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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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Date of Report (Date of Earliest Event Reported): SEPTEMBER 29, 2003
DWANGO NORTH AMERICA CORP.
(Exact Name of Registrant as Specified in Charter)
NEVADA 333-69006 84-1407365
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification Number)
5847 SAN FELIPE STREET, SUITE 2825
HOUSTON, TEXAS 77057-3000
(Address of Principal Executive Offices) (Zip Code)
(713) 914-9600
(Registrant's telephone number, including area code)
WOODLAND HATCHERY, INC.
1442 LOWER RIVER ROAD
WOODLAND, UTAH 84036
(Former name or former address, if changed since last report)
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ITEM 1. CHANGES IN CONTROL OF COMPANY.
Pursuant to an Agreement and Plan of Reorganization (the "Agreement"),
dated September 19, 2003, among Woodland Hatchery, Inc. (which has changed its
name to Dwango North America Corp.), a Nevada corporation (the "Company"), Cody
T. Winterton, the principal shareholder of the Company, Dwango North America,
Inc., a Texas corporation ("Dwango"), and the securityholders of Dwango listed
therein, the Company acquired a substantial majority of the issued and
outstanding shares of common stock, par value $.001 per share ("Dwango Common
Stock"), of Dwango and a substantial majority of the securities convertible into
or exercisable for Dwango Common Stock in exchange (the "Exchange") for
4,420,534 shares of common stock, par value $.001 per share ("New Dwango Common
Stock"), of the Company and securities convertible into or exercisable for
6,327,584 shares of New Dwango Common Stock. The closing (the "Closing") of the
Exchange occurred on September 29, 2003. Prior to the Closing and in accordance
with the terms of the Agreement, (i) the Company effected a one for 4.5 reverse
stock split, leaving 2,548,889 shares of New Dwango Common Stock issued and
outstanding, and (ii) Cody T. Winterton surrendered for cancellation 1,888,889
post-split shares of New Dwango Common Stock owned by him, representing 74.1 %
of the issued and outstanding shares of New Dwango Common Stock prior to
Closing. Accordingly, (i) the shareholders of the Company immediately prior to
the Closing owned 660,000 shares of New Dwango Common Stock immediately after
the Exchange and (ii) the shareholders of Dwango immediately prior to the
Closing owned a substantial majority of the New Dwango Common Stock immediately
after the Exchange. At the Closing, Robert E. Huntley exchanged (i) 1,472,250
shares of Dwango Common Stock for 2,051,553 shares of New Dwango Common Stock,
and (ii) options to purchase 500,000 shares of Dwango Common Stock for options
to purchase 696,741 shares of New Dwango Common Stock, 139,348 of which are
exercisable within the next 60 days, resulting in the beneficial ownership by
Mr. Huntley of approximately 42% of the issued and outstanding shares of New
Dwango Common Stock after the Closing (24% on a fully-diluted basis). These
transactions may be deemed to have resulted in a change in control of the
Company from Cody T. Winterton to Robert E. Huntley. Pursuant to the Agreement,
the directors and executive officers of the Company prior to the Closing
resigned and the directors and executive officers of Dwango assumed the same
positions with the Company. In this respect, Robert E. Huntley, L. Derrick
Ashcroft, Joseph Allen, Jay F. Higgins and Paul Eibeler became directors of the
Company. Robert E. Huntley became the Chairman of the Board, President and Chief
Executive Officer, F. Conrad Hametner III became Chief Operating Officer,
Jacques Faust became Chief Financial Officer and Rick Hennessey became Executive
Vice President of the Company.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Pursuant to the Agreement, the Company acquired a substantial majority
of the issued and outstanding shares of Dwango Common Stock and a substantial
majority of the securities convertible into or exercisable for shares of Dwango
Common Stock. The Company intends to seek to acquire the remaining issued and
outstanding shares of Dwango Common Stock and securities convertible into or
exercisable for shares of Dwango Common Stock. Each Dwango shareholder who
elected to participate in the Exchange received 1.3934814 (the "Exchange Ratio")
shares of New Dwango Common Stock for each share of Dwango Common Stock so
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exchanged. Each holder of options, warrants or convertible notes of Dwango who
elected to participate in the Exchange received a security of the Company
comparable to the security of Dwango exchanged by such holder, except that (i)
the number of shares for which the issued security was exercisable or into which
it was convertible was a number of shares equal to the number of shares for
which the Dwango security surrendered for exchange was exercisable or
convertible multiplied by the Exchange Ratio, and (ii) the exercise or
conversion price of the issued security was the exercise or conversion price of
the Dwango security surrendered for exchange divided by the Exchange Ratio.
At the Closing, the Company issued (i) 4,420,534 shares of New Dwango
Common Stock in exchange for 3,172,294 shares of Dwango Common Stock, (ii)
promissory notes in the principal amount of $2,450,000 convertible into
2,041,612 shares of New Dwango Common Stock at a conversion price of $1.20 per
share, (iii) options to purchase 514,126 shares of New Dwango Common Stock at an
exercise price of $.80 per share, (iv) options to purchase 806,498 shares of New
Dwango Common Stock at an exercise price of $1.20 per share, (v) options to
purchase 378,658 shares of New Dwango Common Stock at an exercise price of $1.32
per share, and (vi) warrants to purchase 2,586,690 shares of New Dwango Common
Stock at an exercise price of $1.20 per share. Immediately following the
Closing, the Company had 5,080,534 shares of New Dwango Common Stock, promissory
notes convertible into 2,041,612 shares of New Dwango Common Stock, options
convertible into 1,699,282 shares of New Dwango Common Stock, and warrants
convertible into 2,586,690 shares of New Dwango Common Stock issued and
outstanding. Immediately following the Closing, Dwango still had 389,402 shares
of Dwango Common Stock, promissory notes convertible into 29,940 shares of
Dwango Common Stock and warrants to purchase 29,940 shares of Dwango Common
Stock issued and outstanding, owned by securityholders who had not participated
in the Exchange.
Pursuant to the terms of the Agreement and prior registration rights
agreements entered into by Dwango, the Company agreed to file a registration
statement under the Securities Act of 1933 to register the shares of New Dwango
Common Stock underlying the convertible notes and certain of the warrants issued
at the Closing. Accordingly, the Company is obligated to file a registration
statement no later than four months after the Closing and use its reasonable
commercial efforts to cause such registration statement to become effective as
soon as practicable thereafter. In addition, the holders of certain shares of
New Dwango Common Stock issued at the Closing, including shares of New Dwango
Common Stock underlying warrants issued at the Closing, have "piggyback"
registration rights which will allow them to have their shares registered in the
registration statement to be filed by the Company. It is anticipated that the
Company will also include certain warrants issued at the Closing in such
registration statement.
In connection with the Closing, in exchange for the surrender for
cancellation by Cody Winterton of 1,888,889 shares of New Dwango Common Stock on
a post-reverse stock split basis and his assumption of all liabilities of the
Company existing at or relating to periods prior to the Closing, all pre-Closing
assets of the Company were transferred to Cody T. Winterton and Dwango paid to
Mr. Winterton $50,000. Immediately after Closing, on a consolidated basis, the
only assets and liabilities of the Company were those of Dwango.
3
In accordance with the terms of the Agreement, the Company filed an
amendment to its Articles of Incorporation on September 26, 2003 to increase the
number of shares of preferred stock, par value $.001 per share, of the Company
authorized for issuance from five million to ten million and to change its name
to "Dwango North America Corp."
The consideration exchanged pursuant to the Agreement was negotiated at
"arms-length" and the director of the Company used the following criteria in
evaluating the merits of the transaction and amount of the consideration: the
relative value of the assets of the Company in comparison to those of Dwango;
Dwango's present and past business operations; the future potential of Dwango;
Dwango's management; and the potential benefit to the stockholders of the
Company. The director of the Company determined that the consideration for the
exchange was reasonable, under the circumstances, in his good faith judgment.
Neither the Company nor Dwango secured a fairness opinion or independent
appraisal in connection with the determination of the Exchange Ratio or any of
the other terms of the Agreement.
No director, executive officer or beneficial holder of 5% or more of
the shares of New Dwango Common Stock prior to Closing had any direct or
indirect interest in Dwango or any of its affiliates prior to Closing. No
director, executive officer or beneficial holder of 5% or more the shares of
Dwango Common Stock prior to Closing had any direct or indirect interest in the
Company or any of its affiliates prior to Closing.
The transactions contemplated by the Agreement are intended to qualify
as a tax-free reorganization pursuant to Section 368(a)(1)(B) of the Internal
Revenue Code of 1986, as amended.
The foregoing description of the Agreement and the transactions
contemplated thereby is subject to the more detailed provisions set forth in the
Agreement, a copy of which is attached hereto as Exhibit 2.1 and which is
incorporated herein by reference.
The Company is a successor to and intends to continue the business
operations conducted by Dwango prior to Closing. The following is a summary of
certain information regarding Dwango. Where the context requires in the
discussion below, "Dwango" refers to the Company after giving effect to the
Exchange.
BUSINESS
General
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Dwango develops and distributes wireless applications for users of next
generation wireless devices. These applications include games, polyphonic
musical ringtones and other entertainment content. Dwango is an early entrant
into this market in the United States, a market that Dwango anticipates will
grow rapidly. Dwango currently distributes its content through agreements with
wireless carriers and a handset manufacturer. In addition to publishing its own
content, Dwango publishes licensed content from third parties for distribution
through its channels.
4
Dwango has signed exclusive licensing agreements with Dwango Co., Ltd.
("Dwango Japan"), one of the leading developers of wireless entertainment and
networking technology in Japan, which permit Dwango to use and exploit the
wireless intellectual property of Dwango Japan (including software, technology,
content and trademarks) in the United States, Canada and Mexico ("North
America"). Dwango Japan recently completed its initial public offering in Japan
and was listed on the Tokyo Stock Exchange on July 17, 2003. Dwango has the
opportunity to adapt and implement both current and future Dwango Japan
technology and content for use in North America. Dwango Japan has established
itself as a leading entertainment content and network technology provider for
NTT DoCoMo's i-mode(TM) service, the largest wireless data service in the world.
Dwango anticipates that it will benefit from its association with Dwango Japan.
Robert E. Huntley, the founder and Chief Executive Officer of Dwango,
is also a founder, the former Chairman of the Board and a shareholder of Dwango
Japan. He continued as an active director of Dwango Japan until he stepped down
in December 2001 following the establishment of Dwango. Dwango intends to
utilize Dwango Japan's leadership position and proven wireless technology in the
more mature Asian wireless market as a significant competitive advantage in the
emerging North American market. Dwango intends to publish game titles licensed
from Dwango Japan and also anticipates that it will implement current and future
wireless technologies and content developed by Dwango Japan. Additionally,
Dwango intends to pursue opportunities to develop and implement its own wireless
portal and content for use in the U.S. wireless market, through internal
development and strategic alliances. Dwango also intends to publish game titles
from other leading Japanese wireless content developers.
All of the major U.S. wireless carriers have recently launched their
next generation of data services, known as "2.5G" and "3G." These new services
allow for a significant expansion of options and features for wireless devices.
In the later part of 2002, Dwango entered into agreements with AT&T Wireless and
Verizon Wireless which provide the terms and conditions under which Dwango's
applications may be made available to end-users of those carriers. Two of
Dwango's games, STAR EXCEED(TM) and dwango Racing(TM), have launched with AT&T
Wireless on the Motorola T720 wireless handset and with Verizon Wireless on the
LG VX4400 wireless handset. Relationships are also being pursued with Alltel,
Cingular, Nextel, Sprint PCS, and T-Mobile. In addition, Dwango has an agreement
with NEC America, a major international handset manufacturer, to have Dwango
game content preloaded on a next generation wireless handset. This handset
became available for sale in July 2003.
In April 2003, Dwango entered into a Letter of Intent to acquire
Over-the-Air Wireless, Inc., a company engaged in the wireless ringtone
business. The Letter of Intent provides, among other things, that Dwango will
initially issue to the shareholders of such company 200,000 shares of Dwango
common stock, prior to giving effect to the Exchange, subject to increase of up
to an aggregate of 600,000 shares, prior to giving effect to the Exchange,
depending upon the valuation of Dwango common stock in certain defined future
transactions, including the Exchange.
5
Dwango operates three divisions: dwango wireless, dwango media and
dwango studios.
o dwango wireless: is the publishing division of Dwango, and is
responsible for maintaining distribution relationships with
carriers and handset manufacturers and porting applications
for use in the North American market;
o dwango media: manages and creates media applications such as
ringtones, graphic downloads and picture applications; and
o dwango studios: encompasses the game studio which develops
original game content.
Although Dwango has three divisions, it operates in one segment and
does not account for each division separately.
It is contemplated that in the future any related businesses formed or
acquired by Dwango will be operated in separate divisions.
Dwango was incorporated in Texas on November 20, 2000. Its principal
executive office is located at 5847 San Felipe Street, Suite 2825, Houston,
Texas 77057. Its telephone number at such address is (713) 914-9600.
Products and Services
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Games
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In order to distribute the games licensed from Dwango Japan, Dwango
must "port" the applications to United States standards for use in the North
American market. Porting is a two-step process. First, the games must be
translated from Japanese to English and any cultural modifications deemed
necessary must be made. Second, the games must be taken off of the Japanese
development platform, which in the case of NTT DoCoMo's imode service is known
as DOJA, and modified for the development platforms used in the United States.
Two such platforms which Dwango is pursuing are J2ME (MIDP) and BREW. Games will
be developed for use with either or both of these platforms depending upon the
carrier for which the games are being ported. Porting from DOJA to BREW or J2ME
(MIDP) is not necessary in all cases. For example, the NEC 515 wireless handset,
which launched with AT&T Wireless in July 2003, has Dwango content pre-loaded
and ships in the United States with the Japanese DOJA platform. NEC is an active
manufacturer of handsets in Japan.
The games to be distributed by Dwango fall into one of four categories:
standalone games, turn-based network games, massively multiplayer games and
browser based network games. Standalone games are one-player games. Turn-based
network games are games where the player competes against other players on the
network and the game involves taking turns by the players. Massively multiplayer
games are games where the player may compete with thousands of other players
with an ongoing story line. Browser based network games are multiplayer games
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where the players each play simultaneously, and game play is performed through
the use of the phone's browser, rather than an application running on the phone
itself. The following is a brief description of the games currently being
distributed by Dwango:
Star Exceed(TM) is a standalone top down vertical scrolling shooting
game. The object is to destroy as many enemy craft as possible thus scoring the
highest amount of points, while avoiding being destroyed. A player is given
three fighter craft in each game. The player shoots enemy craft by using
rapid-fire lasers or homing missiles. The homing missiles will seek out and
destroy all enemy craft that have been targeted or "locked on" (designated by a
square around an enemy craft) in the fighter's radar simultaneously. To clear
the stage, the player must defeat the mother ship that appears at the end of
each stage. The game has a total of five stages, each getting progressively more
difficult. A follow-up game to STAR EXCEED(TM), Star Diversion, is also a
standalone top down vertical scrolling shooting game and is available for use on
more robust handsets. The game play is similar to that of STAR EXCEED(TM).
dwango Racing(TM) is a standalone top down vertical scrolling racing
game. The player competes against one of eight rival cars to win the race and
post the fastest lap time. The player can choose which car to use for the race,
each of which has different handling, acceleration, top speed and grip. During
the race, the player must navigate obstacles and hairpin turns. Each car is
equipped with three nitro boosts, which accelerate the car beyond its normal
speed. There are also nitro boosts along the track, which have the same
accelerating effect when the driver runs over them. If the player wins the race,
they are advanced to the next stage.
Ringtones
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Dwango has a license from Dwango Japan that includes the North American
distribution rights to approximately 1,200 high-quality ringtones appropriate
for the U.S. market. These ringtones must be modified for use in the North
American market. The required modification will depend upon the handset on which
the ringtone will be carried. In April 2003, Dwango executed a letter of intent
to acquire Over-the-Air Wireless, Inc. ("OTA Wireless"), a company engaged in
the wireless ringtone business. OTA Wireless maintains licenses with Sony, EMI,
Warner/Chappel Hill, ASCAP, Harry Fox and BMI, and anticipates entering into
licenses with Universal and BMG. Licenses of the type held by OTA Wireless are
necessary for the distribution of Dwango's ringtones, including the ringtones
licensed from Dwango Japan. In addition, OTA Wireless has developed an
application that can be used in connection with the browsing and downloading of
ringtones. There can be no assurance that the acquisition of OTA Wireless will
be consummated. In the event that such acquisition is not consummated, the
Company will have to enter into similar licensing agreements to those already
entered into by OTA Wireless and develop necessary applications in order to
distribute ringtones.
Images
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Dwango anticipates offering images for download upon consummation of
its planned acquisition of OTA Wireless, for which there can be no assurance.
OTA Wireless currently maintains a catalog of over 1,000 images. The image
catalog is comprised of 100% original artwork. OTA has also begun discussions
for exclusive rights to professionally generated images. Images can be
downloaded to phones as logos, which can be displayed on the main screen of a
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user's phone, calling group icons, which are displayed when a call is received
by selected calling parties, picture messages, which can be sent to friends
along with text, or screensavers. OTA Wireless has also developed an image
catalog application to allow subscribers to browse and download images to their
phones.
Dwango Japan Licenses
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Dwango entered into a Technology License Agreement and a Trademark
License Agreement with Dwango Japan effective August 14, 2002. The Technology
License Agreement allows Dwango to use exclusively all wireless technology of
Dwango Japan (including all wireless technology developed by Dwango Japan during
the term of the license) in North America for a period of eight years. To
maintain the right to use such technology Dwango must pay to Dwango Japan a
royalty equal to the greater of $50,000 per year or 2% of Dwango's annual gross
revenue arising from wireless technology. Gross revenue not arising from
wireless technology is not subject to this royalty.
The Trademark License Agreement allows Dwango to use exclusively the
Dwango Japan trademarks, including the name "dwango," in North America for a
period of 25 years. To maintain the right to use such trademarks, Dwango must
pay to Dwango Japan a royalty equal to the greater of $50,000 per year or 1/2 of
1% of Dwango's annual gross revenue arising from wireless technology. Gross
revenue not arising from wireless technology is not subject to this royalty.
The parties have recognized that Dwango Japan has previously entered
into and may in the future enter into certain global transactions with
independent third parties for the development of wireless technology. To account
for this business reality (the possible use of Dwango Japan wireless technology,
not content, in North America when distributed as part of a global distribution
agreement) and recognizing that Dwango has a license to the Dwango Japan
wireless technology within North America, the parties have agreed that Dwango
will have the right in certain circumstances to share with Dwango Japan in the
revenues generated from these global transactions to the extent that they result
in revenue arising from and/or business opportunities within North America, on
terms to be agreed between Dwango and Dwango Japan.
In connection with the execution of the Technology License Agreement
and Trademark License Agreement, on August 14, 2002, Dwango Japan purchased
common stock of Dwango for $400,000. Prior to that, in July 2002, Dwango Japan
invested $100,000 in Dwango in consideration for a one-year convertible note,
bearing interest at 4% per annum. Such note was converted into common stock of
Dwango, at a conversion price of $1.67 per share, on July 7, 2003, prior to
giving effect to the Exchange.
Please see "Risk Factors: Dwango is dependent upon Dwango Japan and the
maintenance of the License Agreements that it has with Dwango Japan" for more
information on the license agreements.
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Distribution
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In the later part of 2002, Dwango entered into an agreement with AT&T
Wireless which provides the terms and conditions under which Dwango's
applications may be made available to AT&T Wireless subscribers. Dwango is
currently selling three games through AT&T Wireless' m-Mode channel: STAR
EXCEED(TM) and dwango Racing(TM) on the Motorola T720 wireless handset and Star
Diversion on the NEC 515 wireless handset. In addition, Star Diversion is
preloaded on the NEC 515 next generation wireless handsets sold by AT&T Wireless
pursuant to an agreement Dwango has with NEC America. This allows AT&T Wireless
subscribers who purchase the NEC 515 wireless handset access to one free level
of game play. Subsequent levels will be available for purchase. This type of
channel distribution with upgrade billing from within the application represents
a first-of-a-kind innovation in the North American wireless market.
In May of 2002, Dwango executed an agreement to become a certified BREW
developer with Qualcomm. This agreement enables Dwango to create and publish
content on the BREW platform. BREW is the platform being used by Verizon
Wireless for its data applications, including entertainment offerings. In
October of 2002, Dwango executed a BREW application license agreement with
Verizon Wireless. The agreement gives Dwango access to post for distribution
BREW software applications to the online BREW catalog maintained by Qualcomm.
These combined agreements give Dwango a channel to publish content on Verizon
Wireless' network. Dwango successfully launched its first BREW application, STAR
EXCEED(TM), on Verizon's Get-It-Now deck in May 2003 for the LG VX4400 handset
and subsequently launched dwango Racing(TM) on such handset in August 2003.
Get-It-Now is Verizon's entertainment service and is available on BREW handsets.
Dwango anticipates entering into agreements similar to those described
above to make their content available to subscribers of other major carriers
such as Alltel, Cingular, Nextel, Sprint PCS, and T-Mobile.
Dwango's content is initially being sold primarily using a download fee
model, which is currently the prevailing model in the United States market.
Under this model, a download fee is charged for each download of an application.
The one-time fee is usually higher than in a subscription based model, where
fees are charged on a monthly basis for access to content within the
subscription package. When using the subscription model, the applications
downloaded expire after a period of time so that they are no longer usable on
the handset to which they were downloaded unless a renewal fee is paid. Dwango
anticipates that it will offer such a subscription based fee arrangement if and
when it determines that the United States market demands such type of pricing or
in response to competitive moves.
Whether a download model or subscription model is used, the fees for
downloading content may be collected by the carriers and then forwarded to
Dwango in what is known as a billing-on-behalf-of-others system, which is the
current system employed by Dwango. When games are sold through a carrier, the
carrier is entitled to retain a royalty. The development and implementation of
billing-on-behalf-of-others systems enables wireless carriers to collect
revenues for subsequent remittance to content providers. This model is critical
to attract users who are comfortable paying for content as part of their regular
wireless phone bill but who may be hesitant paying for content in an
over-the-air credit card transaction.
9
Markets
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The United States wireless market is evolving to the next generation
that allows carriers to provide data services in addition to voice services and
generate revenue from those data services. Dwango believes this will result in a
market similar to the one that has developed in Japan, where NTT DoCoMo's
i-mode(TM) data service has grown from the time of launch to over 31 million
subscribers in three years.
Dwango believes that in the United States, a number of changes in the
wireless market are driving the evolution to the next generation. These changes
include the development of new handsets with higher resolution color screens,
longer battery life and the ability to download and execute applications on the
handset, the upgrade of wireless networks, the ability of wireless carriers to
bill on behalf of application developers such as Dwango, and the development by
companies such as Dwango of new wireless applications.
According to a March 2003 Telecompetition, Inc. market study, the
aggregate number of wireless subscribers in the United States represents
approximately 50% of the residents in the United States. The number of such
subscribers is expected to continue to grow. In-Stat/MDR, a market research
company, has estimated that the wireless gaming market will grow to $2.8 billion
worldwide by 2006. Frost & Sullivan, a company engaged in strategic market
consulting and training, has stated that mobile gaming revenues could reach
$12.8 billion worldwide by 2008.
Dwango's target market is youth, which is typically defined as
consumers between the ages of 14 and 24 years old, and sometimes includes
consumers through their late 20's. Wireless carriers, particularly in North
America, are increasingly focusing on this segment as the most rapidly adopting
segment with respect to the wireless content marketplace.
Marketing and Sales
- -------------------
Dwango's success in marketing and selling its applications will rely on
product innovation (including freshness), placement in the upper tiers of the
handset menus (making the applications easy to find), and distribution (the
number of carriers that offer Dwango products). Dwango has already begun
marketing its products to wireless carriers. Marketing of the applications to
consumers is anticipated to be performed through a combination of marketing by
the wireless carriers of wireless content to their subscribers, direct consumer
marketing efforts by Dwango, and the public relations efforts of Dwango. Dwango
also expects to gain exposure through industry trade shows, industry conference
attendance, its website, and general industry exposure.
Competition
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The market for wireless content is highly competitive. Dwango is an
early entrant into the wireless content market, and Dwango expects that the
competition will increase as the market grows. Many of Dwango's competitors have
substantially greater financial resources than Dwango, which may allow them to
10
identify emerging trends more quickly and develop technology at a faster pace.
Dwango believes that the principal competitive factors are the quality of the
content, including its freshness and innovative differentiation, relationships
with wireless carriers, the ability to have the content placed in the upper
tiers of the handset menus, and the number of carriers who offer the content.
Dwango believes that it competes, or will compete, favorably in these
categories. Dwango believes it has a unique competitive advantage in its ability
to leverage the license for the Dwango Japan content and technology.
Government Regulation
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Dwango is not currently subject to direct federal, state, or local
government regulation, other than regulations applicable to businesses
generally. The telecommunications industry is subject to regulation by federal
and state agencies, including the Federal Communications Commission, and various
state public utility and service commissions. While such regulation does not
necessarily affect Dwango directly, the effects of these regulations on the
wireless carriers that provide Dwango's applications to their subscribers may,
in turn, adversely affect Dwango's business, by, for example, increasing
Dwango's costs or reducing its ability to continue selling its products.
Intellectual Property
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Dwango regards its patents, copyrights, servicemarks, trademarks, trade
secrets, proprietary technology and similar intellectual property, including
that licensed from Dwango Japan, as critical to its success, and it relies on
trademark and copyright law, trade secret protection and confidentiality and
license agreements with its employees, customers, independent contractors,
partners and others to protect its intellectual property rights. There can be no
assurance that the steps Dwango has taken to protect its proprietary rights will
be adequate to prevent third parties from infringing or misappropriating its
proprietary rights.
Properties
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Dwango currently maintains its executive office at 5847 San Felipe
Street, Suite 2825, Houston, Texas 77057-3000. dwango wireless and dwango media
are located at 200 West Mercer Street, Suite 501, Seattle, Washington 98119, and
dwango studios is located at 582 Market Street, Suite 1101, San Francisco,
California 94104. The aggregate monthly base rent for such space is
approximately $8,700.
Employees
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Dwango currently has a total of thirty-two employees, all of whom work
full-time. Eight of Dwango's employees are located at Dwango's Houston, Texas
office, five are located at Dwango's San Francisco office, and nineteen are
located at Dwango's Seattle, Washington office. None of Dwango's employees are
represented by unions and Dwango is not aware of any activities seeking such
organization. Dwango considers its relations with its employees to be good.
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RISK FACTORS
Dwango's operations, as well as an investment in its securities,
involve numerous risks and uncertainties. The reader should carefully consider
the risk factors discussed below and elsewhere in this Current Report on Form
8-K.
DWANGO IS A DEVELOPMENT STAGE COMPANY WITH A LIMITED OPERATING HISTORY AND HAS
INCURRED LOSSES TO DATE.
Dwango was incorporated on November 16, 2000 and is a development stage
company. Accordingly, Dwango has a limited operating history in the wireless
content market upon which an evaluation of Dwango and its prospects can be
based. Dwango's prospects must be considered in light of the risks and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets. To
address these risks, Dwango must, among other things, respond to competitive
developments, continue to attract, retain and motivate qualified personnel, and
continue to upgrade its technologies and commercialize products and services
incorporating such technologies. There can be no assurance that Dwango will be
successful in addressing such risks. Dwango has generated nominal revenues to
date and no assurance can be given that it will be able to generate or sustain
meaningful revenues in the future. Dwango has incurred net losses of $206,000,
$1,270,000 and $1,253,000 for the years ended December 2001 and 2002, and for
the six months ended June 30, 2003, respectively, and expects to incur losses
for at least twelve months. At June 30, 2003, Dwango had an accumulated deficit
of $2,730,000. There can be no assurance that Dwango will achieve profitable
operations.
IF DWANGO IS UNABLE TO SECURE SUBSTANTIAL ADDITIONAL FINANCING IT MAY HAVE TO
SIGNIFICANTLY CURTAIL OR CEASE OPERATIONS.
At June 30, 2003, Dwango had a negative working capital position of
$837,000 and a negative stockholders equity of $663,000. Since July 1, 2003,
Dwango has raised gross proceeds of $1,450,000 from a recently completed private
placement of Senior Subordinated Convertible Promissory Notes and Warrants. At
August 31, 2003, Dwango had a cash position of $289,000. Dwango requires
substantial additional financing to fund the cost of continued operating
activities, which financing Dwango intends to seek. If further funding is not
obtained by October 31, 2003, Dwango may be required to significantly curtail or
cease operations. Further, if additional funds are raised by issuing equity
securities, significant dilution to shareholders may occur and new investors may
get rights that are preferential to current shareholders.
THE WIRELESS CONTENT MARKET IS A DEVELOPING MARKET WHICH MAY NOT DEVELOP AS
DWANGO ANTICIPATES.
The wireless content market, currently a minimal revenue generator in
North America, is an emerging market that is relatively new and will require
additional development if Dwango is to achieve meaningful levels of revenues and
profitability. The applications to be offered by Dwango will be dependent upon,
among other things, the market acceptance of the next generation of wireless
handsets which were initially introduced in summer 2002. The demand for Dwango's
12
products and services is dependent on a number of variables, which Dwango cannot
predict with accuracy. There can be no assurance that the market will develop as
Dwango anticipates.
Dwango will incur operating expenses based largely on anticipated
revenue trends that are difficult to predict. To prepare to participate in the
wireless content market, Dwango plans to invest a significant amount of its
resources to develop, market and support its products and services in advance of
generating substantial revenues, and accordingly anticipates its incurring
substantial losses until such time, if ever, that substantial revenues are
generated. Accordingly, the success of Dwango will depend on the market for
Dwango's products developing sufficiently to support profitable operations, and
its ability to commercialize its products and services in order to generate
sufficient revenue from sales of these products and services to offset the
expenses associated with developing, marketing and supporting them.
THE ACCURACY OF THE PROJECTIONS REGARDING THE SUBSCRIBER BASE OF DWANGO ARE
CRITICAL TO ITS PROFITABILITY.
Dwango anticipates that its financial results in the near term will be
principally driven by its ability to properly allocate its limited cash
resources. The allocation of these resources must be coordinated with and take
into account the projected rate of growth of Dwango's subscriber base and the
pricing assumptions in its business model. Management has made significant
estimates regarding the anticipated growth of its subscriber base, taking into
account many variables, certain of which are outside Dwango's control. The
business model of Dwango requires expanding and improving its technological and
other capabilities necessary in order to properly service anticipated increased
usage by a growing subscriber base, and if the subscriber base of Dwango does
not grow at projected rates, or its pricing assumptions are incorrect, then the
up front expenses of Dwango will exceed its revenues by amounts greater than
currently anticipated, exacerbating projected losses and putting additional
pressure on cash resources.
DWANGO IS DEPENDENT UPON DWANGO JAPAN AND THE MAINTENANCE OF THE LICENSE
AGREEMENTS THAT IT HAS WITH DWANGO JAPAN.
Dwango anticipates that it will derive a portion of its revenues from
the distribution of current and future applications developed utilizing the
intellectual property of Dwango Japan, and will benefit from being associated
with Dwango Japan. The Chief Executive Officer of Dwango, Robert E. Huntley, is
a co-founder, former Chairman of the Board and currently a shareholder of Dwango
Japan.
Dwango has a license agreement with Dwango Japan that provides Dwango
with an eight-year license to use, market, sell and make products and services
using Dwango Japan's current and future wireless technology in North America. In
addition, a separate license agreement with Dwango Japan provides Dwango with a
25-year license to use, market, sell and make products and services using Dwango
Japan's trademarks in North America. If Dwango discontinues operation of its
service for a continuous period of more than six consecutive months and the
service is not restarted within 60 days after written notice from Dwango Japan,
the licenses may be terminated by Dwango Japan. Upon termination of the
13
licenses, Dwango must cease use of the intellectual property granted to it by
Dwango Japan under the licenses. There can be no assurance that Dwango can meet
the requirements contained in the licenses.
Although Dwango has a license to use Dwango Japan's technology in North
America, Dwango Japan may develop and/or provide to third parties certain of
Dwango Japan's technology, but not content, so that such third parties can
distribute such third parties' content on a global basis using Dwango Japan's
technology, including distribution in North America. If a distribution is made
by a third party in the North America using Dwango Japan's technology, Dwango
will have the right in certain circumstances to share with Dwango Japan in the
revenue generated from that distribution in the North America on terms to be
agreed upon by Dwango Japan and Dwango. There can be no assurance that Dwango
will be successful in negotiating revenue sharing agreements with Dwango Japan
on terms satisfactory to Dwango. In addition, to the extent these third parties
distribute their content in North America, whether or not using Dwango Japan
technology, Dwango will be competing with such third parties.
Dwango is obligated to pay Dwango Japan a royalty for both the
technology and trademark licenses. With respect to the trademark license, Dwango
must pay Dwango Japan .5% of Dwango's gross revenue (from wireless technology
products) or $50,000 per year, whichever is greater. With respect to the
technology license, Dwango must pay Dwango Japan 2% of Dwango's gross revenue
(from wireless technology products) or $50,000 per year, whichever is greater.
If Dwango is unable to meet its payment obligations under the licenses with
Dwango Japan, the licenses may be terminated by Dwango Japan.
Due to Dwango's important contractual ties with Dwango Japan, and the
benefits received from being associated with Dwango Japan, Dwango would be
significantly and adversely affected should Dwango Japan be unable to continue
operations or otherwise perform its obligations to Dwango, or if the licenses
are terminated by Dwango Japan.
DWANGO'S SUCCESS DEPENDS UPON ENTERING INTO DISTRIBUTION ARRANGEMENTS WITH MAJOR
WIRELESS CARRIERS AND DEVELOPING AND MAINTAINING STRATEGIC RELATIONSHIPS WITH
SUCH WIRELESS CARRIERS.
Dwango's strategy for pursuing a significant share of the emerging
wireless content market in North America is dependent upon entering into
distribution arrangements with major wireless carriers and developing and
maintaining strategic relationships with such wireless carriers so that, among
other things, Dwango can obtain favorable treatment with respect to the timing
and placement of its applications on the wireless handset download menus. In
this respect, Dwango has entered into agreements with AT&T Wireless and Verizon
Wireless which provide for the terms and conditions under which Dwango's
applications may be made available to end-users of such carriers. Distribution
agreements are also being pursued with Alltel, Cingular, Nextel, Sprint PCS and
T-Mobile. Dwango is dependent upon the subsequent success of these wireless
carriers in performing their responsibilities and sufficiently marketing
Dwango's applications. There can be no assurance that Dwango will be able to
negotiate, execute and maintain favorable agreements and relationships with
wireless carriers, that the carriers with whom Dwango has a contractual
relationship will choose to utilize Dwango's applications or that such wireless
carriers will be successful and/or will not pursue alternative technologies.
14
DWANGO'S PERFORMANCE MAY BE DEPENDENT IN PART UPON ITS ABILITY TO TIMELY AND
COST EFFICIENTLY PORT APPLICATIONS FROM THE JAPANESE DEVELOPMENT PLATFORM TO
UNITED STATES STANDARDS.
In order to distribute the applications licensed from Dwango Japan,
Dwango must port the applications to United States software and hardware
standards, including handsets, unless the handset on which the application will
be distributed ships in North America with the Japanese development platform for
which the content was developed. If Dwango is unable to so port the applications
in a timely and cost efficient manner, its business could be adversely affected.
DWANGO MAY BE UNABLE TO IMPLEMENT ITS ACQUISITION GROWTH STRATEGY, AND FAILURE
TO MANAGE ITS ACQUISITION STRATEGY PROPERLY MAY HARM ITS BUSINESS.
Dwango's business strategy includes making strategic acquisitions of
other companies or businesses. In April 2003, Dwango executed a Letter of Intent
to acquire Over-the-Air Wireless, Inc., a company engaged in the wireless
ringtone business. The letter of intent is nonbinding and there can be no
assurance that the acquisition will be consummated. Dwango's continued growth
may depend on its ability to identify and acquire, on acceptable terms,
companies that complement or enhance its business. The competition for
acquisition candidates is intense and Dwango expects this competition to
increase. There can be no assurance that Dwango will identify and successfully
compete for appropriate acquisition candidates or complete acquisitions at
reasonable purchase prices, in a timely manner or at all. Further, Dwango may
not be able to realize the anticipated benefits of future acquisitions. In
implementing its acquisition growth strategy, Dwango may encounter:
-costs associated with incomplete or poorly implemented acquisitions;
-expenses, delays and difficulties of integrating acquired companies
into Dwango's existing organization;
-dilution of the interest of existing stockholders; and
-diversion of management's attention.
Any of these matters could have a material adverse effect on Dwango's
business, results of operations and financial condition.
DWANGO FACES SIGNIFICANT COMPETITION AND MAY BE UNABLE TO COMPETE SUCCESSFULLY.
The market for wireless applications is extremely competitive. Dwango's
competition is expected to intensify as competitors reduce prices, incorporate
new features and expand and accelerate the release of new products and service
offerings, and new competitors enter the market. The evolution of technology in
the wireless market is rapid and Dwango must adapt to remain competitive. Dwango
is aware of other companies that provide mobile applications. Many of these
15
companies have substantially greater financial resources than Dwango which could
allow them to identify emerging trends more quickly and develop technology at a
faster pace. Dwango may not be able to compete successfully against current or
future competitors and such competitive pressures could harm Dwango's business,
operating results or financial condition. Some of Dwango's competitors have
already made significant progress in the market.
FAILURE TO DEVELOP WIRELESS CONTENT AND RESPOND TO CHANGES IN TECHNOLOGY ON A
TIMELY BASIS COULD ADVERSELY AFFECT DWANGO'S BUSINESS.
Dwango's ability to design, develop, test and support, or obtain from
third parties, new or enhanced content for wireless network technology on a
timely basis to meet the changing needs of wireless phone users and respond to
technological developments and evolving industry standards is critical to
Dwango's future growth. There can be no assurance that Dwango will be able to
identify emerging technologies which will gain widespread acceptance. If Dwango
invests substantial resources in acquiring, developing or implementing wireless
content that does not become widely accepted or which is delayed in
introduction, Dwango may be unable to recoup such investment. There can be no
assurance that others will not develop technologies that achieve a greater
market acceptance than Dwango, that render Dwango's services obsolete or that
otherwise adversely affect Dwango's competitive position.
IF DWANGO IS UNABLE TO MAINTAIN A PROMINENT POSITION ON APPLICATION DOWNLOAD
MENUS, IT COULD HAVE AN ADVERSE EFFECT ON ITS BUSINESS.
Dwango will need to continually develop new products in order to
maintain a prominent position on the application download menus maintained by
wireless carriers, as consumers are more likely to download newer applications
that are higher up in the download menu. New applications are generally
introduced onto the application download menus on a weekly basis, and older
applications are pushed toward the bottom of the menu. If Dwango is unable to
maintain a prominent position on the download menus, it could adversely affect
its business.
THE LIFE CYCLE OF DWANGO'S PRODUCTS MAY BE SHORT, WHICH COULD ADVERSELY AFFECT
ITS BUSINESS.
The emergence of new wireless products and technologies, changes in
consumer preferences and other factors may limit the life cycle of Dwango's
technologies and any future products and services that Dwango develops. Dwango's
future performance will depend on its ability to identify emerging technological
trends in the wireless content market, identify changing consumer needs, desires
or tastes, develop and maintain competitive technology, including new product
and service offerings, improve the performance, features and reliability of
Dwango's products and services, particularly in response to technological
changes and competitive offerings, and bring technology to the market quickly at
cost-effective prices.
DWANGO'S FUTURE PERFORMANCE WILL BE DEPENDENT UPON ITS ABILITY TO DEVELOP ITS
BRAND WITH CONSUMERS.
Dwango's future performance will be dependent upon its ability to
develop its brand with consumers. In developing its brand, Dwango will be
dependent upon both the marketing performed by wireless carriers and its own
16
marketing efforts. Currently, Dwango has limited marketing capabilities. Dwango
will need to develop a marketing group with technical expertise to promote the
development of its brand or retain an appropriate marketing firm. There can be
no assurance that Dwango will have the financial resources needed to develop a
marketing group or retain a marketing firm, or that any of the marketing efforts
undertaken by Dwango will be successful.
DWANGO'S INABILITY TO PROTECT ITS INTELLECTUAL PROPERTY RIGHTS COULD HARM ITS
BUSINESS.
Dwango's performance and ability to compete will be dependent to a
significant degree on licensed and internally developed content and technology.
Dwango expects to rely on a combination of patent, copyright, trademark and
trade secret laws, confidentiality and nondisclosure agreements with its
employees and with third parties and contractual provisions to establish and
maintain its proprietary rights, including those rights licensed from Dwango
Japan. There can be no assurance that the steps taken by Dwango to protect its
proprietary rights will be adequate, or that third parties will not infringe
upon or misappropriate Dwango's licensed or proprietary patents, copyrights,
trademarks, service marks and similar proprietary rights. In addition, effective
patent, copyright and trademark protection may be unenforceable or limited in
certain foreign countries.
THE LOSS OF THE SERVICES OF DWANGO'S KEY MANAGEMENT WOULD LIKELY HARM ITS
BUSINESS.
Dwango's success will depend in large part upon the continued services
and contributions of a small number of key management employees, including
Robert E. Huntley, Dwango's Chief Executive Officer. The loss of the services of
one or more of Dwango's key employees could have a material adverse effect on
Dwango. In addition, if one or more of Dwango's key employees resign from Dwango
to join a competitor or to form a competitor, the loss of such employee(s) and
any resulting loss of existing or potential customers to such competitor could
have a material adverse effect on Dwango. Dwango currently does not have an
employment agreement with Mr. Huntley.
IF DWANGO IS UNABLE TO ATTRACT AND RETAIN QUALIFIED MANAGEMENT AND OTHER
PERSONNEL, ITS BUSINESS MAY SUFFER.
Dwango currently has thirty-two full-time employees. Most of Dwango's
present management has limited experience in managing a business as large as
that currently contemplated by Dwango. In order to meet its business objectives,
it will be necessary for Dwango to hire appropriate management personnel, as
well as additional technical personnel. Dwango competes for such persons with
other companies, some of which may have substantially greater capital resources
and facilities than Dwango. There can be no assurance that Dwango will be
successful in recruiting and retaining such personnel of the requisite caliber
or in adequate numbers to enable it to conduct its business as proposed.
DWANGO'S PRINCIPAL STOCKHOLDER WILL HOLD APPROXIMATELY 40% OF THE OUTSTANDING
SHARES OF NEW DWANGO COMMON STOCK.
17
Robert E. Huntley, Chief Executive Officer of Dwango, presently owns
2,051,553 shares of New Dwango Common Stock, representing approximately 40% of
the currently issued and outstanding shares of New Dwango Common Stock. Mr.
Huntley also holds options to purchase an additional 696,741 shares of New
Dwango Common Stock. Accordingly, Mr. Huntley will have significant influence
over the outcome of all matters submitted to the shareholders for approval,
including the election of directors.
DWANGO HAS NEVER PAID ANY DIVIDENDS ON ITS COMMON STOCK AND DOES NOT ANTICIPATE
DOING SO IN THE FORESEEABLE FUTURE.
Dwango has not paid any cash dividends on its equity securities since
inception and it is anticipated that the Company will not pay cash dividends on
its equity securities in the foreseeable future. The Company is expected to
follow a policy of retaining all of its earnings, if any, to finance development
and expansion of its business.
THE POSSIBLE ISSUANCE OF SUBSTANTIAL AMOUNTS OF ADDITIONAL SHARES WITHOUT
SHAREHOLDER APPROVAL COULD DILUTE DWANGO'S SHAREHOLDERS.
As of the date of this Current Report on Form 8-K, the Company has an
aggregate of 5,080,534 shares of New Dwango Common Stock outstanding and
6,327,584 shares of New Dwango Common Stock issuable upon exercise or conversion
of outstanding options, warrants and convertible notes. The Company has
50,000,000 shares of New Dwango Common Stock authorized. All of such authorized
shares in excess of those currently outstanding may be issued without any action
or approval by the Company's shareholders and may result in dilution to the
current shareholders of the Company.
THERE IS A LIMITED PUBLIC MARKET FOR SHARES OF NEW DWANGO COMMON STOCK.
There is currently only a limited public market for the New Dwango
Common Stock on the Over-the-Counter Bulletin Board. Most of the shares of New
Dwango Common Stock issued and outstanding are restricted and may only be sold
subject to certain conditions. The development of an active public trading
market depends upon the existence of willing buyers and sellers that are able to
sell their shares and market makers that are willing to make a market in the
shares. Under these circumstances, the market bid and ask prices for the shares
may be significantly influenced by the decisions of the market makers to buy or
sell the shares for their own account, which may be critical for the
establishment and maintenance of a liquid public market in New Dwango Common
Stock. Market makers are not required to maintain a continuous two-sided market
and are free to withdraw firm quotations at any time. No assurance can be given
that an active public trading market for the shares will develop or be
sustained.
THERE IS NO PUBLIC MARKET FOR THE NOTES AND WARRANTS ISSUED IN CONNECTION WITH
THE EXCHANGE.
There is no public market for the notes or warrants issued in
connection with the Exchange, and there can be no assurance that a trading
market will ever develop or, if such a market develops, that it will be
sustained.
18
THE STOCK PRICE OF NEW DWANGO COMMON STOCK IS EXPECTED TO BE VOLATILE.
The market for New Dwango's Common Stock is anticipated to be highly
volatile. The trading price of the New Dwango Common Stock could be subject to
wide fluctuations in response to, among other things, quarterly variations in
operating and financial results, announcements of technological innovations or
new products by Dwango or its competitors, changes in Dwango's revenues and
revenue growth rate and general market conditions. In addition, statements or
changes in opinions, ratings, or earnings estimates made by brokerage firms or
industry analysts relating to Dwango's market or relating to Dwango could result
in an immediate and adverse effect on the market price of New Dwango Common
Stock.
A SIGNIFICANT NUMBER OF SHARES OF NEW DWANGO COMMON STOCK AND WARRANTS TO
PURCHASE NEW DWANGO COMMON STOCK WILL BECOME ELIGIBLE FOR SALE ON THE
EFFECTIVENESS OF A REGISTRATION STATEMENT EXPECTED TO BE FILED.
The Company is required to file a registration statement to register
under the Securities Act of 1933 the shares of New Dwango Common Stock
underlying the convertible notes and certain of the warrants issued in
connection with the Exchange. In addition, certain holders of New Dwango Common
Stock issued in connection with the Exchange, including shares underlying
warrants issued in connection with the Exchange, have piggyback registration
rights which will allow them to have their shares registered in such
registration statement. It is also anticipated that Dwango will include the
warrants to purchase New Dwango Common Stock issued in connection with the
Exchange in such registration statement. As there is currently a very limited
amount of shares in the public float due to the restricted nature of a
significant portion of the shares outstanding, and a significant number of
shares is expected to become saleable in the public market at the time the
registration statement referred to above becomes effective, the market price for
the New Dwango Common Stock could decrease significantly at such time.
DWANGO MAY BE SUBJECT TO PENNY STOCK REGULATIONS, WHICH MAY MAKE IT MORE
DIFFICULT TO SELL THE SHARES OF NEW DWANGO COMMON STOCK.
The Securities and Exchange Commission has adopted rules that regulate
broker-dealer practices in connection with transactions in "penny stocks". Penny
stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
Nasdaq, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system). Prior to
a transaction in a penny stock, a broker-dealer is required to:
- deliver a standardized risk disclosure document prepared by the
Securities and Exchange Commission that provides information about penny stocks
and the nature and level of risks in the penny stock market;
- provide the customer with current bid and offer quotations for the
penny stock;
19
- explain the compensation of the broker-dealer and its salesperson in
the transaction;
- provide monthly account statements showing the market value of each
penny stock held in the customer's account; and
- 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 requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. As the shares of New Dwango Common Stock may be subject to the
penny stock rules, investors may find it more difficult to sell their shares in
the event they become otherwise freely resalable.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
Statements contained in this Current Report on Form 8-K include
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors which could cause the actual results, performance and
achievements, whether expressed or implied by such forward-looking statements,
not to occur or be realized. Such forward-looking statements generally are based
upon Dwango's best estimates of future results, performance or achievement,
based upon current conditions and the most recent results of operations.
Forward-looking statements may be identified by the use of forward-looking
terminology such as "may," "will," "expect," believe," "estimate," "anticipate,"
"continue," or similar terms, variations of such terms or the negative of such
terms. Potential risks and uncertainties include, among other things, such
factors as:
o The market acceptance and amount of sales of Dwango's
products,
o Dwango's expansion strategy,
o The competitive environment within the wireless industry,
o Dwango's ability to raise additional capital,
o Dwango's ability to attract and retain qualified personnel,
and
o The other factors and information disclosed and discussed
under "Risk Factors" above.
Investors should carefully consider such risks, uncertainties and other
information, disclosures and discussions which contain cautionary statements
identifying important factors that could cause actual results to differ
materially from those provided in the forward-looking statements. Dwango
undertakes no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events, or otherwise.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following should be read in conjunction with the financial
statements and related notes thereto included elsewhere in this Current Report
20
on Form 8-K. This discussion contains forward-looking statements that involve
risks, uncertainties and assumptions. The actual results may differ materially
from those anticipated in these forward-looking statements.
Overview
Dwango is a development stage company founded in November 2000 to
provide content, network technology and application publishing channels through
North American wireless carriers. Since inception, Dwango has not had any
significant revenues.
Effective August 14, 2002, Dwango entered into exclusive license
agreements with Dwango Japan which allow Dwango to use Dwango Japan's current
and future wireless intellectual property and trademarks, subject to certain
conditions and limitations. Currently, the wireless intellectual property
licensed from Dwango Japan consists primarily of games, a library of ringtones
and other wireless device applications.
During the next twelve months, subject to the receipt of sufficient
financing, Dwango intends to focus on significantly expanding its business.
Dwango plans to develop and promote its own applications for the North American
wireless market as well as applications based on the licensed technology and
content from Dwango Japan. In addition, as part of its expansion strategy,
Dwango intends to acquire businesses engaged in developing and marketing
wireless technology and applications, including games and ringtones. In
connection with this expansion of its business, Dwango anticipates that it will
hire additional employees.
Dwango has not achieved a significant amount of revenues and is not
profitable. Dwango anticipates that it will continue to incur net losses for the
foreseeable future. The extent of these losses will depend, in part, on the
amount of growth in Dwango's revenues from consumer acceptance and use of its
games and ringtones and the number of wireless mobile carriers who agree to
carry Dwango's games and ringtones. As of June 30, 2003, Dwango had an
accumulated deficit of $2,730,000. Dwango expects, subject to the receipt of
sufficient financing, that its operating expenses will increase significantly
during the next several months, especially in the areas of product development
and marketing. Thus, Dwango will need to generate a significant amount of
increased revenues to achieve profitability. To the extent that increases in its
operating expenses precede or are not subsequently followed by commensurate
increases in revenues, or if Dwango is unable to adjust operating expense levels
accordingly, Dwango's business, results of operations and financial condition
would be materially and adversely affected. There can be no assurance that
Dwango can achieve or sustain profitability or that Dwango's operating losses
will not increase in the future.
Results of Operations
Dwango had no revenues in 2001 and 2002, and had $6,000 in revenues for
the six months ended June 30, 2003. The revenues during the six months ended
June 30, 2003 reflect Dwango's initial sales of games through AT&T Wireless.
General and administrative expenses increased from $196,000 for the
twelve months ended December 31, 2001 to $1,213,000 for the twelve months ended
December 31, 2002. Such expenses were $1,199,000 for the six months ended June
30, 2003. This increase in general and administrative expenses is due to
21
Dwango's significantly increased development efforts. Dwango hired new employees
in both operations and administration and incurred increased legal fees as a
result of increased contract negotiations with mobile phone carriers and with
Dwango Japan in connection with the intellectual property licenses. Dwango
anticipates that such expenses will continue to increase if it expands its
business as contemplated.
Liquidity and Capital Resources
Dwango has historically funded its operations primarily through the
sale of its securities. Dwango's ability to meet its business objectives as
described above depends upon its ability to raise significant additional
capital. Including funds raised after June 30, 2003, Dwango anticipates that it
will be able to satisfy its cash requirements through October 30, 2003, although
no assurance can be given in that regard. If Dwango is not able to raise
sufficient additional capital to support its operations by October 31, 2003,
Dwango may have to significantly curtail or cease operations.
At June 30, 2003, Dwango had cash totaling $192,000 compared to cash
totaling $293,000 at December 31, 2002. Net cash used in operating activities
for the twelve months ended December 31, 2001 was $148,000 and for the twelve
months ended December 31, 2002 was $1,009,000. Net cash used in operating
activities for the six months ended June 30, 2003 was $858,000. Dwango expects
this amount to continue to increase as it expands its business.
Dwango's working capital at December 31, 2002 was $21,000. At June 30,
2003 Dwango had a working capital deficit of $837,000.
The following table summarizes, as of June 30, 2003, Dwango's
obligations and commitments to make future payments under debt and operating
leases:
Payments due by period
----------------------------------------------------------------------------
Less Than After
Total 1 Year 1-3 Years 3-4 Years 4 Years
----- ------ --------- --------- -------
Long-term Debt...... $ 650,000 $ - $ - $ 650,000 $ -
Operating Leases.... 187,000 86,000 101,000 - -
---------- ----------- ----------- ---------- ---------
Total............... $ 837,000 $ 86,000 $ 751,000 $ - $ -
========== =========== =========== ========== =========
Dwango's outstanding long-term debt as of June 30, 2003 consists of Senior
Subordinated Convertible Promissory Notes. The Promissory Notes bear interest at
the rate of 8% per annum and are due September 15, 2006.
Critical Accounting Policies
22
Dwango accounts for software development costs in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. SFAS No.
86 specifies that costs incurred internally in creating a computer software
product should be charged to expense when incurred as research and development
costs until technological feasibility has been established for the product. Once
technological feasibility is established, all development costs should be
capitalized until the product is available for general release to customers.
Judgment is required in determining when the technological feasibility of a
product is established, in estimating the life of the product for which the
capitalized costs will be amortized and in estimating if the carrying value of
capitalized software costs is equal to or less than future operating profits
from the associated products. To date, Dwango has not capitalized any software
development costs.
MANAGEMENT
The following sets forth certain information regarding the directors
and executive officers of the Company immediately after the Exchange. Each
director will hold office until the next annual meeting of the stockholders and
until his successor has been duly elected and qualified. Each executive officer
shall serve at the discretion of the board of directors of the Company.
Name Age Position
---- --- --------
Robert E. Huntley 45 Chairman, President and Chief Executive Officer
F. Conrad Hametner III 34 Chief Operating Officer
Jacques Faust 42 Chief Financial Officer
Rick J. Hennessey 36 Executive Vice President
Joseph Allen 59 Director
L. Derrick Ashcroft 74 Director
Paul Eibeler 48 Director
Jay F. Higgins 58 Director
Robert E. Huntley founded Dwango in November 2000 and since inception
has served as its Chairman, President and Chief Executive Officer. Prior to
founding Dwango, in August 1997, he co-founded Dwango Co., Ltd., a leading
developer of wireless content and networking technology in Japan. Mr. Huntley
served as Chairman of Dwango Co., Ltd. until December 1999 when he relinquished
his position and remained a director through December 2000. From August 1994 to
October 1998, Mr. Huntley served as the Chairman, President and Chief Executive
Officer of Interactive Visual Systems, Inc., a company that he founded which
developed and operated online networking software and systems for interactive
video game entertainment.
F. Conrad Hametner III joined Dwango in June 2001 and served as its
Vice President of Business Development from June 2001 through April 2002, as its
Senior Vice President of Business Development from April 2002 through July 2003,
and as its Chief Operating Officer from July 2003 to the present. Mr. Hametner
also served as the President of the dwango wireless division from September 2002
23
to July 2003. Prior to joining Dwango, from November 1999 to June 2001, Mr.
Hametner was President of Trip.net, a Texas-based application and internet
service provider. Prior to that, from August 1997 to November 1999, he served as
Vice President of Operations for Zakhem Investments America, a private
investment group, where he oversaw the company's U.S. assets and portfolio
companies.
Jacques Faust joined Dwango in August 2003 as its Chief Financial
Officer. Prior to such time, from December 2000 through July 2003, Mr. Faust was
an independent consultant, consulting various clients on financial and business
operational issues. From June 2000 through November 2000, he was a Senior
Director of Financial Business Operations and Sales Support for Cable & Wireless
a-Services, a telecommunications company. From July 1997 through May 2000, Mr.
Faust was the principal of Business Solutions, a consulting firm focused on
providing financial and business operational consulting services. From July 1996
to July 1997, he was a Senior Consultant with KPMG. From June 1994 to June 1996,
he was a Consultant with PricewaterhouseCoopers. He has been a CPA in Texas
since 1986 and earned his MBA from the University of Chicago Graduate School of
Business in 1994.
Rick Hennessey joined Dwango in April 2003 as Vice President of
Business Development of the dwango wireless division of Dwango. Mr. Hennessey
served as Vice President of Business Development of the dwango wireless division
from April 2003 until July 2003, at which time he became Executive Vice
President of Dwango and President of the dwango wireless division. Mr. Hennessey
co-founded OTA in June 2001 and has served as its Chief Executive Officer since
such time. Prior to that, from January 1996 to December 2002, Mr. Hennessey was
Chief Executive Officer of Eversio Technologies, a mobile enterprise solutions
provider. From January 1996 to the present, Mr. Hennessey has served as Chairman
of Eversio Technologies.
Joseph Allen has been a director of Dwango since April 1, 2002. Mr.
Allen has served since 1981 as the Chairman and Chief Executive Officer of Allen
& Caron Inc., a privately held investor relations agency which he founded. Mr.
Allen is also the Vice Chairman and a director of Surgilight Inc., a public
company engaged in the development of lasers used for vision correction, which
positions he has held since July 2001.
L. Derrick Ashcroft has been a director of Dwango since November 20,
2002. Mr. Ashcroft is currently an owner of the Flying X Ranch, a company
engaged in the breeding of cattle. Mr. Ashcroft is currently a director of
Tatatech, Inc. (India), a member of the Tata group of companies. Mr. Ashcroft
has previously served on the board of directors of the following public and
private companies in the United States and abroad: Leased Edge Corporation,
Access West, Inc., Publistix, Inc., Boreham Services, Ltd. (UK), Premier Laser
Systems, and Westergaard.com, Inc. Mr. Ashcroft has served as President of AARK
Enterprise, Inc., Senior Vice President of the Carteret Financial Group,
Chairman of Ashcroft Rubin, Inc. and Chairman of Cardiopet, Inc.
Paul Eibeler has been a director of Dwango since August 12, 2003. Mr.
Eibeler is currently the President and Chief Operating Officer of Acclaim North
America, a division of Acclaim Entertainment, Inc., a developer, publisher and
mass marketer of software for use with interactive entertainment game consoles.
24
From July 2000 through July 2003, Mr. Eibeler was the President of Take-Two
Interactive Software, Inc., a developer, publisher and distributor of
interactive game software. Mr. Eibeler was also a director of Take-Two
Interactive from January 2001 through April 2003. From June 1997 through March
2000, Mr. Eibeler was Executive Vice President and General Manager of Acclaim
North America. Mr. Eibeler also was a consultant to Microsoft in connection with
the development and launch of Microsoft's Xbox.
Jay F. Higgins has been a director of Dwango since April 1, 2002. Mr.
Higgins has served since 1992 as the President and a managing partner of
Cloverleaf Partners, a banking and financial advisory services firm which he
founded. From May 2003 through the present, Mr. Higgins has also served as the
Chairman of Bengal Partners, an NASD broker-dealer, and from June 1998 through
May 1998, he was Vice Chairman of Bengal Partners. From 1970 through 1992, Mr.
Higgins held various positions at Salomon Brothers, including Vice Chairman in
charge of Worldwide Investment Banking. Mr. Higgins was a General Partner of
Salomon Brothers from 1979 through 1992 and was named to the board of directors
in 1986. Mr. Higgins graduated from Princeton University (AB) and The University
of Chicago School of Business (MBA).
Jay Higgins, Joseph Allen and L. Derek Ashcroft serve on the Audit
Committee of the Board of Directors of the Company. Mr. Higgins is the Chairman
of such committee. The Audit Committee is responsible for overseeing
management's conduct in the financial reporting process, including reviews of
the Company's annual, quarterly and other financial reports and its systems of
internal accounting, bookkeeping, and financial controls. The Audit Committee is
responsible for reviewing any non-audit services and special engagements to be
performed by the independent auditors and considering the effect of such
performance on the auditors' independence. The Audit Committee is also
responsible for engaging and dismissing the Company's independent certified
public accountants. In discharging its oversight role, the Audit Committee is
empowered to meet and discuss with the Company's management and independent
auditors the quality and accuracy of its accounting principles, the completeness
and clarity of its financial disclosures and other significant decisions made by
management in the preparation of financial reports.
Joseph Allen, Paul Eibeler and L. Derek Ashcroft serve on the
Compensation Committee of the Board of Directors of the Company. Mr. Allen is
the Chairman of such committee. The Compensation Committee of the Board of
Directors is responsible for review and approval of the Company's executive
compensation and administering its stock option plan.
EXECUTIVE COMPENSATION
The following table provides information concerning the annual and
long-term compensation earned or paid to Dwango's chief executive officer (the
"named executive officer"). No executive officer received compensation which
exceeded $100,000 during 2002.
25
Long-Term Compensation
----------------------
Name and Principal Annual Compensation Restricted Number of Securities All Other
-------------------
Position Year Salary Bonus Stock Award Underlying Options Compensation
-------- ---- ------ ----- ----------- ------------------ ------------
Robert E. Huntley 2002 $78,000 - - - -
Chief Executive Officer 2001 - - - - -
2000 - - - - -
DIRECTOR COMPENSATION
As compensation for services on the Board of Directors of Dwango, each
of the directors, other than Robert E. Huntley, were granted under Dwango's 2002
Stock Option Plan a non-qualified stock option to purchase 45,000 shares of
common stock at an exercise price of $1.11 per share, the fair market value of
the common stock on April 4, 2002, the date of grant. Each option is for a term
of ten years commencing as of April 4, 2002 and is exercisable to the extent of
one-eighth of the shares immediately, and as to an additional one-eighth of the
shares every three months thereafter. In connection with the Exchange, these
options with respect to each director converted into options to purchase 62,707
shares of Common Stock, at an exercise price of $.80.
Each director is reimbursed for his expenses incurred in connection
with the performance of his duties as a director. In addition, effective
beginning in July 2003, each director became entitled to $500 per meeting of the
Board of Directors or any committee thereof in which he participates.
OPTION GRANTS IN LAST FISCAL YEAR
There were no grants of stock options to the named executive officer
during 2002.
EMPLOYMENT AGREEMENTS
Dwango currently does not have an employment agreement with Mr.
Huntley.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date hereof and after giving
effect to the Exchange, the New Dwango Common Stock beneficially owned by the
directors and named executive officer of the Company, by persons known by the
Company to beneficially own, individually, or as a group, more than 5% of the
outstanding New Dwango Common Stock, and all of the Company's current directors
and executive officers as a group.
26
Amount and
Nature of
Name and Address Beneficial Percent of
of Beneficial Owner (1) Ownership (2) Class
- ----------------------- ------------- -----
Robert E. Huntley 2,190,901 (3) 42.0 %
Huntley Family Trust 696,741 13.7 %
F. Conrad Hametner III 326,841 (4) 6.4 %
Jacques Faust 10,451 (5) *
Joseph Allen 54,868 (6) 1.1 %
L. Derrick Ashcroft 88,103 (7) 1.7 %
Jay F. Higgins 54,868 (8) 1.1 %
Paul Eibeler 83,442 (9) 1.6 %
James Scoroposki (10) 458,931 (11) 8.5 %
Terry Phillips (12) 333,768 (13) 6.4 %
James Scibelli (14) 496,480 (15) 9.0 %
Silverman Partners(16) 500,650 (17) 9.0 %
All directors and executive officers
as a group (8 persons) 2,809,474 (18) 50.8 %
___________
*Less than 1%
(1) The address of each person, except as otherwise noted, is c/o Dwango
North America Corp., 5847 San Felipe Street, Suite 2825, Houston, Texas
77057-3000.
(2) Except as otherwise noted, each individual or entity has sole voting
and investment power over the securities listed. Pursuant to the rules
and regulations of the Securities and Exchange Commission, shares of
New Dwango Common Stock that an individual or group has a right to
acquire within 60 days pursuant to the exercise of options or warrants
are deemed to be outstanding for the purposes of computing the
percentage ownership of such individual or group, but are not deemed to
be outstanding for the purpose of computing the percentage ownership of
any other person shown in the table.
(3) Includes 139,348 shares of New Dwango Common Stock issuable upon
exercise of options held by Mr. Huntley. Does not include 696,741
shares of New Dwango Common Stock beneficially owned by Huntley Family
Trust, or 139,348 shares of New Dwango Common Stock beneficially owned
by Huntley Trust No. 2, with respect to which shares Mr. Huntley
disclaims beneficial ownership.
(4) Includes 55,739 shares of New Dwango Common Stock issuable upon
exercise of options held by Mr. Hametner.
(5) Consists of shares of New Dwango Common Stock issuable upon exercise of
options held by Mr. Faust.
(6) Consists of shares of New Dwango Common Stock issuable upon exercise of
options held by Mr. Allen.
(7) Includes 54,868 shares of New Dwango Common Stock issuable upon
exercise of options held by Mr. Ashcroft.
(8) Consists of shares of New Dwango Common Stock issuable upon exercise of
options held by Mr. Higgins.
(9) Consists of 41,721 shares of New Dwango Common Stock issuable upon
conversion of Senior Subordinated Convertible Promissory Notes and
41,721 shares of New Dwango Common Stock issuable upon exercise of
warrants held by Mr. Eibeler.
(10) The address of Mr. Scoroposki is c/o Acclaim Entertainment, Inc., One
Acclaim Plaza, Glen Cove, NY 11542-2788.
27
(11) Includes 166,884 shares of New Dwango Common Stock issuable upon
conversion of Senior Subordinated Convertible Promissory Notes and
166,883 shares of New Dwango Common Stock issuable upon exercise of
warrants held by Mr. Scoroposki.
(12) The address of Mr. Phillips is c/o Phillips Sales, Inc., 2900 Polo
Parkway, Suite 200, Midlothian, VA 23113.
(13) Includes 83,442 shares of New Dwango Common Stock issuable upon
conversion of Senior Subordinated Convertible Promissory Notes and
83,441 shares of New Dwango Common Stock issuable upon exercise of
warrants held by Mr. Phillips.
(14) The address of Mr. Scibelli is c/o RG Securities, LLC, 165 EAB Plaza,
6th Floor, Uniondale, NY 11556-0165.
(15) Includes 166,884 shares of New Dwango Common Stock issuable upon
exercise of warrants held by Mr. Scibelli and 246,154 shares of New
Dwango Common Stock issuable upon exercise of warrants held by RG
Securities, LLC, of which Mr. Scibelli may be deemed to be the
beneficial owner.
(16) The address of Silverman Partners is c/o Harvey Silverman, Spear, Leeds
& Kellogg, 120 Broadway, 6th Floor, New York, NY 10271.
(17) Consists of 179,640 shares of New Dwango Common Stock issuable upon
conversion of Senior Subordinated Convertible Promissory Notes and
179,640 shares of New Dwango Common Stock issuable upon exercise of
warrants held by Silverman Partners.
(18) Includes 453,585 shares of New Dwango Common Stock issuable upon
exercise of options and warrants held by the directors and executive
officers.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired. The following financial
statements of Dwango North America, Inc. are set forth in Annex A hereto:
1. Independent auditor's report.
2. Balance Sheets as of December 31, 2002 and June 30,
2003 (unaudited)
3. Statements of operations for the years ended December
31, 2002 and 2001 and for the period from November
20, 2000 (inception) to December 31, 2002, for the
six-month periods ended June 30, 2003 and 2002
(unaudited) and for the period from November 20, 2000
(inception) to June 30, 2003 (unaudited).
4. Statement of stockholders' equity (deficit) for the
period from November 20, 2000 (inception) to December
31, 2000, for the years ended December 31, 2002 and
2001, and for the six-month period ended June 30,
2003 (unaudited).
5. Statements of cash flows for the years ended December
31, 2002 and 2001, for the period from November 20,
2000 (inception) to December 31, 2002, for the
six-month periods ended June 30, 2003 and 2002
(unaudited) and for the period from November 20, 2000
(inception) to June 30, 2003 (unaudited).
28
(b) Pro Forma Financial Information. The Exchange is being accounted
for as a capital transaction. No pro forma financial statements are required.
(c) Exhibits.
2.1 Agreement and Plan of Reorganization, dated September
19, 2003, among Woodland Hatchery, Inc., Dwango North
America, Inc. and the securityholders of Dwango
listed therein
3.1 Amendment to Articles of Incorporation of Woodland
Hatchery, Inc.
4.1 Form of Senior Convertible Promissory Note
4.2 Form of Warrant to purchase 41,722 shares of New
Dwango Common Stock
4.3 Form of Warrants to purchase an aggregate of 83,444
shares of New Dwango Common Stock
4.4 Form of Warrants to purchase an aggregate of
2,461,524 shares of New Dwango Common Stock
32.1 Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: October 7, 2003
DWANGO NORTH AMERICA CORP.
By: /s/ Robert E. Huntley
-------------------------------------
Robert E. Huntley
Chairman, President and Chief
Executive Officer
30
EXHIBIT INDEX
2.1 Agreement and Plan of Reorganization, dated September 17,
2003, among Woodland Hatchery, Inc., Dwango North America,
Inc. and the securityholders of Dwango listed therein
3.1 Amendment to Articles of Incorporation of Woodland Hatchery,
Inc.
4.1 Form of Senior Convertible Promissory Note
4.2 Form of Warrant to purchase 41,722 shares of New Dwango Common
Stock
4.3 Form of Warrants to purchase an aggregate of 83,444 shares of
New Dwango Common Stock
4.4 Form of Warrants to purchase an aggregate of 2,461,524 shares
of New Dwango Common Stock
32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
31
ANNEX A
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
FINANCIAL STATEMENTS
DECEMBER 31, 2002 and
JUNE 30, 2003 (unaudited)
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Contents
Page
----
Financial Statements
Independent auditors' report 1
Balance sheets as of December 31, 2002 and June 30, 2003 (unaudited) 2
Statements of operations for the years ended December 31, 2002 and 2001 and
for the period from November 20, 2000 (inception) to December 31, 2002,
for the six-month periods ended June 30, 2003 and 2002 (unaudited) and for
the period from November 20, 2000 (inception) to June 30, 2003 (unaudited) 3
Statements of stockholders' equity (deficit) for the period from November 20,
2000 (inception) to December 31, 2000, for the years ended December 31,
2002 and 2001, and for the six-month period ended June 30, 2003 (unaudited) 4
Statements of cash flows for the years ended December 31, 2002 and 2001, for
the period from November 20, 2000 (inception) to December 31, 2002, for
the six-month periods ended June 30, 2003 and 2002 (unaudited) and
for the period from November 20, 2000 (inception) to June 30, 2003 (unaudited) 5
Notes to financial statements 6
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Dwango North America, Inc.
We have audited the accompanying balance sheet of Dwango North America, Inc.
(the "Company") (formerly known as Dwango U.S.A., Inc.) (a development stage
company) as of December 31, 2002, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the years ended December 31,
2002 and 2001 and for the period from November 20, 2000 (inception) to December
31, 2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of Dwango North America, Inc. (a
development stage company) as of December 31, 2002, and the results of its
operations and its cash flows for the years ended December 31, 2002 and 2001 and
for the period from November 20, 2000 (inception) to December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has not generated any revenues, has incurred
losses since inception and has been dependent upon funds generated from the sale
of common stock and loans. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans regarding
those matters also are described in Note A. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Eisner LLP
New York, New York
June 30, 2003, except as to Notes C and I,
for which the date is August 29, 2003
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Balance Sheets
December 31, June 30,
2002 2003
------------ ------------
ASSETS (unaudited)
Current assets:
Cash $ 293,000 $ 192,000
Prepaid expenses 31,000 16,000
Other current assets 8,000 5,000
------------ ------------
Total current assets 332,000 213,000
Fixed assets, net 80,000 101,000
Deferred acquisition costs 47,000
Deferred financing costs 217,000
------------ ------------
$ 412,000 $ 578,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 211,000 $ 560,000
Senior subordinate notes payable, net of debt discount of $61,000 340,000
Notes payable - line of credit 50,000
Notes payable - related party 100,000 100,000
------------ ------------
Total current liabilities 311,000 1,050,000
Senior subordinate convertible notes payable, net of debt
discount of $458,000 191,000
------------ ------------
Total liabilities 311,000 1,241,000
------------ ------------
Stockholders' equity (deficit):
Preferred stock, $.001 par value; 2,000,000 shares authorized;
no shares issued and outstanding
Common stock, $.001 par value; 10,000,000 shares authorized;
3,473,314 shares issued and outstanding 3,000 3,000
Additional paid-in capital 1,575,000 2,064,000
Deficit accumulated during development stage (1,477,000) (2,730,000)
------------ ------------
Total stockholders' equity (deficit) 101,000 (663,000)
------------ ------------
$ 412,000 $ 578,000
============ ============
See notes to financial statements 2
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Statements of Operations
Period
From
November 20,
2000
(Inception)
Year Ended to
December 31, December 31,
---------------------------------- -----------------
2002 2001 2002
--------------- ---------------- -----------------
Revenue
Expenses:
General and administrative $ 1,213,000 $ 196,000 $ 1,410,000
--------------- ---------------- -----------------
Operating loss (1,213,000) (196,000) (1,410,000)
Interest expense 57,000 10,000 67,000
--------------- ---------------- -----------------
Net loss $ (1,270,000) $ (206,000) $ (1,477,000)
=============== ================ =================
Common share data:
Basic and diluted loss per share $ (0.46) $ (0.08)
=============== ================
Weighted average number of basic and diluted
common shares outstanding 2,770,793 2,446,661
=============== ================
Period
From
November 20,
2000
(Inception)
Six-Month Period Ended to
June 30, June 30,
---------------------------------- -----------------
2003 2002 2003
--------------- ---------------- -----------------
(unaudited) (unaudited) (unaudited)
Revenue $ 6,000 $ 6,000
Expenses:
General and administrative 1,199,000 $ 287,000 2,609,000
--------------- ---------------- -----------------
Operating loss (1,193,000) (287,000) (2,603,000)
Interest expense 60,000 16,000 127,000
--------------- ---------------- -----------------
Net loss $ (1,253,000) $ (303,000) $ (2,730,000)
=============== ================ =================
Common share data:
Basic and diluted loss per share $ (0.36) $ (0.12)
=============== ================
Weighted average number of basic and diluted
common shares outstanding 3,473,314 2,540,828
=============== ================
See notes to financial statements 3
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Statements of Stockholders' Equity (Deficit)
Deficit
Common Stock Accumulated
$.001 Par Value Additional During
-------------------------
Number of Paid-in Development
Shares Amount Capital Stage Total
----------- ----------- ------------- ---------------- ---------------
Shares issued in connection with the
formation of the Company, November 20,
2000 2,446,000 $ 2,000 $ 2,000
Net loss for the year ended December 31,
2000 $ (1,000) (1,000)
----------- ----------- ---------------- ---------------
Balance at December 31, 2000 2,446,000 2,000 (1,000) 1,000
Capital contribution by majority
stockholder in 2001 $ 61,000 61,000
Sale of stock, December 27, 2001 90,000 100,000 100,000
Net loss for the year ended December 31,
2001 (206,000) (206,000)
----------- ----------- ------------- ---------------- ---------------
Balance at December 31, 2001 2,536,000 2,000 161,000 (207,000) (44,000)
Common stock issued in payment for
rent, June 1, 2002 32,000 54,000 54,000
Conversion of note payable, August 14, 2002 61,000 103,000 103,000
Warrant issued in connection with note
payable 46,000 46,000
Sale of stock, August 14, 2002 240,000 370,000 370,000
Capital contribution by majority
stockholder, August 14, 2002 57,000 57,000
Exercise of stock options, September 20,
2002 6,000 6,000 6,000
Common stock issued in October 2002,
in connection with private financing, net 599,000 1,000 778,000 779,000
Net loss for the year ended December 31,
2002 (1,270,000) (1,270,000)
----------- ----------- ------------- ---------------- ---------------
Balance at December 31, 2002 3,474,000 3,000 1,575,000 (1,477,000) 101,000
Warrants issued in connection with notes
payable, net 489,000 489,000
Net loss for the six-month period ended
June 30, 2003 (1,253,000) (1,253,000)
----------- ----------- ------------- ---------------- ---------------
Balance at June 30, 2003 (unaudited) 3,474,000 $ 3,000 $ 2,064,000 $ (2,730,000) $ (663,000)
=========== =========== ============= ================ ===============
See notes to financial statements 4
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Statements of Cash Flows
Period Period
From From
November 20, November 20,
2000 2000
(Inception) (Inception)
Year Ended to Six-Month Period to
December 31, December 31, Ended June 30, June 30,
--------------------------- -------------- ---------------------------
2002 2001 2002 2003 2002 2003
------------- ------------ -------------- ------------- ------------ --------------
(unaudited) (unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (1,270,000) $ (206,000) $ (1,477,000) $ (1,253,000) $ (303,000) $(2,730,000)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation expense 36,000 36,000 20,000 56,000
Common stock issued for rent 37,000 37,000 17,000 54,000
Amortization of debt discount 46,000 46,000 43,000 3,000 89,000
Deferred financing cost 12,000 12,000
Changes in:
Prepaid expenses (14,000) (14,000) (2,000) (16,000)
Other assets (8,000) (8,000) 3,000 (4,000) (5,000)
Deferred acquisition costs (47,000) (47,000)
Accounts payable and
accrued expenses 164,000 58,000 221,000 349,000 27,000 570,000
------------- ------------ -------------- ------------- ------------ --------------
Net cash used in
operating activities (1,009,000) (148,000) (1,159,000) (858,000) (277,000) (2,017,000)
------------- ------------ -------------- ------------- ------------ --------------
Cash flows from investing activities:
Purchase of fixed assets (116,000) (116,000) (41,000) (157,000)
------------- ------------ -------------- ------------- ------------ --------------
Cash flows from financing activities:
Proceeds from line of credit 45,000 55,000 100,000 50,000 41,000 150,000
Repayment of line of credit (88,000) (12,000) (100,000) (7,000) (100,000)
Proceeds from loan 54,000 54,000 54,000 54,000
Warrant issued in connection with
note payable 46,000 46,000 46,000 46,000
Proceeds from related party loan 150,000 50,000 200,000 50,000 200,000
Repayment of related party loan (50,000) (50,000) (50,000)
Proceeds from issuance of notes
payable and warrants 1,050,000 1,050,000
Expenses allocated to issuance of
notes payable (302,000) (302,000)
Proceeds from issuance of
common stock, net of expenses 1,155,000 161,000 1,318,000 1,318,000
------------- ------------ -------------- ------------- ------------ --------------
Net cash provided
by financing
activities 1,312,000 254,000 1,568,000 798,000 184,000 2,366,000
------------- ------------ -------------- ------------- ------------ --------------
Net increase (decrease) in cash 187,000 106,000 293,000 (101,000) (93,000) 192,000
Cash at beginning of period 106,000 293,000 106,000
------------- ------------ -------------- ------------- ------------ --------------
Cash at end of period $ 293,000 $ 106,000 $ 293,000 $ 192,000 $ 13,000 $ 192,000
============= ============ ============== ============= ============ ==============
Supplementary disclosure of cash
flow information:
Interest paid $ 3,000 $ 3,000 $ 2,000 $ 1,000 $ 5,000
Noncash transactions:
Conversion of debt to common
stock $ 103,000 $ 103,000 $ 103,000
Costs attributable to issuance of
convertible notes and warrants $ 77,000 $ 77,000
Notes and accrued interest
contributed as capital $ 57,000 $ 57,000 $ 57,000
See notes to financial statements 5
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Notes to Financial Statements
December 31, 2002 and 2001 and Unaudited with Respect to June 30, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Description of business:
Dwango North America, Inc. (the "Company"), formerly known as Dwango
U.S.A., Inc., is a development stage company, which was founded in
November 2000 for the purpose of providing wireless content and
application publishing channels through North American wireless carriers,
developing and publishing content and applications for wireless devices,
and developing and providing wireless network technology for both content
and applications developed internally and for partner content developers.
The Company has an eight-year exclusive North America license for all
Dwango Company, Ltd. ("Dwango Japan") current and future wireless
intellectural property, which at the current time principally consists of
games, a library of ringtones and other wireless devices applications.
[2] Basis of presentation:
At December 31, 2002, the Company has not generated any revenues, has
incurred losses since inception and has been dependent upon funds
generated from the sale of common stock and loans. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Management intends to seek additional funding through equity and debt
financing. There can be no assurance that additional funds will be
available to the Company, or available on terms acceptable to the
Company.
[3] Use of estimates:
The accounting and financial reporting policies of the Company conform to
accounting principles generally accepted in the United States of America.
The preparation of financial statements in conformity with such
accounting principles requires management to make assumptions and
estimates that impact the amounts reported in those statements. Such
assumptions and estimates are subject to change in the future as
additional information becomes available or as circumstances are
modified. Actual results could differ from these estimates.
[4] Fixed assets:
Property and equipment are recorded at cost. Depreciation of furniture
and office equipment is computed using the straight-line method over the
estimated useful lives of the assets (three to seven years). Leasehold
improvements are amortized over the shorter of the term of the lease or
useful life of the improvements.
[5] Income taxes:
The Company accounts for income taxes following the asset and liability
method in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Under such method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years that the asset
is expected to be recovered or the liability settled. The effect on
deferred tax assets and liabilities of a change in tax law or rates is
recognized in income in the period that includes the enactment date of
change. A valuation allowance is recorded if it is more likely than not
that some portion or all of the deferred tax asset will not be realized.
6
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Notes to Financial Statements
December 31, 2002 and 2001 and Unaudited with Respect to June 30, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[6] Stock option plan:
The Company accounts for stock-based employee and directors compensation
under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. The Company has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which was released in December
2002 as an amendment of SFAS No. 123. The following table illustrates the
effect on net loss and net loss per share if the fair value based method
had been applied to all awards.
Had compensation cost for the Company's stock option grants been
determined based on the fair value at the grant dates consistent with the
methodology of SFAS No. 123, the Company's net loss and net loss per
share for the periods indicated would have been increased to the pro
forma amounts indicated as follows (there were no options issued in
2001):
Year Ended Six-Month Period Ended
December 31, June 30,
----------------------------------
2002 2003 2002
---------------- --------------- ----------------
(unaudited) (unaudited)
Net loss $ (1,270,000) $ (1,253,000) $ (303,000)
Stock-based employee compensation determined
under the fair value based method, net of related
tax effect (160,000) (177,000) (33,000)
---------------- --------------- ----------------
Pro forma net loss $ (1,430,000) $ (1,430,000) $ (336,000)
================ =============== ================
Net loss per share (basic and diluted):
As reported $(0.46) $(0.36) $(0.12)
======= ======= =======
Pro forma $(0.52) $(0.41) $(0.13)
======= ======= =======
The per share weighted average fair value of stock options granted during
2002 was $0.97, estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: risk-free interest
rates of 3.4% - 4.9%, volatility of 90%, dividend yield of 0% and
expected lives of three to six years.
7
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Notes to Financial Statements
December 31, 2002 and 2001 and Unaudited with Respect to June 30, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[7] Loss per share:
The Company's basic and diluted net loss per share is computed by
dividing net loss by the weighted average number of outstanding common
shares. Potentially dilutive securities, which were excluded from the
computation of diluted loss per share because to do so would have been
anti-dilutive, are as follows:
Six-Month
Year Ended Period Ended
December 31, June 30,
2002 2003
------------- ---------------
(unaudited)
Options 524,000 1,024,000
Warrants 89,000 657,000
Convertible notes 60,000 449,000
------------- ---------------
Total dilutive shares 673,000 2,130,000
============= ===============
[8] Concentration of credit risk:
The Company maintains a portion of its cash balances in accounts which at
times exceed the federally insured limits.
[9] Valuation of long-lived assets:
Long-lived assets such as property and equipment are reviewed for
impairment when events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. An impairment loss
is recognized when estimated future undiscounted cash flows expected to
result from the use of the assets and their eventual disposition are less
than their carrying amount.
[10] Fair value of financial instruments:
The fair values of the Company's financial instruments, including
short-term debt, approximate their carrying values because their interest
rates approximate rates of interest which correspond to instruments with
similar maturities.
[11] Advertising costs:
Advertising costs, which are expensed as incurred, are not significant
for 2002 and 2001. For the six-month period ended June 30, 2003,
advertising expense was approximately $42,000.
[12] Stock splits:
All share and per share amounts give retroactive effect to a 3:1 stock
split on April 1, 2002.
8
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Notes to Financial Statements
December 31, 2002 and 2001 and Unaudited with Respect to June 30, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[13] Royalties:
On August 14, 2002, the Company entered into two licensing agreements
with Dwango Japan, a stockholder of the Company, to use its trademark
(25-year term) and intellectual property (eight-year term) in North
America. The agreements provide for royalties of 2% (intellectual
property) and 0.5% (trademark) of the total gross revenue, subject to an
annual minimum royalty (commencing October 1, 2002) of $50,000 per each
agreement. These two agreements replaced a license agreement entered into
by these parties on January 31, 2002. For the year ended December 31,
2002 and the six-month period ended June 30, 2003, royalty expenses were
$25,000 and $50,000, respectively, based upon the minimum.
NOTE B - FIXED ASSETS
Fixed assets consist of the following:
Six-Month
Year Ended Period Ended
Estimated December 31, June 30,
Useful Lives 2002 2003
--------------- -------------- -----------------
(unaudited)
Furniture and fixtures 7 years $ 9,000 $ 27,000
Computer and office equipment 3 years 103,000 126,000
Leasehold improvements 2-3 years 4,000 4,000
-------------- ------------------
116,000 157,000
Less accumulated depreciation and
amortization 36,000 56,000
-------------- ------------------
$ 80,000 $ 101,000
============== ==================
NOTE C - DEBT
[1] Line of credit:
During March 2002, the Company entered into a credit facility with a
financial institution that permits borrowing of up to $50,000, which
expires on April 11, 2004. Borrowings under the facility bear interest at
the prime rate plus one percent. As of June 30, 2003 and December 31,
2002, $50,000 and $0, respectively, were outstanding. This credit
facility is guaranteed by the president of the Company.
[2] Loans and notes payable:
On July 10, 2002, the Company issued a convertible promissory note to
Dwango Japan for $100,000, with interest at 4% per year, which is due on
July 31, 2003. The note can be converted, at the option of the holder,
into 59,881 shares of common stock (see Note I). For the year ended
December 31, 2002 and the six-month period ended June 30, 2003, the
interest expense on the note was $2,000.
9
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Notes to Financial Statements
December 31, 2002 and 2001 and Unaudited with Respect to June 30, 2003 and 2002
NOTE C- DEBT (CONTINUED)
During the six-month period ended June 30, 2003, the Company received $400,000
in proceeds from the issuance of eight units, each unit consisting of a senior
subordinated note in the amount of $50,000 with interest at 11% per year and
warrants to purchase 12,500 shares of common stock at $1.67 per share, which
expire five years from the date of issuance. The promissory notes and the
related accrued interest are due upon consummation of certain additional
financing, as defined. The fair market value of the warrants was $80,000
utilizing the Black Scholes option-pricing model with the following assumptions:
90% volatility, three-year expected life, risk-free interest rate of 4% and a
dividend yield of 0%, and will be amortized over 13 months as additional
interest expense. These warrants remain unexercised as of June 30, 2003. In
connection with the sale of these units, the Company incurred an aggregate of
$62,000 in costs consisting of: placement agent fees of approximately $24,000,
legal expenses of approximately $26,000 and other costs of approximately
$12,000. Of the aggregate costs, $50,000 has been allocated as deferred
financing costs, to be amortized over 13 months, or earlier if retired before
maturity. The remaining $12,000 of costs is attributable to additional paid-in
capital. For the six-month period ended June 30, 2003, interest expense and
amortization of deferred financing costs on these notes were approximately
$29,000 and $8,000, respectively.
During the six-month period ended June 30, 2003, the Company received $650,000
in proceeds from the issuance of 13 units, each unit consisting of a senior
subordinated convertible note in the amount of $50,000 with interest at 8% per
year and warrants to purchase 29,940 shares of common stock at $1.67 per share
until September 15, 2006. The fair market value of the warrants was $384,000,
utilizing the Black Scholes option-pricing model with the following assumptions:
90% volatility, three-year expected life, risk-free interest rate of 4% and a
dividend yield of 0%. In accordance with EITF 00-27, "Application of Issue No.
98-5 to Certain Convertible Instruments," the Company allocated the net proceeds
between the convertible notes and the warrants based on the relative fair value
based method. The proceeds allocated to the warrants of $241,000 were recorded
as debt discount. Additionally, the difference between the proceeds allocated
to, and the relative fair value of the convertible notes, which amounted to
$241,000, was recorded as additional debt discount. The aggregate debt discount
of $482,000 is being amortized over the life of the convertible notes. Upon the
conversion of the notes into common stock, the unamortized debt discount balance
will be recognized as additional interest expense. The notes and any accrued
interest can be converted, at the option of the holder at any time, into shares
of common stock at $1.67 per share, subject to certain anti-dilution provisions.
The full principal amount of the promissory notes and the related accrued
interest are due on September 15, 2006. In connection with the sale of these
units, the Company incurred an aggregate of $241,000 in costs consisting of:
placement agent fees of approximately $85,000; warrants to purchase 77,844
shares of common stock at $1.67 per share that expire in 2006, valued at
$77,000; legal expenses of approximately $55,000; and other costs of
approximately $25,000. The warrants were valued utilizing the Black Scholes
option-pricing model with the following assumptions: 90% volatility, three-year
expected life, risk-free interest rate of 4% and a dividend yield of 0%. These
warrants remain unexercised as of June 30, 2003. Of the aggregate costs,
$180,000 has been allocated as deferred financing costs, to be amortized over 40
months, or earlier if converted into common stock, and the remaining $61,000 of
costs has been attributable to additional paid-in capital. For the six-month
period ended June 30, 2003, interest expense and amortization of deferred
financing costs on these notes were approximately $28,000 and $5,000,
respectively. The Company received $1,020,000 from July 1, 2003 through August
31, 2003, in proceeds from the issuance of additional units.
10
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Notes to Financial Statements
December 31, 2002 and 2001 and Unaudited with Respect to June 30, 2003 and 2002
NOTE D - OTHER RELATED PARTY TRANSACTIONS
On April 27, 2001, the Company borrowed, in the form of a note, from the wife of
the Company's president, $50,000 with interest at 10% per year which was due on
September 27, 2001 and was extended to April 26, 2003. On August 20, 2002, this
note and the interest due totaling $57,000 was contributed to the capital of the
Company and, accordingly, recorded as an additional capital contribution as
shown in the statements of stockholders' equity (deficit). Interest expense on
this note for the years ended December 31, 2002 and 2001 was $3,000 and $4,000,
respectively.
On April 23, 2002, in consideration of an additional $50,000 loan, the Company
issued an additional note to the wife of the Company's president for $50,000
with interest at 10% per year which was due on October 20, 2002. Principal and
interest were repaid on August 20, 2002. Interest expense on this note for the
year ended December 31, 2002 was $2,000.
NOTE E - COMMITMENTS AND CONTINGENCIES
[1] Operating lease:
The Company leases office space in Seattle, Washington, through May 31,
2005. In December 2002, the Company entered into a lease for office space
in Houston, Texas, which expires on January 31, 2006. These leases are
not subject to any escalation provisions.
Total future minimum lease payments under the lease agreements are as
follows:
Year Ending
December 31, Amount
--------------- ------------
2003 $ 86,000
2004 86,000
2005 55,000
2006 3,000
------------
$ 230,000
============
NOTE F - STOCKHOLDERS' EQUITY (DEFICIT)
[1] Stock issuances:
On December 27, 2001, the Company sold 90,000 shares of common stock to
Dwango Japan for $100,000.
On April 25, 2002, the Company issued a convertible note to an individual
for $100,000, due on April 25, 2004, with a warrant to purchase 29,941
shares of common stock at $1.67 per share that expires on April 26, 2007.
The value ascribed to the warrant was $46,000 utilizing the Black Scholes
option-pricing model with the following assumptions: 90% volatility,
three-year expected life, risk-free interest rate of 4.0% and a dividend
yield of 0%, and was to be amortized over two years as additional
interest expense. These warrants remain outstanding at December 31, 2002
and June 30, 2003, respectively. On August 14, 2002, the principal and
interest totaling $103,000 were converted into 61,520 shares of common
stock as provided in the convertible note agreement. Upon the conversion
of the note into common stock, the unamortized balance of the warrant
value was recognized as additional interest expense.
11
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Notes to Financial Statements
December 31, 2002 and 2001 and Unaudited with Respect to June 30, 2003 and 2002
NOTE F - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
[1] Stock issuances: (continued)
On May 31, 2002, the Company issued 32,163 shares of its common stock,
valued at $1.67 per share, for the first year's rent of $54,000 of its
Seattle office.
On August 14, 2002, the Company sold 239,521 shares of common stock at
$1.67 per share to Dwango Japan for proceeds of $400,000. In connection
with this offering, the private placement agents received aggregate fees
of approximately $30,000.
On September 16, 2002, stock options were exercised to purchase 5,600
common shares at $1.11 each for proceeds of $6,000.
[2] Private placement:
In October 2002, the Company received net proceeds of $779,000 from the
sale of 598,835 shares of common stock. In connection with this private
placement, the placement agents received aggregate fees of approximately
$126,000 and warrants to purchase an aggregate of 59,882 shares of common
stock at $1.67 per share that expire in October 2007. These warrants
remain unexercised as of December 31, 2002 and June 30, 2003,
respectively. Other costs of the private placement approximated $95,000.
[3] Stock option plan:
On April 1, 2002, the Company established an Equity Incentive Plan (the
"Plan") under which stock options may be granted. A stock option grant
allows the holder of the option to purchase a share of the Company's
common stock in the future at a stated price. The Plan is administered by
the Board of Directors, which determines the individuals to whom the
options shall be granted, as well as the terms and conditions of each
option grant, the option price and the duration of each option.
The Plan was approved and became effective on April 1, 2002. Vesting of
options granted under the Plan is determined by the Company, and the
options expire over varying terms, but not later than ten years from the
date of grant. On May 28, 2003, the Board approved the increase in shares
available for issuance from 1,000,000 to 2,000,000. Stock option activity
for the period April 1, 2002 (inception of Plan) to December 31, 2002 and
for the six-month period ended June 30, 2003, is as follows:
Period Ended
--------------------------------------------------------
December 31, June 30,
2002 2003
------------------------- ---------------------------
(unaudited)
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ------------- ------------ -------------
Options outstanding at beginning of period 0 523,950 $ 1.28
Granted 529,550 $ 1.27 500,000 $ 1.76
Exercised 5,600 $ 1.11
---------- ------------
Outstanding at end of period 523,950 $ 1.28 1,023,950 $ 1.52
========== ============
12
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Notes to Financial Statements
December 31, 2002 and 2001 and Unaudited with Respect to June 30, 2003 and 2002
NOTE F - STOCKHOLDERS' DEFICIT (CONTINUED)
[3] Stock option plan (continued):
The following summarizes information about stock options at December 31,
2002:
Options Outstanding Options Exercisable
------------------------------------------- ------------------------------
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Number Exercise Exercise Life in Number Exercise
Outstanding Prices Price Years Exercisable Price
------------- ----------- ------------ -------------- --------------- -------------
368,950 $ 1.11 $ 1.11 9.26 126,750 $1.11
155,000 $ 1.67 $ 1.67 9.84 40,000 $1.67
------------- ---------------
523,950 166,750 $1.24
============= ===============
The following summarizes information about stock options at June 3, 2003.
Options Outstanding Options Exercisable
------------------------------------------- ------------------------------
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Number Exercise Exercise Life in Number Exercise
Outstanding Prices Price Years Exercisable Price
------------- ----------- ------------ -------------- --------------- -------------
368,950 $ 1.11 $ 1.11 8.76 211,200 $1.11
383,265 $ 1.67 $ 1.67 9.68 85,653 $1.67
271,735 $ 1.84 $ 1.84 4.91 54,347 $1.84
------------- ---------------
1,023,950 351,200 $1.36
============= ===============
NOTE G - INCOME TAXES
As of December 31, 2002, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $1,400,000, which may be available
to offset future federal taxable income, if any, through 2022. Management does
not expect the Company to be taxable in the near future and established a 100%
valuation allowance against the deferred tax asset created by the net operating
loss carryforwards at December 31, 2002 and 2001. The valuation allowance
increased $407,000 for the year ended December 31, 2002, and $63,000 for the
year ended December 31, 2001.
NOTE H - OTHER
On April 23, 2003 the Company entered into a letter of intent to acquire
Over-the-Air Wireless, Inc. to add premium ringtone and media content to its
product portfolio of mobile entertainment services. The transaction has not been
consummated as of June 30, 2003 and the purchase price has not yet been
determined.
13
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Notes to Financial Statements
December 31, 2002
NOTE I - SUBSEQUENT EVENTS
On July 15, 2003, the Company entered into employment agreements with four
individuals at an aggregate monthly salary of approximately $24,000. Within 30
days, an aggregate of 30,000 shares of the Company's common stock is required to
be issued to these individuals. Should any of the individuals leave the Company
or be terminated prior to January 15, 2004, their shares are required to be
returned to the Company. In addition, an aggregate of 154,500 stock options will
be issued, of which one-eleventh vested on July 15, 2003, and the balance will
vest one-eleventh on each subsequent six-month anniversary, as long as an
employee remains with the Company. The exercise price of the option is the
lesser of $5.00 per share or the fair market value at the exercise date, as
defined, but not less than $1.67 per share. These employee agreements and
related provisions can be cancelled with or without cause by either party within
30 days' written notice.
In connection with the above agreements, the Company purchased, for an aggregate
of $40,000, certain assets from these individuals. Should any of these
individuals leave the Company prior to January 15, 2004, any amount paid to them
shall be refunded to the Company.
On July 7, 2003, Dwango Japan converted its $100,000 convertible promissory note
into 59,881 shares of common stock.
14