800
for
the period ended December 31, 2006.
Accounts
Payable
Included
in accounts payable at December 31, 2006 is accrued interest payable amounting
to $10,294 on a note and loans payable (see Notes 4 and 5) to two officers
and
significant stockholders and rent payable to an officer amounting to
$4,200.
Purchase
of Equipment
The
Company purchased computer equipment and fixtures in the amount of $41,074
from
Chongqing Yahu Information Development Co. Ltd. The purchase price of the
equipment was assessed and decided by an independent third party to be at
fair
value.
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
9 - |
Concentration
of Credit Risk
|
The
Company maintains cash balances in various banks in China. Currently, no
deposit
insurance system has been set up in China. Therefore, the Company will bear
a
risk if any of these banks become insolvent. As of December 31, 2006, the
Company’s uninsured cash balance was $16,955.
At
December 31, 2006, the Company had available a net-operating loss carry-forward
for Federal tax purposes of approximately $248,000, which may be applied
against
future taxable income, if any, from 2025 to 2026. Certain significant changes
in
ownership of the Company may restrict the future utilization of these tax
loss
carry-forwards.
PAY88,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
At
December 31, 2006, the Company had available a foreign net-operating loss
carryforward of approximately $270,000, which may be applied against future
foreign taxable income, if any, through 2011. The utilization of the foreign
tax
loss carryforwards are subject to the tax regulations of China, which, among
other things, may require approval by the tax regulation agency of the
utilization.
At
December 31, 2006, the Company has a deferred tax asset of approximately
$186,000 representing the benefit of its federal, state and foreign net
operating loss carry-forwards. The Company has not recognized the tax benefit
because realization of the tax benefit is uncertain and thus a valuation
allowance has been fully provided against the deferred tax asset. The difference
between the Federal Statutory Rate of 34% and the Company’s effective tax rate
of 0% is due to an increase in the valuation allowance of approximately
$30,000.
| NOTE
11 - |
Subsequent
Events
|
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. Tao’s Agreement provides that if Mr. Tao Fan’s
employment is terminated without cause at any time within the five year term
commencing on February 1, 2007, 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.