As filed with the Securities and Exchange Commission on January 30, 2004
Registration No.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Dwango North America Corp.
(Name of Small Business Issuer in Its Charter)
Nevada 4812 84-1407365
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
5847 San Felipe Street
Suite 3220
Houston, Texas 77057-3000
(713) 914-9600
(Address and telephone number of principal executive offices
and principal place of business)
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Robert E. Huntley
Chairman, President and CEO
Dwango North America Corp.
5847 San Felipe Street
Suite 3220
Houston, Texas 77057-3000
(713) 914-9600
(Name and telephone number of agent for service)
Copy to:
Gary T. Moomjian, Esq.
Moomjian & Waite, LLP
500 North Broadway--Suite 142
Jericho, New York 11753
(516) 937-5900
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Approximate Date of Commencement of Proposed Sale to the Public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Maximum Maximum Amount Of
Title Of Each Class Of Amount to Be Offering Price Aggregate Registration
Securities To Be Registered (1) Registered Per Share (2) Offering Price (2) Fee
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Common Stock (3) 5,581,749 $1.30 $7,256,274 $ 920
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Common Stock (4) 41,722 $1.30 $ 54,239 $ 7
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Common Stock (5) 83,444 $1.30 $ 108,477 $ 14
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Common Stock (6) 2,083,333 $1.30 $2,708,333 $ 344
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Common Stock (7) 2,086,037 $1.30 $2,711,848 $ 344
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Common Stock (8) 417,208 $1.30 $ 542,370 $ 69
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Common Stock (9) 250,000 $1.30 $ 325,000 $ 42
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Common Stock (10) 50,000 $1.30 $ 65,000 $ 9
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Common Stock (11) 1,802,043 $1.30 $2,342,656 $ 297
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Common Stock (12) 708,333 $1.30 $ 920,833 $ 117
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Common Stock (13) 212,500 $1.30 $ 276,250 $ 35
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Common Sock (14) 10,284 $1.30 $ 13,369 $ 2
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Common Stock (15) 368,594 $1.30 $ 479,172 $ 61
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TOTAL $2,261
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(1) All common stock share data set forth herein has been adjusted to reflect
a 1-for-4.5 reverse stock split of the registrant's common stock approved
by the registrant's stockholders and board of directors effective
September 30, 2003.
(2) Estimated solely for purposes of calculating the registration fee, based
on the average of the high and low prices for the registrant's common
stock at $1.30 per share as reported on the Over-the Counter Bulletin
Board on January 26, 2004, in accordance with Rule 457(c) promulgated
under the Securities Act of 1933, as amended.
(3) Relates to the resale of shares of common stock previously issued by the
registrant.
(4) Relates to the resale of shares of common stock issuable upon the exercise
of warrants acquired by a selling securityholder in August 2002.
(5) Relates to the resale of shares of common stock issuable upon the exercise
of warrants issued to HCFP/Brenner Securities, LLC and RG Securities, LLC
and their designees for acting as placement agent for a private placement
completed by the registrant in October 2002.
(6) Relates to the resale of shares of common stock issuable upon conversion
of the registrant's 8% senior convertible promissory notes due 2006
acquired by the selling securityholders in a private placement completed
by the registrant in September 2003.
(7) Relates to the resale of shares of common stock issuable upon the exercise
of warrants acquired by the selling securityholders in the September 2003
private placement.
(8) Relates to the resale of shares of common stock issuable upon the exercise
of warrants issued to HCFP/Brenner Securities, LLC and RG Securities, LLC
for acting as the placement agent in connection with the September 2003
private placement.
(9) Relates to the resale of shares of common stock issuable upon the exercise
of warrants acquired by a selling securityholder in a private placement
completed by the registrant in December 2003.
(10) Relates to the resale of shares of common stock issuable upon the exercise
of warrants issued to HCFP/Brenner Securities, LLC and RG Securities, LLC
for acting as placement agent in connection with the December 2003 private
placement.
(11) Relates to the resale of shares of common stock issuable upon conversion
of the registrant's 9% senior convertible note due 2007 acquired by a
selling securityholder in a private placement completed by the registrant
in January 2004. 385,376 of such shares have been registered in connection
with possible interest payments.
(12) Relates to the resale of shares of common stock issuable upon the exercise
of warrants acquired by a selling securityholder in the January 2004
private placement.
(13) Relates to the resale of shares of common stock issuable upon the exercise
of warrants issued to HCFP/Brenner Securities, LLC and RG Securities, LLC
for acting as placement agent in connection with the January 2004 private
placement.
(14) Relates to the resale of shares of common stock issuable upon exercise of
warrants issued to HCFP/Brenner Securities, LLC and RG Securities, LLC.
(15) Relates to the resale of shares of common stock issuable upon exercise of
warrants issued to our chairman, president and chief executive officer and
an outside director in connection with the conversion of advances to our
company by such individuals to common stock and warrants.
Pursuant to Rule 416 of the Securities Act of 1933, this registration
statement also relates to such additional indeterminate number of shares of
common stock as may become issuable by reason of stock splits, dividends,
antidilution adjustments and similar adjustments in accordance with the
provisions of the warrants, the 8% senior convertible promissory notes due 2006,
and the 9% senior convertible notes due 2007.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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The information contained in this preliminary prospectus is not complete and may
be changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is declared effective. This
preliminary prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
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SUBJECT TO COMPLETION, DATED JANUARY 30, 2004
PRELIMINARY PROSPECTUS
DWANGO NORTH AMERICA CORP.
13,695,247 shares of common stock
This prospectus relates to the resale of up to 13,695,247 shares of our
common stock by the selling securityholders named in this prospectus from time
to time. The shares of common stock offered for resale hereby consist of
5,581,749 shares of our common stock currently issued and outstanding, 2,083,333
shares of our common stock underlying 8% senior convertible promissory notes due
2006 issued by us, 1,802,043 shares of our common stock underlying a 9% senior
convertible note due 2007 issued by us (including interest on such note), and
4,228,122 shares of our common stock issuable upon the exercise of warrants
issued by us. The shares offered for resale hereby are 119% greater than the
6,241,800 shares of our common stock issued and outstanding as of January 27,
2004 and 1,974% greater than the 660,051 shares currently in the public float.
We will not receive any of the proceeds from the sale of the shares of
common stock, other than the exercise price, if any, to be received upon
exercise of the warrants. We have agreed to bear all of the expenses in
connection with the registration and sale of the shares, except for any
applicable underwriting discounts, brokerage fees or commissions and transfer
taxes, as well as the fees and disbursements of the selling securityholders'
counsel and advisors.
Our common stock is traded on the Over-the-Counter Bulletin Board under
the symbol DWGN. On January 26, 2004, the closing price of our common stock was
$1.30 per share.
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THE SECURITIES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF RISK.
AMONG OTHER THINGS, WE ONLY HAVE SUFFICIENT CASH RESOURCES TO OPERATE OUR
BUSINESS UNTIL APPROXIMATELY MARCH 30, 2004 AND WE RECEIVED AN OPINION FROM OUR
INDEPENDENT AUDITORS WITH RESPECT TO OUR FINANCIAL STATEMENTS AS OF AND FOR THE
YEAR ENDED DECEMBER 31, 2002 WHICH CONTAINED AN EXPLANATORY PARAGRAPH DISCUSSING
THE EXISTENCE OF SUBSTANTIAL DOUBT REGARDING OUR ABILITY TO CONTINUE AS A GOING
CONCERN. YOU SHOULD CAREFULLY READ AND CONSIDER THE "RISK FACTORS" COMMENCING ON
PAGE 4 FOR INFORMATION THAT SHOULD BE CONSIDERED IN DETERMINING WHETHER TO
PURCHASE ANY OF THE SECURITIES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is ______________, 2004
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering, including the risk factors and the financial statements and related
notes, included elsewhere in this prospectus.
On September 29, 2003, we acquired substantially all of the outstanding
securities of Dwango North America, Inc., a Texas corporation, pursuant to an
exchange offer completed with the securityholders of Dwango North America, Inc.
We are a Nevada corporation. Following the acquisition, although we maintained
our corporate and legal identity, we changed our name from Woodland Hatchery,
Inc. to Dwango North America Corp. Pursuant to the acquisition, Dwango North
America, Inc. became a substantial majority-owned subsidiary of ours. It has
since become a wholly-owned subsidiary. In that the securityholders of Dwango
North America, Inc. acquired a majority of the voting securities of our company,
Dwango North America, Inc. was deemed to be the accounting acquiror. Unless the
context otherwise requires, references in this prospectus to our company for
periods prior to September 29, 2003 are to Dwango North America, Inc.
Our operations are conducted through Dwango North America, Inc. Unless the
context otherwise requires, reference to our company and its operations include
the operations of Dwango North America, Inc.
In connection with the exchange offer, we effected a one-for-4.5 reverse
stock split of our common stock. All common stock data set forth herein has been
adjusted to reflect this reverse stock split.
Our Business
We develop and distribute wireless applications for users of next
generation wireless devices. We currently distribute games that can be played on
cell phones. We expect to introduce polyphonic musical ringtones and other
entertainment content in the near future. We are an early entrant into this
market in the United States, a market that we anticipate will grow rapidly. We
currently distribute our content through agreements with wireless carriers and
handset manufacturers. In addition to publishing our own content, we publish
licensed content from third parties for distribution through our channels.
Our principal executive office is located at 5847 San Felipe Street, Suite
3220, Houston, Texas 77057-3000. Our telephone number at that location is (713)
914-9600. Our internet address is www.dwango.com. The information contained on
our website is not incorporated by reference in this prospectus and shall not be
considered a part of this prospectus.
The Offering
Shares offered: 13,695,247 shares of common stock to be offered by the selling
securityholders as follows:
o 5,581,749 of which are currently issued;
o 2,083,333 of which will be issued upon conversion
of our 8% senior convertible promissory notes due
2006;
o 1,802,043 of which will be issued upon conversion
of our 9% senior convertible note due 2007 and in
payment of interest on such note; and
o 4,228,122 of which will be issued upon exercise of
our warrants.
Use of proceeds: We will not receive any of the proceeds from the sale of the
shares of common stock offered in this prospectus, other than
the exercise price, if any, to be received upon exercise of
the warrants.
2
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Summary Financial Information
The following summary financial information has been derived from our
financial statements as of and for the years ended December 31, 2001 and 2002
and as of and for the nine months ended September 30, 2002 and 2003. Our
financial statements appear later in this prospectus, which should be read in
conjunction with the related notes.
Year Ended Nine-Month Period Ended
December 31 September 30
-------------------------- --------------------------
2001 2002 2002 2003
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Statement of operations data:
Revenue .................................... $ -- $ -- $ -- $ 10,000
Expenses:
Research and development .......... -- -- -- 84,000
General and administrative ........ 196,000 1,213,000 728,000 2,453,000
----------- ----------- ----------- -----------
Operating loss ............................. (196,000) (1,213,000) (728,000) (2,527,000)
Interest expense ........................... 10,000 57,000 51,000 247,000
----------- ----------- ----------- -----------
Net loss ................................... $ (206,000) $(1,270,000) $ (779,000) (2,774,000)
=========== =========== =========== ===========
Common share data:
Basic and diluted loss per share .. $ (0.06) $ (0.33) $ (0.21) $ (0.57)
=========== =========== =========== ===========
Weighted average number of basic and diluted
common shares outstanding .................. 3,409,377 3,861,754 3,626,845 4,880,847
=========== =========== =========== ===========
As of As of
December 31, 2002 September 30, 2003
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Balance sheet data:
Current assets ..................... $332,000 $ 157,000
Working capital (deficit) .......... 21,000 (337,000)
Total assets ....................... 412,000 815,000
Convertible notes .................. -- 787,000(1)
Total liabilities .................. 311,000 1,281,000
Total stockholders' equity (deficit) 101,000 (466,000)
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(1) Net of debt discount of $1,713,000.
3
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RISK FACTORS
You should carefully consider the risks and uncertainties described below,
as well as the discussion of risks and other information contained or
incorporated by reference in this prospectus before deciding whether to invest
in our common stock. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also impair our business operations.
If any of the following risks actually occur, our business, financial
condition or operating results could be materially adversely affected. In such
case, the trading price of our common stock or warrants could decline and you
may lose part or all of your investment.
Our company was incorporated on May 16, 1997 in the State of Nevada. On
September 29, 2003, we acquired Dwango North America, Inc., a Texas corporation,
in a reverse acquisition. Our name was changed at the time of the acquisition
from Woodland Hatchery, Inc. to Dwango North America Corp. In that the
securityholders of Dwango North America, Inc. acquired a majority of the voting
securities of our company, Dwango North America, Inc. was deemed to be the
accounting acquiror. Accordingly, the financial results discussed in "Risk
Factors" and throughout this prospectus prior to September 29, 2003 are those of
Dwango North America, Inc., unless otherwise specified.
RISKS RELATING TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY, HAVE INCURRED LOSSES TO DATE, AND
CANNOT GIVE ANY ASSURANCE THAT WE CAN EVER ATTAIN PROFITABILITY.
We have a limited operating history in the wireless content market. We
have generated nominal revenues to date. We cannot give any assurance that we
will be able to generate or sustain meaningful revenues in the future. For the
year ended December 31, 2002, we incurred a net loss of $1,270,000. For the nine
months ended September 30, 2003, we incurred a net loss of $2,774,000. At
September 30, 2003, we had an accumulated deficit of $(4,251,000). We expect to
continue to incur losses for at least the next twelve months. We cannot give you
any assurance that we will soon make a profit or that we will ever make a
profit. To achieve profitability, we must, among other things, develop, market
and sell substantially more of our products, hire and retain qualified and
experienced employees, and be able to manage our expected growth. We may not be
successful in these efforts.
WE HAVE A NEED FOR SUBSTANTIAL ADDITIONAL FINANCING AND WILL HAVE TO
SIGNIFICANTLY CURTAIL OR CEASE OPERATIONS IF WE ARE UNABLE TO SECURE SUCH
FINANCING.
At September 30, 2003, we had a negative working capital position of
$337,000 and a negative stockholders equity of $466,000. Since September 30,
2003, we have raised gross proceeds of $2,000,000 from two recently completed
private placements, the first consisting of common stock and warrants and the
second consisting of 9% senior convertible notes due 2007 and warrants. In
addition, our chairman, president and chief executive officer and one of our
directors converted an aggregate of approximately $442,000 in advances made to
us from October through December 2003 into common stock and warrants. At January
26, 2004, we had a cash position of $629,572. We require substantial additional
financing to fund the cost of continued operating activities, which financing we
intend to seek. If further funding is not obtained by March 30, 2004, we 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 MARKET FOR WIRELESS APPLICATIONS IS A DEVELOPING MARKET THAT REQUIRES
FURTHER DEVELOPMENT TO SUPPORT MEANINGFUL REVENUES TO OUR COMPANY.
The market for wireless applications is currently a minimal revenue
generator in North America. It is an emerging market that is relatively new.
Further development of this market is necessary to support meaningful levels of
revenues for our company. The success of the applications we offer will depend
upon, among other things, a high level of market acceptance of the current
generation of advanced wireless handsets. We cannot give you any assurance that
the market will develop as we anticipate. In addition, in view of the battery
drain caused by the use of advanced wireless applications, the success of these
applications may also depend upon the development of technology and/or cost
effective products or accessories that extend the battery life of current
wireless devices, for which there can be no assurance.
4
We will incur operating expenses based largely on anticipated revenue
trends that are difficult to predict. We plan to invest a significant amount of
our resources to develop, market and support our products and services in
advance of generating substantial revenues. We anticipate incurring substantial
losses until such time, if ever, that substantial revenues are generated. Our
success will depend on the market for our products developing sufficiently to
support profitable operations, and our ability to commercialize our 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 OUR PROJECTIONS REGARDING OUR SUBSCRIBER BASE ARE CRITICAL
TO OUR PROFITABILITY.
We anticipate that our financial results in the near term will be
principally driven by our ability to properly allocate our limited cash
resources. The allocation of these resources must be coordinated with and take
into account the projected rate of growth of our subscriber base and the pricing
assumptions in our business model. Our management has made significant estimates
regarding the anticipated growth of our subscriber base, taking into account
many variables, certain of which are outside our control. Our business model
requires expanding and improving our technological and other capabilities
necessary in order to properly service anticipated increased usage by a growing
subscriber base. If our subscriber base does not grow at projected rates, or our
pricing assumptions are incorrect, then our up front expenses will exceed our
revenues by amounts greater than currently anticipated, exacerbating projected
losses and putting additional pressure on cash resources.
WE ARE DEPENDENT UPON DWANGO JAPAN AND THE MAINTENANCE OF THE LICENSE
AGREEMENTS THAT WE HAVE WITH DWANGO JAPAN.
We anticipate that we will derive a portion of our revenues from the
distribution of current and future applications developed utilizing the
intellectual property of Dwango Co., Ltd., and will benefit from being
associated with this company. Dwango Co., Ltd., which we sometimes refer to as
Dwango Japan, is one of the leading developers of wireless entertainment and
networking technology in Japan. Our chief executive officer, Robert E. Huntley,
is a co-founder, former chairman of the board and currently a shareholder of
Dwango Japan.
We have a license agreement with Dwango Japan that provides us with a
license, expiring in 2010, 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 us with a
license, expiring in 2027, to use, market, sell and make products and services
using Dwango Japan's trademarks in North America. If we discontinue operation of
our 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
licenses, we must cease use of the intellectual property granted to us by Dwango
Japan under the licenses. We cannot give you any assurance that we can meet the
requirements contained in the licenses.
Although we have 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 North America using Dwango Japan's technology, we will have
the right in certain circumstances to share with Dwango Japan in the revenue
generated from that distribution in North America on terms to be agreed upon by
Dwango Japan and our company. We cannot give you any assurance that we will be
successful in negotiating satisfactory revenue sharing agreements with Dwango
Japan. In addition, to the extent these third parties distribute their content
in North America, whether or not using Dwango Japan technology, we will be
competing with such third parties.
5
We are obligated to pay Dwango Japan a royalty for both the technology and
trademark licenses. With respect to the trademark license, we must pay Dwango
Japan 0.5% of our gross revenue (from wireless technology products) or $50,000
per year, whichever is greater. With respect to the technology license, we must
pay Dwango Japan 2% of our gross revenue (from wireless technology products) or
$50,000 per year, whichever is greater. If we are unable to meet our payment
obligations, the licenses may be terminated by Dwango Japan.
Due to our important contractual ties with Dwango Japan, and the benefits
received from being associated with Dwango Japan, we would be significantly and
adversely affected should Dwango Japan be unable to continue operations or
otherwise perform its obligations to us, or if the licenses are terminated by
Dwango Japan.
OUR SUCCESS DEPENDS UPON ENTERING INTO DISTRIBUTION ARRANGEMENTS WITH
MAJOR WIRELESS CARRIERS AND DEVELOPING AND MAINTAINING STRATEGIC RELATIONSHIPS
WITH SUCH WIRELESS CARRIERS.
Our 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. We need to develop and maintain
strategic relationships with these wireless carriers so that, among other
things, we can obtain favorable treatment with respect to the timing and
placement of our applications on the wireless handset download menus. In this
respect, we have entered into agreements with AT&T Wireless, Verizon Wireless,
T-Mobile USA, Cingular and Alltel which provide for the terms and conditions
under which our applications may be made available to end-users of such
carriers. Distribution agreements are also being pursued with Nextel, Sprint PCS
and US Cellular. We are dependent upon the subsequent success of these wireless
carriers in performing their responsibilities and sufficiently marketing our
applications. We cannot give you any assurance that we will be able to
negotiate, execute and maintain favorable agreements and relationships with
wireless carriers, that the carriers with whom we have a contractual
relationship will choose to utilize our applications or that such wireless
carriers will be successful and/or will not pursue alternative technologies.
OUR PERFORMANCE MAY BE DEPENDENT IN PART UPON OUR ABILITY TO TIMELY AND
COST EFFICIENTLY PORT APPLICATIONS FROM THE JAPANESE DEVELOPMENT PLATFORM TO
UNITED STATES STANDARDS.
In order to distribute the applications we license from Dwango Japan, we
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 we are unable to so port the applications in
a timely and cost efficient manner, our business could be harmed.
WE MAY BE UNABLE TO IMPLEMENT OUR ACQUISITION GROWTH STRATEGY, AND FAILURE
TO MANAGE OUR ACQUISITION STRATEGY PROPERLY MAY HARM OUR BUSINESS.
Our business strategy includes making strategic acquisitions of other
companies. In April 2003, we 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. We cannot give you any assurance that the acquisition
will be consummated. Our continued growth may depend on our ability to identify
and acquire, on acceptable terms, companies that complement or enhance our
business. The competition for acquisition candidates is intense and we expect
this competition to increase. We can- not give you any assurance that we will
identify and successfully compete for appropriate acquisition candidates or
complete acquisitions at reasonable purchase prices, in a timely manner or at
all. Further, we may not be able to realize the anticipated benefits of future
acquisitions. In implementing our acquisition growth strategy, we may encounter:
o costs associated with incomplete or poorly implemented acquisitions;
o expenses, delays and difficulties of integrating acquired companies
into our existing organization;
6
o dilution of the interest of existing stockholders; and
o diversion of management's attention.
Any of these matters could harm our business.
WE FACE SIGNIFICANT COMPETITION AND MAY BE UNABLE TO COMPETE SUCCESSFULLY.
The market for wireless applications is extremely competitive. We expect
our competition to intensify as competitors 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 we must adapt to remain competitive. We are aware of other
companies that provide mobile applications. Many of these companies have
substantially greater financial resources than us which could allow them to
identify emerging trends more quickly and develop technology at a faster pace.
We may not be able to compete successfully against current or future competitors
and such competitive pressures could harm our business. Some of our competitors
have already made significant progress in the market.
WE MUST DEVELOP WIRELESS CONTENT AND RESPOND TO CHANGES IN TECHNOLOGY ON A
TIMELY BASIS IN ORDER TO BE SUCCESSFUL.
Our 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 our
future growth. We cannot give you any assurance that we will be able to identify
emerging technologies which will gain widespread acceptance. If we invest
substantial resources in acquiring, developing or implementing wireless content
that does not become widely accepted or which is delayed in introduction, we may
be unable to recoup our investment. We cannot give you any assurance that others
will not develop technologies that achieve a greater market acceptance than
ours, that render our services obsolete or that otherwise adversely affect our
competitive position.
IF WE ARE UNABLE TO MAINTAIN A PROMINENT POSITION ON APPLICATION DOWNLOAD
MENUS, OUR BUSINESS COULD BE HARMED.
We will need to continually develop new products in order to maintain a
prominent position on the application download menus maintained by wireless
carriers. 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 we are unable to maintain a prominent
position on the download menus, our business could be harmed.
THE LIFE CYCLE OF OUR PRODUCTS MAY BE SHORT, WHICH COULD HARM OUR
BUSINESS.
The emergence of new wireless products and technologies, changes in
consumer preferences and other factors may limit the life cycle of our
technologies and any future products and services that we develop. Our future
performance will depend on our 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 our
products and services, particularly in response to technological changes and
competitive offerings, and bring technology to the market quickly at
cost-effective prices.
OUR PERFORMANCE WILL DEPEND UPON OUR ABILITY TO DEVELOP OUR BRAND WITH
CONSUMERS.
In developing our brand, we will be dependent upon both the marketing
performed by wireless carriers and our own marketing efforts. Currently, we have
limited marketing capabilities. We will need to develop a marketing group with
technical expertise to promote the development of our brand or retain an
appropriate marketing firm. We cannot give you any assurance that we 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 us will be
successful.
7
OUR BUSINESS COULD BE HARMED IF WE FAIL TO PROTECT OUR INTELLECTUAL
PROPERTY RIGHTS.
Our business depends to a significant degree on licensed and internally
developed content and technology. To protect our proprietary products we rely on
a combination of patent, copyright, trademark and trade secret laws, as well as
contractual provisions relating to confidentiality and related matters. We
cannot assure you that our means of protecting our proprietary rights will be
adequate or that competitors will not independently develop similar or superior
technology.
THE LOSS OF THE SERVICES OF OUR KEY MANAGEMENT WOULD LIKELY HARM OUR
BUSINESS.
Our success depends in large part upon the continued services and
contributions of a small number of key management employees, including Robert E.
Huntley, our chairman of the board, president and chief executive officer. The
loss of the services of one or more of our key employees could harm our
business. In addition, if one or more of our key employees resigns 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 harm
our business. We currently do not have an employment agreement with Mr. Huntley.
OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED
MANAGEMENT AND OTHER PERSONNEL.
We currently have thirty-five full-time employees. Most of our present
management has limited experience in managing a business as large as that
currently contemplated by us. In order to meet our business objectives, we must
hire appropriate management personnel, as well as additional technical
personnel. We compete for such persons with other companies, some of which may
have substantially greater capital resources and facilities than we do. We
cannot give you any assurance that we will be successful in recruiting and
retaining such personnel of the requisite caliber or in adequate numbers to
enable us to conduct our business as proposed.
RISKS RELATING TO OUR COMMON STOCK
A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK WILL BECOME ELIGIBLE
FOR SALE UPON THE EFFECTIVENESS OF THE REGISTRATION STATEMENT OF WHICH THIS
PROSPECTUS FORMS A PART.
The shares offered for resale hereby are 119% greater than the 6,241,800
shares of our common stock issued and outstanding as of January 27, 2004 and
1,974% greater than the 660,051 shares currently in the public float. 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 will become saleable in the public market at the
time the registration statement of which this prospectus forms a part becomes
effective, the market price for our common stock could decrease significantly at
such time and our ability to raise capital could be adversely affected.
ROBERT E. HUNTLEY, OUR CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
HOLDS APPROXIMATELY 38% OF THE OUTSTANDING SHARES OF OUR COMMON STOCK.
Robert E. Huntley, our chairman of the board, president and chief
executive officer, presently owns 2,378,480 shares of our common stock,
representing approximately 38% of our outstanding shares of common stock. Mr.
Huntley also holds options and warrants to purchase an additional 1,357,001
shares of our common stock. Accordingly, Mr. Huntley has significant influence
over the outcome of all matters submitted to the shareholders for approval,
including the election of directors.
8
WE DO NOT ANTICIPATE PAYING DIVIDENDS ON OUR COMMON STOCK.
We have never paid dividends on our common stock and do not anticipate
paying dividends in the foreseeable future. We intend to follow a policy of
retaining all of our earnings, if any, to finance development and expansion of
our business.
THE POSSIBLE ISSUANCE OF SUBSTANTIAL AMOUNTS OF ADDITIONAL SHARES WITHOUT
SHAREHOLDER APPROVAL MAY DILUTE THE PERCENTAGE OWNERSHIP OF OUR SHAREHOLDERS.
There are 6,241,800 shares of our common stock outstanding and 10,010,737
shares of common stock issuable upon exercise or conversion of outstanding
options, warrants and convertible notes. There are 50,000,000 shares of our
common stock and 10,000,000 shares of our preferred stock authorized for
issuance. All of our authorized shares in excess of those currently outstanding
may be issued without any action or approval by our shareholders and may dilute
the percentage ownership of our current shareholders.
THERE IS A LIMITED PUBLIC MARKET FOR SHARES OF OUR COMMON STOCK.
There is currently only a limited public market for our common stock on
the Over-the-Counter Bulletin Board. 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 our common stock.
Market makers are not required to maintain a continuous two-sided market and are
free to withdraw firm quotations at any time. We cannot give you any assurance
that an active public trading market for the shares will develop or be
sustained.
THE PRICE OF OUR COMMON STOCK IS VOLATILE.
The market for our common stock is highly volatile. The trading price of
our common stock is 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 us or our competitors, changes
in our 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 our market or relating to
our company could result in an immediate and adverse effect on the market price
of our common stock.
OUR COMMON STOCK IS CONSIDERED TO BE A "PENNY STOCK," WHICH MAY MAKE IT
MORE DIFFICULT FOR INVESTORS TO SELL THEIR SHARES.
Our common stock is considered to be a "penny 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:
o 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;
o provide the customer with current bid and offer quotations for the
penny stock;
o explain the compensation of the broker-dealer and its salesperson in
the transaction;
9
o provide monthly account statements showing the market value of each
penny stock held in the customer's account; and
o 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 our stock and investors may find it more
difficult to sell their shares.
FORWARD-LOOKING STATEMENTS
Statements contained in this prospectus 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 our 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 our products,
o our expansion strategy,
o the competitive environment within the wireless industry,
o our ability to raise additional capital,
o our 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. We undertake
no obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
USE OF PROCEEDS
The proceeds from the sale of the shares of common stock by the selling
securityholders will belong to the individual selling securityholders. We will
not receive any of the proceeds from the sale of the shares other than with
respect to the exercise price, if any, of the warrants.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Over-the-Counter Bulletin Board
under the symbol "DWGN" since September 30, 2003. Prior to that time, beginning
April 23, 2002 when our company was first listed on the Over-the-Counter
Bulletin Board, our trading symbol was "WLDH" and the shares traded represented
an interest in the former business of Woodland Hatchery, Inc. The volume of
trading in our common stock has been limited during the period presented and the
quotations provided reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions. The
information provided below was obtained from Knobias.
10
The following table sets forth the high and low closing bid prices for our
common stock for the periods indicated as adjusted for the 1 for 4.5 reverse
stock split effected September 30, 2003:
Quarter Ended High Low
- ------------- ---- ---
June 30, 2002 (commencing May 28, 2002)........ 1.58 .90
September 30, 2002............................. 1.13 .90
December 31, 2002.............................. .90 .90
March 31, 2003................................. 2.30 .90
June 30, 2003 ................................. .90 .90
September 30, 2003 ............................ 1.15 .90
December 31, 2003 ............................. 1.77 1.10
January 1, 2004 to January 28, 2004............ 1.50 1.25
As of January 27, 2004, we have approximately 94 record holders of our
common stock.
DIVIDEND POLICY
We have never paid cash dividends on our capital stock and do not
anticipate paying cash dividends in the foreseeable future. We currently intend
to retain any future earnings for reinvestment in our business. Any future
determination to pay cash dividends will be at the discretion of our board of
directors and will be dependent upon our financial condition, results of
operations, capital requirements and other relevant factors.
SELECTED FINANCIAL DATA
The following selected financial data has been derived from the financial
statements of Dwango North America, Inc. from its inception until our
acquisition of such company on September 29, 2003 and from our consolidated
financial statements for periods presented following such acquisition. Our
financial statements appear later in this prospectus, which should be read in
conjunction with the related notes.
November 20,
2000
Year Ended Nine-MonthPeriod (Inception)
December 31 Ended September 30 to
--------------------------- --------------------------- September 30,
2001 2002 2002 2003 2003
----------- ----------- ----------- ----------- -------------
Statement of operations data:
Revenue ............................. $ -- $ -- $ -- $ 10,000 $ 10,000
Expenses:
Research and development ....... -- -- -- 84,000 84,000
General and administrative...... 196,000 1,213,000 728,000 2,453,000 3,863,000
----------- ----------- ----------- ----------- -----------
Operating loss ...................... (196,000) (1,213,000) (728,000) (2,527,000) (3,937,000)
Interest expense .................... 10,000 57,000 51,000 247,000 314,000
----------- ----------- ----------- ----------- -----------
Net loss ............................ $ (206,000) $(1,270,000) $ (779,000) $(2,774,000) $(4,251,000)
=========== =========== =========== =========== ===========
Common share data:
Basic and diluted loss per share . $ (0.06) $ (0.33) $ (0.21) $ (0.57)
=========== =========== =========== ===========
Weighted average number of basic
and diluted common shares outstanding 3,409,377 3,861,754 3,626,845 4,880,847
=========== =========== =========== ===========
As of As of
December 31, 2002 September 30, 2003
----------------- ------------------
Balance sheet data:
Current assets ..................... $332,000 $ 157,000
Working capital (deficit) .......... 21,000 (337,000)
Total assets ....................... 412,000 815,000
Convertible notes .................. -- 787,000(1)
Total liabilities .................. 311,000 1,281,000
Total stockholders' equity (deficit) 101,000 (466,000)
- ----------
(1) Net of debt discount of $1,713,000.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We are a development stage company founded to provide content, network
technology and application publishing through North American wireless carriers.
Since inception, we have not had any significant revenues.
Effective August 14, 2002, we entered into exclusive license agreements
with Dwango Japan which allow us 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.
We have recently significantly expanded our business. During the next
twelve months, subject to the receipt of sufficient financing, we intend to
continue expanding our business. We plan to develop and promote our own
applications for the North American wireless market as well as applications
based on the licensed technology and content from Dwango Japan and other third
parties. In addition, as part of our expansion strategy, we intend to acquire
businesses engaged in developing and marketing wireless technology and
applications, including games and ringtones. As of September 30, 2003, we had 32
full-time employees. In connection with the expansion of our business, we
anticipate that we will need to hire additional employees.
We currently have agreements with AT&T Wireless, Verizon Wireless,
T-Mobile USA, Alltel Communications, and Cingular Wireless which provide the
terms and conditions under which our applications may be made available to the
subscribers of such carriers. To date, we have released seven games on AT&T
Wireless and three games on Verizon Wireless. We have also released certain of
our games preloaded on certain wireless handsets pursuant to agreements we have
with NEC America and Motorola. We anticipate introducing additional applications
in the near future, including ringtones.
Our company has not achieved a significant amount of revenues and is not
profitable. We anticipate that we 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 our revenues from consumer acceptance and use of our games
and ringtones and the number of wireless mobile carriers who agree to carry our
games and ringtones. As of September 30, 2003, we had an accumulated deficit of
$4,251,000. We expect, subject to the receipt of sufficient financing, that our
operating expenses will increase during the next several months, especially in
the areas of product development and marketing. Thus, we will need to generate a
significant amount of increased revenues to achieve profitability. We cannot
give you any assurance that we can achieve or sustain profitability or that our
operating losses will not increase in the future.
12
RELATIONSHIPS WITH WIRELESS CARRIERS AND HANDSET MANUFACTURERS
We currently publish our content through agreements with two wireless
carriers, Verizon Wireless and AT&T Wireless, and via preloaded game content on
two handset manufacturers, NEC and Motorola. We are continually pursuing
distribution agreements with the other major carriers. Since September 30, 2003,
we have entered into agreements with T-Mobile USA, Inc., Cingular Wireless LLC
and Alltel Communications, Inc. which set forth the terms and conditions under
which our games may be made available to end-users of these wireless carriers.
Accordingly, our company now has five wireless carrier relationships.
RELATIONSHIPS WITH CONTENT PROVIDERS AND NEW APPLICATION DEVELOPMENT
We have recently established relationships with leading global game studios, in
addition to Dwango Japan, to produce original content and implement our global
strategy. We recently completed the first internally produced and created game
title, AquaX, which has been introduced through Verizon Wireless.
We expect to launch our ringtone media service in the near future. In
addition to our library of high quality polyphonic ringtones, we have completed
our ringtone browser application, and the infrastructure for the distribution of
ringtones in the North American market.
RESULTS OF OPERATIONS
REVENUE. During the nine-month period ended September 30, 2003, revenues
were $10,000. During 2002 and 2001 our company earned no revenues.
Revenues resulted from the cumulative number of wireless applications
developed by our company, available on Verizon Wireless and AT&T Wireless, and
purchased by end-users. For the nine-month period ended September 30, 2003, a
total of two applications were published on Verizon Wireless and three
applications were published on AT&T Wireless. In the near future, subject to the
receipt of adequate financing, we anticipate the number of applications to
increase substantially.
RESEARCH AND DEVELOPMENT EXPENSE. During the nine-month period ended
September 30, 2003, we incurred research and development expenses of $84,000.
These expenses consist principally of salaries and related expenses. During 2002
and 2001 we incurred no research and development expenses.
The increase in research and development expenses relates to the
development of games. R&D expenses are expected to continue as we develop in
house games as an addition to our strategy of sourcing production from overseas
developers as well as games and content from Dwango Japan.
GENERAL AND ADMINISTRATIVE EXPENSE. During the nine-month period ended
September 30, 2003, we incurred general and administrative expenses of
$2,453,000. During the comparable period in 2002, we incurred general and
administrative expenses of $728,000. For the years ended December 31, 2002 and
2001, general and administrative expenses were $1,213,000 and $196,000,
respectively.
This increase in general and administrative expenses is due to our
increased operations. We hired new employees in administration and incurred
increased professional fees as a result of increased contract negotiations with
mobile phone carriers as well as costs associated with the acquisition of Dwango
North America, Inc. We anticipate that these expenses will continue to increase
as we expand our business as contemplated.
13
Interest Expense. During the nine-month period ended September 30, 2003,
we incurred interest expense of $247,000. During the comparable period in 2002,
we incurred interest expense of $51,000. For the years ended December 31, 2002
and 2001, interest expense was $57,000 and $10,000, respectively. This increase
in interest expense is directly attributable to the issuance in 2003 of 8%
senior convertible notes due 2006 to finance operations.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, we had a cash balance of $123,000 and negative
working capital of $(337,000). At January 26, 2004, we had a cash balance of
$629,572. We anticipate that such funds will finance operations through March
30, 2004. If further funding is not obtained by such date, we may be required to
curtail or cease operations. We have historically funded our operations
primarily through the sale of our securities, including sales of common stock,
convertible notes and warrants. In September 2003, we completed a $2,500,000
financing of senior convertible notes and warrants. From October through
December, 2003, to fund operations, two individuals (the chairman, president and
chief executive officer of our company and an outside director of our company)
advanced the Company $392,000 and $50,000, respectively. In December 2003, we
completed a private placement pursuant to which we sold 250,000 shares of common
stock and warrants to purchase 250,000 shares of common stock with an exercise
price of $1.20 per share to one investor for $300,000. In January 2004 we
completed a private placement pursuant to which we sold to that same investor
senior convertible notes and warrants for an aggregate purchase price of
$1,700,000. The notes are convertible, and the warrants are exercisable, at
$1.20 per share. Also in January 2004, our chairman, president and chief
executive officer and the outside director that advanced funds to our company
converted such advances into 326,927 and 41,667 shares of our common stock,
respectively, and warrants to purchase 326,927 and 41,667 shares of our common
stock, respectively, exercisable at $1.20 per share.
We anticipate that we will continue to issue equity and/or debt securities
as the primary source of liquidity until we generate positive cash flow from
operations. We cannot give you any assurance that the necessary capital will be
raised or that, if funds are raised, that it will be on favorable terms. Any
future sales of securities to finance our company will dilute existing
shareholders' ownership. Continuation as a going concern depends on our ability
to obtain additional financing and ultimately to generate positive cash flow and
attain profitability.
Our board of directors is in the process of considering the possibility of
closing our Houston office and performing executive and administrative functions
from our Seattle office, which would effectuate cost savings for our company. If
this occurs, this could result in the termination of employees and changes in
responsibilities for certain members of management.
During the nine-month period ended September 30, 2003, net cash used in
operating activities totaled $2,132,000. During the comparable period in 2002,
net cash used in operating activities totaled $710,000.
During the nine-month period ended September 30, 2003, cash outflows from
investing activities totaled $95,000. During the comparable period in 2002, cash
outflows from investing activities totaled $4,000. The increase in investing
activities is primarily related to the purchase of equipment.
During the nine-month period ended September 30, 2003, cash inflows from
financing activities totaled $2,057,000. During the comparable period in 2002,
cash inflows from financing activities totaled $688,000.
The success and growth of our business is dependent in large part on our
ability to partner and develop relationships within the wireless industry. In
order for us to execute on our business plan, we anticipate that this will
require approximately $4,000,000 in additional funding within the next 12 months
to complete the rollout of our operations in North America.
14
The following table summarizes, as of September 30, 2003, our 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-Years
---------- -------- ---------- -------
Long-Term Debt ................. $2,500,000 $ -- $2,500,000 $ --
Operating Leases ............... 351,000 135,000 216,000 --
---------- -------- ---------- ----
Total .......................... $2,851,000 $135,000 $2,716,000 $ --
========== ======== ========== ====
Note: We have employment agreements with ten employees calling for aggregate
annual salaries of $627,000. These are "at will" agreements that can be
terminated with 30 days notice.
Our outstanding long-term debt as of September 30, 2003 consists of senior
subordinated convertible promissory notes. The promissory notes bear interest at
the rate of 8% per annum. The principal balance of these notes, together with
all interest accrued thereon, is due and payable on September 15, 2006.
CRITICAL ACCOUNTING POLICIES
We account for software development costs in accordance with Statement of
Financial Accounting Standards 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 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, we
have not capitalized any software development costs.
Revenue earned from wireless applications is recognized upon delivery
and acceptance by the end-user as a one-time purchase. We identify such delivery
and acceptance and therefore accrue revenue based upon the occurrence of a
download of an application. In 2004, we anticipate a monthly subscription
revenue stream as well. Revenue reported by our company is net of all
third-party platform and carrier distribution fees.
BUSINESS
GENERAL
We develop and distribute wireless applications for users of next
generation wireless devices. We currently distribute games that can be played on
cell phones. We expect to introduce polyphonic musical ringtones and other
entertainment content in the near future. We are an early entrant into this
market in the United States, a market that we anticipate will grow rapidly. We
currently distribute our content through agreements with wireless carriers and
handset manufacturers. In addition to publishing our own content, we publish
licensed content from third parties for distribution through our channels.
We have signed exclusive licensing agreements with Dwango Co., Ltd., whom
we sometimes refer to as Dwango Japan, one of the leading developers of wireless
entertainment and networking technology in Japan. These agreements permit us to
use and exploit Dwango Japan's wireless intellectual property (including
software, technology, content and trademarks) in the United States, Canada and
Mexico, which we refer to as North America. Dwango Japan recently completed its
initial public offering in Japan and is listed on the Tokyo Stock Exchange. We
have 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 Japan currently owns 542,624 shares of our common stock, representing
8.7% of our outstanding shares. We anticipate that we will benefit from our
association with Dwango Japan. In late 2003, we also entered into a licensing
agreement with Enorbus Technologies, a wireless entertainment services provider
in China, with respect to the distribution by us of games owned or licensed by
Enorbus.
15
Robert E. Huntley, our founder, chairman of the board, president and chief
executive officer, is also a founder, the former chairman of the board and
remains 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 our company. We intend 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. We
intend to publish game titles licensed from Dwango Japan and also anticipate
that we will implement current and future wireless technologies and content
developed by Dwango Japan. Additionally, we intend to pursue opportunities to
develop and implement our own wireless portal and content for use in the North
American wireless market, through internal development and strategic alliances.
We also intend to publish game titles from other leading overseas 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. We
have entered into agreements with AT&T Wireless, Verizon Wireless, T-Mobile USA,
Cingular and Alltel, which provide the terms and conditions under which our
applications may be made available to end-users of those carriers. Relationships
are also being pursued with other major wireless carriers, such as Nextel,
Sprint PCS and US Cellular. Seven of our games, STAR EXCEED(TM), Star
Diverson(TM), JumPuyon(TM), Bombt(TM), Slots by dwango, Black Jack by dwango and
dwango Racing(TM) have launched with AT&T Wireless on various wireless handsets.
Three of our games, STAR EXCEED(TM), dwango Racing(TM) and AquaX have launched
with Verizon Wireless on various wireless handsets. In addition, we have an
agreement with each of NEC America and Motorola, major international handset
manufacturers, for distribution of our game content preloaded on certain of
their next generation wireless handsets. In July 2003, the NEC 515 wireless
handset was released with Star Diversion pre-loaded on the handset. Star
Diversion was also pre-loaded on the NEC 525 handset. Motorola i730 handsets
distributed through Bloomingdale's were pre-loaded with dwango Racing and Black
Jack by dwango. We anticipate introducing additional applications in the near
future, including ringtones.
We operate three divisions: dwango wireless, dwango media and dwango
studios.
o dwango wireless: is our publishing division, and is responsible for
maintaining distribution relationships with carriers and handset
manufacturers;
o dwango media: manages and creates media applications such as
ringtones, graphic downloads and picture applications; and
o dwango studios: is our the game studio that develops original game
content, ports applications from Dwango Japan for use in the North
American market and manages third party developers.
Although we have three divisions, we operate in one segment and do not account
for each division separately. It is contemplated that in the future any related
businesses that we form or acquire will be operated in separate divisions.
Our company was incorporated in Nevada on May 16, 1997. On September 29,
2003, we acquired Dwango North America, Inc., which company was incorporated in
Texas on November 20, 2000, by means of an exchange offer. Upon the closing of
such exchange offer, Dwango North America, Inc. became a substantial
majority-owned subsidiary of our company. It has since become a wholly-owned
subsidiary. In that the securityholders of Dwango North America, Inc. acquired a
majority of the voting securities of our company, Dwango North America, Inc. was
deemed to be the accounting acquiror. Unless the context otherwise requires,
references in this prospectus to our company for periods prior to September 29,
2003 are to Dwango North America, Inc.
Our principal executive office is located at 5847 San Felipe Street, Suite
3220, Houston, Texas 77057. Our telephone number at such address is (713)
914-9600.
16
PRODUCTS AND SERVICES
Games
In order to distribute the games licensed from Dwango Japan, we 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 we are 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 our 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 we will distribute fall into one of four categories: stand-alone
games, turn-based network games, massively multiplayer games and browser-based
network games. Stand-alone 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 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 us:
STAR EXCEED(TM) is a standalone top down vertical scrolling shooting game.
Players shoot enemy craft by using rapid-fire lasers or homing missiles. 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. If the player
wins the race, he or she is advanced to the next stage. There are a total of
eight stages in the game.
JumPuyon is a stand-alone side scrolling platform game. Players help the
alien, Puyon, jump on platforms while avoiding obstacles to reach the top. The
goal is to get Puyon back to his ship before it takes off. There are a total of
five levels, each progressively more difficult.
Bombt is a stand-alone puzzle game. Players must use color-coded bombs to
eliminate like-colored blocks in order to clear the stage. A total of 40 levels
get increasingly more complex.
Black Jack by dwango and Slots by dwango are stand-alone games. They are
based on the classic casino games. Players can accumulate and lose credits just
like in the real games.
AquaX is a stand-alone game where players race through the water doing
barrel rolls and double flips on a personal watercraft. Players earn points for
speed, difficulty of tricks or a combination of both in eighteen challenges set
in six different locations.
In addition to the games already released, we have five games that are
ready for launch and we are in development for nine additional games. We
anticipate that we will have released at least fifteen games, inclusive of
currently released games, by the end of 2004.
17
Ringtones
We have 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. We also have our own catalog of ringtones,
currently consisting of over 800 polyphonic ringtones. We currently hold
necessary licenses from Sony, EMI, Warner/Chappel Hill, ASCAP, Harry Fox, BMI,
Universal and BMG which are necessary for the distribution of ringtones and we
have completed our ringtone application that will allow for downloading of our
ringtones. Ringtones can be downloaded to cell phones for use as an alternative
ring for incoming calls to the ringtones that come with a cell phone. Different
ringtones can be used to identify different callers. We expect to release our
catalog of ringtones during the first half of 2004 through one or more wireless
carriers.
Images
We anticipate offering images for download in the near future. Images can
be downloaded to cell phones as logos, which can be displayed on the main screen
of a user's cell 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.
DWANGO JAPAN LICENSES
We entered into a Technology License Agreement and a Trademark License
Agreement with Dwango Japan effective August 14, 2002. The Technology License
Agreement allows us 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 we must pay to Dwango Japan a royalty equal to the
greater of $50,000 per year or 2% of our 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 us 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, we must pay to Dwango
Japan a royalty equal to the greater of $50,000 per year or 1/2 of 1% of our
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 we have a license to the Dwango Japan wireless
technology within North America, the parties have agreed that we 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 us and Dwango Japan.
In connection with the execution of the Technology License Agreement and
Trademark License Agreement, on August 14, 2002, Dwango Japan purchased shares
of common stock of Dwango North America, Inc. for $400,000. Prior to that, in
July 2002, Dwango Japan invested $100,000 in Dwango North America, Inc. in
consideration for a one-year convertible note, bearing interest at 4% per annum.
Such note was converted into shares of our common stock on July 7, 2003.
DISTRIBUTION
In the later part of 2002, we entered into an agreement with AT&T Wireless
which provides the terms and conditions under which our applications may be made
available to AT&T Wireless subscribers. We are currently selling seven games
through AT&T Wireless' m-Mode channel: STAR EXCEED(TM), Star Diversion(TM),
JumPuyon(TM), Bombt(TM), Slots by dwango, Black Jack by dwango and dwango
Racing(TM). Star Diversion is preloaded on the NEC 515 and 525 next generation
wireless handsets sold by AT&T Wireless pursuant to an agreement we have with
NEC America. This allows AT&T Wireless subscribers who purchase the NEC 515 or
525 wireless handset access to one free level of game play. The full version of
the game is available for purchase with a one-time download fee. 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. We also
recently introduced dwango Arcade through AT&T Wireless, a subscription-based
game series where subscribers are given access to four games for a monthly
subscription fee. The Arcade currently consists of STAR EXCEEDTM, dwango
RacingTM, JumPuyonTM, and Black Jack by dwango. It is anticipated that
subscribers will be given access to two new games every month as long as they
continue to subscribe to the Arcade.
18
In May of 2002, we executed an agreement to become a certified BREW
developer with Qualcomm. This agreement enables us 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, we
executed a BREW application license agreement with Verizon Wireless. The
agreement gives us access to post for distribution BREW software applications to
the online BREW catalog maintained by Qualcomm. These combined agreements give
us a channel to publish content on Verizon Wireless' network. We successfully
launched our 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. Both games have also launched on the
LG VX6000 handset as well. Get-It-Now is Verizon's entertainment service and is
available on BREW handsets.
In October 2003 we entered into an agreement with T-Mobile USA, Inc., in
December 2003 we entered into an agreement with Alltel Communications, Inc., and
in January 2004 we entered into an agreement with Cingular Wireless LLC, each of
which provide the terms and conditions under which our applications may be made
available to the subscribers of such respective wireless carriers. We expect to
release games through these carriers in the near future.
We are also seeking to enter into agreements similar to those described
above to make our content available to subscribers of other major carriers such
as Nextel, Sprint PCS and US Cellular.
Our 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. We recently launched our
first subscription-based game series through AT&T Wireless. Four games were
packaged as an arcade of games. It is anticipated that subscribers will be given
access to two new games every month as long as they continue to subscribe to the
arcade.
Whether a download model or subscription model is used, the fees for
downloading content may be collected by the carriers and then forwarded to us in
what is known as a billing-on-behalf-of system, which is the current system
employed by us. When games are sold through a carrier, the carrier is entitled
to retain a fee. The development and implementation of billing-on-behalf-of
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.
MARKETS
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. We believe 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, reaching over 40 million at the end of 2003.
We believe 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 our company, and the
development by companies such as our company of new wireless applications.
19
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.
Our 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
Our success in marketing and selling our 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 our products). In addition to marketing our products to
wireless carriers, we also engage in marketing efforts toward end-user
consumers. Marketing of the applications to consumers is performed through a
combination of marketing by the wireless carriers of wireless content to their
subscribers, direct consumer marketing efforts by our company, and the public
relations efforts of our company. We also seek to gain exposure through industry
trade shows, industry conference attendance, our website, and general industry
exposure.
COMPETITION
The market for wireless content is highly competitive. We are an early
entrant into the wireless content market, and we expect that the competition
will increase as the market grows. Many of our competitors have substantially
greater financial resources than us, which may allow them to identify emerging
trends more quickly and develop technology at a faster pace. We believe 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. We believe that we compete, or
will compete, favorably in these categories. We believe we have a unique
competitive advantage in our ability to leverage the license for the Dwango
Japan content and technology.
GOVERNMENT REGULATION
We are 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 us directly, the effects of these regulations on the wireless
carriers that provide ours applications to their subscribers may, in turn,
adversely affect our business, by, for example, increasing our costs or reducing
our ability to continue selling our products.
INTELLECTUAL PROPERTY
We regard our patents, copyrights, servicemarks, trademarks, trade
secrets, proprietary technology and similar intellectual property, including
that licensed from Dwango Japan, as critical to our success, and we rely on
trademark and copyright law, trade secret protection and confidentiality and
license agreements with our employees, customers, independent contractors,
partners and others to protect our intellectual property rights. There can be no
assurance that the steps we have taken to protect our proprietary rights will be
adequate to prevent third parties from infringing or misappropriating our
proprietary rights.
20
PROPERTIES
We currently maintain our executive office at 5847 San Felipe Street,
Suite 3220, 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 rent for such space is approximately
$12,200.
EMPLOYEES
We currently have a total of thirty-five employees, all of whom work
full-time. Nine of our employees are located at our Houston, Texas office, seven
are located at our San Francisco office, and nineteen are located at our
Seattle, Washington office. None of our employees are represented by unions and
we are not aware of any activities seeking such organization. We consider our
relations with its employees to be good.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following sets forth certain information regarding the directors and
executive officers of our company. Each director holds office until the next
annual meeting of the stockholders and until his successor has been duly elected
and qualified. Each executive officer serves at the discretion of the board of
directors of our 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 Director and Executive Vice President
Joseph Allen 59 Director
L. Derrick Ashcroft 75 Director
Paul Eibeler 48 Director
Jay F. Higgins 58 Director
Vishal Bhutani 29 Director
ROBERT E. HUNTLEY founded our company in November 2000 and since inception
has served as our Chairman, President and Chief Executive Officer. Prior to
founding our company, 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 2001. 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 our company in June 2001 and served as our
Vice President of Business Development from June 2001 through April 2002, as our
Senior Vice President of Business Development from April 2002 through July 2003,
and as our Chief Operating Officer from July 2003 to the present. Mr. Hametner
also served as the President of our wireless division from September 2002 to
July 2003. Prior to joining our company, 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.
21
JACQUES FAUST joined our company in August 2003 as our Chief Financial
Officer. Prior to such time, from December 2000 through July 2003, Mr. Faust was
an independent consultant to 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 our company in April 2003 as Vice President of
Business Development of our dwango wireless division. Mr. Hennessey served as
Vice President of Business Development of our wireless division from April 2003
until July 2003, at which time he became Executive Vice President of our company
and President of the dwango wireless division. In January 2004, Mr. Hennessey
was elected a director of our company. Mr. Hennessey co-founded OTA Wireless 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 our company since April 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 was the Vice Chairman and a director of Surgilight Inc., a public company
engaged in the development of lasers used for vision correction, from July 2001
to April 2003.
L. DERRICK ASHCROFT has been a director of our company since November
2000. Mr. Ashcroft is currently an owner of the Flying X Ranch, a company
engaged in the breeding of cattle. From 1990 through the present, Mr. Ashcroft
has been a director of Tatatech, Inc. (India), a member of the Tata group of
companies. Mr. Ashcroft previously served on the board of directors of the
following public and private companies in the United States and abroad: Leasing
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.
VISHAL BHUTANI has been a director of our company since January 2004. From
August 2002 through the present, Mr. Bhutani has been the Head of Research for
Alexandra Investment Management, LLC, the investment advisor for Alexandra
Global Master Fund Ltd, an investor in our company. From March 2002 to August
2002, Mr. Bhutani was Vice President of Magten Asset Management, a company
engaged in asset management. From August 2000 through March 2002, Mr. Bhutani
was a Corporate Finance Specialist for McKinsey & Company, a management
consulting firm. In 2000, Mr. Bhutani received his MBA in Finance from the NYU
Stern School of Business.
PAUL EIBELER has been a director of our company since August 2003. Mr.
Eibeler is currently engaged in consulting for various business enterprises,
including our company. 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, a company engaged in the development, publication,
marketing and distribution of interactive entertainment software. 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 our company since April 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).
22
Jay Higgins, Joseph Allen and L. Derek Ashcroft serve on the Audit
Committee of the Board of Directors of our 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
our 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 our company's independent certified
public accountants. In discharging its oversight role, the Audit Committee is
empowered to meet and discuss with our company's management and independent
auditors the quality and accuracy of our accounting principles, the completeness
and clarity of our 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 our company. Mr. Allen is the Chairman of
such committee. The Compensation Committee of the Board of Directors is
responsible for review and approval of our company's executive compensation and
administering our stock option plan.
EXECUTIVE COMPENSATION
The following table provides information concerning the annual and
long-term compensation earned or paid to our chief executive officer (the "named
executive officer") for the periods presented. No other executive officer of our
company had compensation that exceeded $100,000 during 2003. For the period
prior to September 29, 2003, the date of the acquisition by us of Dwango North
America, Inc., the following table includes compensation earned at Dwango North
America, Inc.
Annual Long-Term Compensation
Compensation ----------------------------------
Name and Principal -------------- Restricted Number of Securities All Other
Position Year Salary Bonus Stock Award Underlying Options Compensation
- -------- ---- ------ ----- ----------- ------------------ ------------
Robert E. Huntley ..... 2003 $86,000 -- -- 1,030,074 --
Chief Executive Officer 2002 $78,000 -- -- -- --
2001 -- -- -- -- --
DIRECTOR COMPENSATION
As compensation for services on our board of directors, Messrs. Allen,
Ashcroft and Higgins were each granted a non-qualified stock option to purchase
62,707 shares of common stock at an exercise price of $0.80 per share. 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.
On November 19, 2003, Paul Eibeler was granted a non-qualified stock
option to purchase 250,000 shares of common stock at an exercise price of $1.50
per share. The option is for a term of ten years and is immediately exercisable.
In addition to his services as a director, Mr. Eibeler has provided business and
consulting services to our company.
Each director is reimbursed for his expenses incurred in connection with
the performance of his duties as a director. In addition, each director is
entitled to $500 per meeting of the board of directors or any committee thereof
in which he participates.
23
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information concerning individual grants of
stock options made during 2003 to our named executive officer.
Percent of
Number of Total Options
Securities Granted to
Underlying Employees Exercise Price Expiration
Name Options In 2003 (in $ per share) Date
---- ---------- ------------- ---------------- ----------
Robert E. Huntley.......... 318,083 24% $1.20 5/27/13
378,658 29% $1.32 5/27/08
333,333 26% $1.50 11/18/13
AGGREGATED OPTIONS EXERCISES IN 2003 AND YEAR END VALUES
The following table provides information concerning the exercise of stock
options during 2003, and the value of unexercised options owned, by our named
executive officer.
Number of Securities Value of Unexercised
Shares Underlying In-the-Money
Acquired Unexercised Options (1) Options (2)
On Value ------------------------------ -----------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
Robert E. Huntley......... -- -- 472,682 557,392 $79,985 $186,605
- ----------
(1) Includes ownership of options as of December 31, 2003.
(2) Based on closing price of our common stock as reported on the
Over-the-Counter Bulletin Board on December 31, 2003.
EMPLOYMENT AGREEMENTS
We currently do not have an employment agreement with Mr. Huntley.
PROVISIONS OF OUR CHARTER AND BYLAWS
Our articles of incorporation provide that our company will indemnify any
person who is or was a director, officer, employee, agent or fiduciary of our
company to the fullest extent permitted by applicable law. Nevada law permits a
Nevada corporation to indemnify its directors, officers, employees and agents
against liabilities and expenses they may incur in such capacities in connection
with any proceeding in which they may be involved, if (i) such director of
officer is not liable to the corporation or its stockholders due to the fact
that his or her acts or omissions constituted a breach of his or her fiduciary
duties as a director or officer and the breach of those duties involved
intentional misconduct, fraud or a knowing violation of law, or (ii) he or she
acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interests of the company, or that with respect to any criminal
action or proceeding, he or she had reasonable cause to believe that his or her
conduct was unlawful.
In addition, our company's bylaws include provisions to indemnify our
officers and directors and other persons against expenses, judgments, fines and
amounts incurred or paid in settlement in connection with civil or criminal
claims, actions, suits or proceedings against such persons by reason of serving
or having served as officers, directors, or in other capacities, except in any
action, suit or proceeding in which it is adjudged that such person was liable
for negligence or misconduct in the performance of his duty. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere or its equivalent will not, of itself, create a
presumption that the person is liable for negligence or misconduct on the
performance of his or her duties.
24
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in such Act and is, therefore, unenforceable.
BENEFICIAL OWNERSHIP OF SECURITIES
The following table shows the common stock owned by our directors and
"named executive officer", by persons known by us to beneficially own,
individually, or as a group, more than 5% of our outstanding common stock as of
January 27, 2004 and all of our current directors and executive officers as a
group.
Beneficial Percent of
Name and Address Ownership of Common
of Beneficial Owner (1) Capital Stock (2) Stock
- ----------------------- ----------------- -----
Robert E. Huntley ................... 3,178,088(3) 45.1%
Huntley Family Trust ................ 696,741 11.2%
F. Conrad Hametner III .............. 326,841(4) 5.2%
Jacques Faust ....................... 10,451(5) *
Rick Hennessey ...................... -- --
Joseph Allen ........................ 62,707(6) 1.0%
L. Derrick Ashcroft ................. 95,942(7) 1.5%
Vishal Bhutani (8) .................. --(9) --
Jay F. Higgins ...................... 62,707(10) 1.0%
Paul Eibeler ........................ 416,721(11) 6.3%
James Scoroposki (12) ............... 458,714(13) 7.0%
Terry Phillips (14) ................. 333,660(15) 5.2%
James Scibelli (16) ................. 632,763(17) 9.3%
Silverman Partners(18) .............. 500,325(19) 7.4%
Alexandra Global Master Fund Ltd.(20) 658,000(21) 9.9%
Dwango Co., Ltd. (22) ............... 542,624 8.7%
HCFP/Brenner Securities, LLC (23) ... 382,546(24) 5.8%
All directors and executive officers
as a group (9 persons) .............. 4,153,457(25) 54.1%
- ----------
* 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 3220, 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 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.
25
(3) Includes 472,682 shares of common stock issuable upon exercise of options
and 326,927 shares of common stock issuable upon the exercise of warrants
held by Mr. Huntley. Does not include 696,741 shares of common stock
beneficially owned by Huntley Family Trust, or 139,348 shares of 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 common stock issuable upon exercise of options
held by Mr. Hametner.
(5) Consists of shares of common stock issuable upon exercise of options held
by Mr. Faust.
(6) Consists of shares of common stock issuable upon exercise of options held
by Mr. Allen.
(7) Includes 62,707 shares of common stock issuable upon exercise of options
held by Mr. Ashcroft.
(8) The address of Mr. Bhutani is c/o Alexandra Investment Management, LLC,
767 Third Avenue, 39th Floor, New York, New York 10017.
(9) Mr. Bhutani is the Head of Research for Alexandra Investment Management,
LLC, the investment advisor for Alexandra Global Master Fund Ltd., one of
the investors in our company.
(10) Consists of shares of common stock issuable upon exercise of options held
by Mr. Higgins.
(11) Includes 41,667 shares of common stock issuable upon conversion of senior
convertible promissory notes, 83,388 shares of common stock issuable upon
exercise of warrants, and 250,000 shares of common stock issuable upon
exercise of options held by Mr. Eibeler.
(12) The address of Mr. Scoroposki is c/o Acclaim Entertainment, Inc., One
Acclaim Plaza, Glen Cove, NY 11542-2788.
(13) Includes 166,667 shares of common stock issuable upon conversion of senior
convertible promissory notes and 166,883 shares of common stock issuable
upon exercise of warrants held by Mr. Scoroposki.
(14) The address of Mr. Phillips is c/o Phillips Sales, Inc., 2900 Polo
Parkway, Suite 200, Midlothian, VA 23113.
(15) Includes 83,333 shares of common stock issuable upon conversion of senior
convertible promissory notes and 83,442 shares of common stock issuable
upon exercise of warrants held by Mr. Phillips.
(16) The address of Mr. Scibelli is c/o RG Securities, LLC, 165 EAB Plaza, 6th
Floor, Uniondale, NY 11556-0165.
(17) Includes 83,333 shares of common stock issuable upon conversion of senior
convertible notes and 83,442 shares of common stock issuable upon exercise
of warrants held by Mr. Scibelli, and 382,546 shares of common stock
issuable upon exercise of warrants held by RG Securities, LLC, of which
Mr. Scibelli may be deemed to be the beneficial owner.
(18) The address of Silverman Partners is c/o Harvey Silverman, Spear, Leeds &
Kellogg, 120 Broadway, 6th Floor, New York, NY 10271.
(19) Consists of 250,000 shares of common stock issuable upon conversion of
senior convertible promissory notes and 250,325 shares of common stock
issuable upon exercise of warrants held by Silverman Partners.
(20) The address of Alexandra Global Master Fund Ltd. is c/o Alexandra
Investment Management, LLC, 767 Third Avenue, 39th Floor, New York, NY
10017.
(21) Constitutes the maximum number of shares of common stock Alexandra may be
deemed to beneficially own. Pursuant to the purchase agreement pursuant to
which Alexandra acquired its notes and certain of its warrants, the number
of shares that may be acquired at any time by it shall not exceed a number
that, when added to the total number of shares of common stock deemed
beneficially owned by it, would result in beneficial ownership by it of
more than 9.9% of our common stock.
(22) The address of Dwango Co., Ltd. is Hamacho Center Bldg., 2-31-1,
Nihonbashi-Hamacho, Chuo-Ku, Tokyo, Japan 103-0007.
(23) The address of HCFP/Brenner Securities, LLC is 888 7th Avenue, 17th Floor,
New York, New York 10106.
(24) Consists of shares of common stock issuable upon exercise of warrants held
by HCFP/Brenner Securities, LLC.
(25) Includes 1,428,975 shares of common stock issuable upon exercise of
options and warrants held by the directors and executive officers.
CERTAIN TRANSACTIONS
In October 2002, Mr. James Scibelli, a principal of RG Securities, LLC,
purchased $100,000 of common stock of our company pursuant to an offering in
which RG Securities, LLC and HCFP/Brenner Securities, LLC acted as co-placement
agents. RG Securities and HCFP/Brenner Securities and their designees received a
cash fee and warrants to purchase an aggregate of 83,444 shares of our common
stock for acting as co-placement agents for such offering.
26
In May 2003, Mr. James Scibelli purchased $100,000 of our senior
convertible promissory notes and warrants pursuant to an offering, completed in
September 2003, in which RG Securities and HCFP/Brenner Securities acted as
co-placement agents. RG Securities and HCFP/Brenner Securities received a cash
fee and warrants to purchase an aggregate 417,208 shares of our common stock for
acting as co-placement agents for such offering.
RG Securities, LLC, of which Mr. James Scibelli is a principal, and
HCFP/Brenner Securities, LLC acted as co-placement agents in connection with our
offering of common stock and warrants to Alexandra Global Master Fund Ltd. in
December 2003. RG Securities and HCFP/Brenner Securities received a cash fee and
warrants to purchase an aggregate of 50,000 shares of our common stock for
acting as co-placement agents for such offering.
RG Securities, LLC, of which Mr. James Scibelli is a principal, and
HCFP/Brenner Securities, LLC acted as co-placement agents in connection with our
offering of 9% senior convertible notes due 2007 and common stock purchase
warrants to Alexandra Global Master Fund Ltd. in January 2004. RG Securities and
HCFP/Brenner Securities received a cash fee and warrants to purchase an
aggregate of 212,500 shares of our common stock for acting as co-placement
agents for such offering.
In January 2004, we issued to HCFP/Brenner Securities, LLC and RG
Securities, LLC warrants to purchase an aggregate of 10,284 shares of our common
stock in consideration of their deferment of cash fees owing to them.
From October through December 2003, Robert E. Huntley, our chairman,
president and chief executive officer, and Paul Eibeler, one of our outside
directors, advanced an aggregate of approximately $442,000 to our company. In
January 2004, such individuals elected to apply such amounts toward the purchase
of an aggregate of 368,333 shares of our common stock ($1.20 per share) and
warrants to purchase 368,333 shares of our common stock at an exercise price of
$1.20 per share.
SELLING SECURITYHOLDERS
The securities covered by this prospectus are shares of our common stock
that have been issued and shares of our common stock that may be issued upon the
conversion of convertible notes or upon the exercise of warrants to purchase
shares of our common stock. The number of shares of common stock that may be
actually sold by the selling securityholders will be determined by such selling
securityholder. We are registering for the selling securityholders named herein
an aggregate of 13,695,247 shares of common stock. The shares of common stock to
which this prospectus relates consist of the following:
o 5,581,749 shares of common stock previously issued by our company.
o 41,722 shares of common stock issuable upon the exercise of warrants
acquired by the selling securityholder in August 2002.
o 83,444 shares of common stock issuable upon the exercise of warrants
issued to HCFP/Brenner Securities, LLC and RG Securities, LLC and
their designees for acting as placement agents for a private
placement completed by our company in October 2002.
o 2,083,333 shares of common stock issuable upon conversion of our 8%
senior convertible promissory notes due 2006 acquired by the selling
securityholders in a private placement completed by the registrant
in September 2003.
o 2,086,037 shares of common stock issuable upon the exercise of
warrants acquired by the selling securityholders in the September
2003 private placement.
27
o 417,208 shares of common stock issuable upon the exercise of
warrants issued to HCFP/Brenner Securities, LLC and RG Securities,
LLC for acting as the placement agents in connection with the
September 2003 private placement.
o 250,000 shares of common stock issuable upon the exercise of
warrants acquired by a selling securityholder in a private placement
completed by the registrant in December 2003.
o 50,000 shares of common stock issuable upon the exercise of warrants
issued to HCFP/Brenner Securities, LLC and RG Securities, LLC for
acting as placement agents in connection with the December 2003
private placement.
o 1,802,043 shares of common stock issuable upon conversion of our 9%
senior convertible note due 2007 acquired by a selling
securityholder in a private placement completed by the registrant in
January 2004. 385,376 of such shares have been registered in
connection with possible interest payments.
o 708,333 shares of common stock issuable upon the exercise of
warrants acquired by a selling securityholder in the January 2004
private placement.
o 212,500 shares of common stock issuable upon the exercise of
warrants issued to HCFP/Brenner Securities, LLC and RG Securities,
LLC for acting as placement agents in connection with the January
2004 private placement.
o 10,284 shares of common stock issuable upon exercise of warrants
issued to HCFP/Brenner Securities, LLC and RG Securities, LLC.
o 368,594 shares of common stock issuable upon exercise of warrants
issued to our chairman, president and chief executive officer and an
outside director in connection with the conversion of advances to
our company by such individuals to common stock and warrants.
Except as noted below or in the "Beneficial Ownership of Securities" and
"Management" sections of this prospectus, none of the selling securityholders
has, or within the past three years has had, any relationship, position or
office with us or our predecessors or affiliates.
The following table sets forth, as of January 27, 2004: (1) the name of
each selling securityholder, (2) the number of shares of our common stock
beneficially owned by each selling securityholder, including the number of
shares purchasable upon exercise of options or warrants or conversion of notes,
(3) the maximum number of shares of common stock which the selling
securityholders can sell pursuant to this prospectus and (4) the number of
shares of common stock that the selling securityholders would own if they sold
all their shares registered by this prospectus.
Except as otherwise noted below, the number of shares of our common stock
registered for sale hereunder for a selling securityholder consists of shares of
our common stock either beneficially owned or issuable upon exercise of the
warrants or conversion of the notes described above.
28
Number of
Shares of Number of
Common Stock Shares of Number of shares Percentage
Beneficially Common Stock of Common Stock Of Our
Owned Prior Being Registered to be Beneficially Outstanding
to in this Owned After Common Stock
Selling Securityholder Offering Prospectus Offering After Offering
- ---------------------- -------- ---------- -------- --------------
Michael Ades 125,081 125,081 0 0
Alexandra Global Master Fund Ltd. 658,000(1) 3,010,376 0 0
Satoshi Aoshima 166,775 166,775 0 0
L. Derrick Ashcroft 95,942 33,235 62,707 1.0%
Carol Bartumioli 83,388 83,388 0 0
Dominic Bassani 20,862 20,862 0 0
Moish Brenman (2) 4,370 2,090 2,280 *
Joseph Catalano 41,693 41,693 0 0
Rod Cousens 41,722 41,722 0 0
Crestwood Holdings, LLC 125,110 125,110 0 0
Deerwood Trust 41,693 41,693 0 0
Mark Defazio 2,087 2,087 0 0
Chris Down (3) 67,837 35,534 32,303 *
Dwango Co. Ltd. 542,624 542,624 0 0
Paul Eibeler 416,721 166,721 250,000 3.8%
Farkas Family Trust 83,388 83,388 0 0
Bruce Feirstein 41,693 41,693 0 0
Israel Feit 200,130 200,130 0 0
Walter and Renee Friedman 20,862 20,862 0 0
Growth Ventures, Inc. 125,081 125,081 0 0
Len Grunstein 62,555 62,555 0 0
Gary Gunn (4) 58,161 58,161 0 0
Edward S. Gutman 250,163 250,163 0 0
Robert Gutman 41,693 41,693 0 0
Gutman A/C The HRG Trust 41,693 41,693 0 0
The Gutman Family Foundation 41,693 41,693 0 0
F. Conrad Hametner III 326,841 271,102 55,739 *
Hanan Haskell 83,388 83,388 0 0
HCFP/Brenner Securities, LLC (5) 382,546 382,546 0 0
Cory D. Heith 41,693 41,693 0 0
HF DNAI Company 16,690 16,690 0 0
Alan Hoffman 20,862 20,862 0 0
Robert W. Holmes 41,722 41,722 0 0
Huntley Family Trust 696,741 696,741 0 0
Huntley Trust No. 2 139,348 139,348 0 0
Robert E. Huntley 3,178,088 2,705,407 472,681 5.0%
JR Squared LLC 125,081 125,081 0 0
Kass & Jaffe Investment Group 41,693 41,693 0 0
Stephen L. Kass 41,693 41,693 0 0
Edward B. Katz 50,033 50,033 0 0
David E. Kent, M.D 125,081 125,081 0 0
Theodore Kesten 104,250 104,250 0 0
Harold Kenneth King and Patricia
Lake, JT TEN 20,862 20,862 0 0
29
Number of
Shares of Number of
Common Stock Shares of Number of shares Percentage
Beneficially Common Stock of Common Stock Of Our
Owned Prior Being Registered to be Beneficially Outstanding
to in this Owned After Common Stock
Selling Securityholder Offering Prospectus Offering After Offering
- ---------------------- -------- ---------- -------- --------------
Katten Muchin Zavis Rosenman 4,172 4,172 0 0
Burton I. Koffman 104,250 104,250 0 0
Elizabeth Koffman 41,693 41,693 0 0
William D. Kornreich 62,555 62,555 0 0
Travis D. Lake 20,862 20,862 0 0
Eric Lerner 4,172 4,172 0 0
Allan R. Lyons 83,388 83,388 0 0
Alan and Melissa Matarasso, JTROS 41,693 41,693 0 0
Medi-Computer Billing Inc. 83,388 83,388 0 0
Gary T. Moomjian (6) 129,176 74,273 54,903 *
Robert Mullins (4) 58,161 58,161 0 0
Satoshi Nakajima 127,449 127,449 0 0
Mel Paikoff 41,693 41,693 0 0
Terry Phillips 333,660 333,660 0 0
Andrea Pines 20,862 20,862 0 0
RG Securities, LLC (5) 382,546 382,546 0 0
Stewart Richer 168,862 168,862 0 0
James Scibelli (5) 250,217 250,217 0 0
James Scoroposki 458,714 458,714 0 0
Sabey Corporation 44,819 44,819 0 0
Seneca Ventures 20,860 20,860 0 0
Steven Shapiro 83,388 83,388 0 0
Silverman Partners 500,325 500,325 0 0
Martin Smolowitz, Esq
Self-Directed Defined Benefit
Pension Plan 20,881 20,881 0 0
D802-3 Holdings, LLC 83,388 83,388 0 0
Sunset Realty Corp. 41,693 41,693 0 0
Marshall Trabout 41,693 41,693 0 0
David Treiger (7) 33,235 33,235 0 0
Stig and Britt Marie Wennerstrom, 62,555 62,555 0 0
JT TEN
Woodland Venture Fund 20,860 20,860 0 0
UMB Bank, N.A., Trustee of the
and Profit Sharing Plan of
Latham & Watkins fbo Peter Benzian 20,862 20,862 0 0
Vulcan Properties Inc. 41,693 41,693 0 0
Alvin Wong (8) 4,370 2,090 2,280 *
---------- ---------- ---------- ----------
Totals 14,242,764 13,695,247 932,893 13.0%
========== ========== ========== ==========
- ----------
* Less than 1%
(1) Constitutes the maximum number of shares of common stock Alexandra may be
deemed to beneficially own. Pursuant to the purchase agreement pursuant to
which Alexandra acquired its notes and certain of its warrants, the number
of shares that may be acquired at any time by it shall not exceed a number
that, when added to the total number of shares of common stock deemed
beneficially owned by it, would result in beneficial ownership by it of
more than 9.9% of our common stock.
30
(2) Moish Brenman is an employee of our company.
(3) Chris Down is an employee of company.
(4) Gary Gunn and Robert Mullins are principals of Gunn, Mullins & Farrell
LLP, counsel to our company
(5) HCFP/Brenner Securities, LLC and RG Securities, LLC have acted as
co-placement agents for our company in connection with various financings
consummated by our company. James Scibelli is a principal of RG
Securities, LLC.
(6) Gary T. Moomjian is a principal of Moomjian & Waite, LLP, counsel to our
company.
(7) David Treiger has performed financial consulting services for our company.
(8) Alvin Wong is an employee of our company.
DESCRIPTION OF SECURITIES
Authorized capital stock
We are authorized to issue up to 50,000,000 shares of common stock with a
par value of $.001 per share, and 10,000,000 shares of preferred stock with a
par value of $.001 per share.
Common stock
As of January 27, 2004 there were 6,241,800 shares of our common stock
issued and outstanding. Our common stock is traded on the Over-the-Counter
Bulletin Board under the symbol "DWGN". The holders of common stock are entitled
to one vote per share on each matter submitted to a vote of stockholders. In the
event of liquidation, holders of common stock are entitled to share ratably in
the distribution of assets remaining after payment of liabilities, if any.
Holders of common stock have no cumulative voting rights, and, accordingly, the
holders of a majority of the outstanding shares have the ability to elect all of
the directors. Holders of common stock have no preemptive or other rights to
subscribe for shares. Holders of common stock are entitled to such dividends as
may be declared by the board of directors out of funds legally available
therefor. The outstanding common stock is, and the common stock to be
outstanding upon completion of this offering will be, validly issued, fully paid
and non-assessable.
Preferred Stock
We currently have no shares of preferred stock outstanding. Our board of
directors is empowered, without approval of the stockholders, to cause shares of
preferred stock to be issued in one or more series; with the numbers of shares
of each series to be determined by it. The board of directors is also authorized
to fix and determine variations in the designations, preferences, and special
rights (including, without limitation, special voting rights, preferential
rights to receive dividends or assets upon liquidation, rights of conversion
into common stock or other securities, redemption provisions and sinking fund
provisions) between the preferred stock or any series thereof and the common
stock. The shares of preferred stock or any series thereof may have full or
limited voting powers or be without voting powers.
Capital raising transactions
All issuances of our securities prior to our September 2003 acquisition of
Dwango North America, Inc. described below were issued by Dwango North America,
Inc., and have been converted to equivalent securities of our company pursuant
to the terms of the acquisition.
In July 2002, Dwango Japan invested $100,000 in consideration for a
one-year convertible note, bearing interest at 4% per annum. Such note was
converted into 83,443 shares of common stock on July 7, 2003. These shares of
common stock are registered for resale in this prospectus.
31
In April 2002, we issued to one accredited investor a convertible
promissory note in the principal amount of $100,000 and warrants to purchase
preferred stock. In August 2002 such note (and accrued interest) and warrants
converted into 85,727 shares of common stock and warrants to purchase 41,722
shares of common stock at an exercise price of $1.20 per share. The shares of
common stock and the shares of common stock underlying the warrants are
registered for resale in this prospectus.
In August 2002, we issued to Dwango Japan 333,768 shares of common stock
for $400,000. These shares of common stock are registered for resale in this
prospectus.
In October 2002, we sold 834,465 shares of common stock pursuant to a
private placement offering to 24 accredited investors for an aggregate of
approximately $1,000,000. In connection with the offering, we issued to the
placement agents and their designees five-year warrants to purchase an aggregate
of 83,444 shares of common stock at an exercise price of $1.20 per share. The
shares of common stock issued to the investors and the shares of common stock
underlying the warrants issued to the placement agents and their designees are
registered for resale in this prospectus.
In September 2003, we concluded a private placement pursuant to which we
issued to 42 accredited investors $2,500,000 in principal amount of senior
convertible promissory notes convertible into 2,083,333 shares of common stock
and warrants to purchase 2,086,037 shares of common stock at an exercise price
of $1.20 per share. Such warrants are exercisable through September 15, 2006. In
connection with such offering, we issued to the placement agents warrants to
purchase an aggregate of 417,208 shares of common stock at an exercise price of
$1.20 per share. The shares of common stock underlying the notes and warrants
are registered for resale in this prospectus.
In December 2003, we concluded a private placement pursuant to which we
issued to one accredited investor 250,000 shares of common stock for a purchase
price of $300,000. In connection with the offering, we also issued (i) warrants
to purchase 250,000 shares of common stock at an exercise price of $1.20 per
share to such accredited investor, and (ii) warrants to purchase 50,000 shares
of common stock at an exercise price of $1.20 per share to the placement agents
for such offering. The shares of common stock and the shares of common stock
underlying the warrants are registered for resale in this prospectus.
In January 2004, we concluded a private placement pursuant to which we
issued to one accredited investor a $1,700,000 principal amount 9% senior
convertible note due 2007 convertible into 1,416,667 shares of common stock and
warrants to purchase 708,333 shares of common stock at an exercise price of
$1.20 per share. In connection with such offering, we issued to the placement
agents five-year warrants to purchase an aggregate of 212,500 shares of common
stock at an exercise price of $1.20 per share. The shares of common stock
underlying the notes and warrants are registered for resale in this prospectus.
PLAN OF DISTRIBUTION
Plan of Distribution
The selling securityholders (and their respective pledgees, transferees,
donees or other successors in interest) may offer and sell the shares of common
stock owned by them or derived from the conversion of our convertible notes and
the exercise of warrants covered by this prospectus from time to time as
follows:
o in the open market;
o on the Over-the-Counter Bulletin Board or such other market or
exchange on which the shares of common stock are traded;
o in privately negotiated transactions;
o in an underwritten offering; or
o a combination of such methods or any other legally available means.
32
Such sales may be made at varying prices determined by reference to, among other
things:
o market value prevailing at the time of the sale;
o prices related to the then-prevailing market price; or
o negotiated prices.
Negotiated transactions may include:
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which a broker
solicits purchasers; or
o block trades in which a broker-dealer so engaged will attempt to
sell the shares as agent but may take a position and resell a
portion of the block as principal to facilitate the transaction.
In connection with distributions of our common stock, any selling securityholder
may:
o enter into hedging transactions with broker-dealers and the
broker-dealers may engage in short sales of our common stock in the
course of hedging the positions they assume with the selling
securityholders;
o sell our common stock short and deliver the common stock to close
out such short positions;
o enter into option or other transactions with broker-dealers that
involve the delivery of our common stock to the broker-dealers,
which may then resell or otherwise transfer such common stock; and
o loan or pledge our common stock to a broker-dealer which may then
sell our common stock so loaned, and upon a default, the common
stock may be sold or otherwise transferred.
During such time as the selling securityholders may be engaged in a
distribution of the securities we are registering by this Registration
Statement, they are required to comply with the applicable provisions of the
Securities Exchange Act and the rules and regulations thereunder, including
Regulation M. Regulation M may limit the timing of purchases and sales of our
securities. These restrictions may affect the marketability of our common stock
and the ability of any person to engage in market-making activities with respect
to our common stock. The selling securityholders may, however, engage in short
sales in accordance with Rule 104 of Regulation M. Short sales, if engaged in by
the selling securityholders, may effect the market price of our common stock.
Regulation M specifically prohibits short sales that are the result of
fraudulent, manipulative or deceptive practices. Selling securityholders are
required to consult with their own legal counsel to ensure compliance with
Regulation M.
Broker dealers may receive commissions or discounts from the selling
securityholders in amounts to be negotiated immediately prior to the sale. The
selling securityholders and any broker executing selling orders on behalf of the
selling securityholders may be deemed to be an "underwriter" within the meaning
of the Securities Act. Commissions received by any such broker may be deemed to
be underwriting commissions under the Securities Act.
LEGAL MATTERS
The validity of the common stock that we are offering will be passed upon
for us by Moomjian & Waite, LLP, Jericho, New York. Gary T. Moomjian, a partner
of Moomjian & Waite, LLP, currently owns 74,273 shares of our common stock and
options to purchase 54,903 shares of our common stock.
EXPERTS
The financial statements of Dwango North America, Inc. (now known as
Dwango North America Corp.) as of December 31, 2002 and for each of the periods
ended December 31, included in this prospectus, have been audited by Eisner LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing. Such report included an explanatory
paragraph regarding the existence of substantial doubt about the entity's
ability to continue as a going concern.
33
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form SB-2, including exhibits, schedules and
amendments filed with the registration statement, under the Securities Act with
respect to the common stock to be sold in this offering. This prospectus does
not contain all of the information set forth in this registration statement. For
further information about us and the shares of common stock to be sold in the
offering, please refer to the registration statement. For additional
information, please refer to the exhibits that have been filed with our
registration statement on Form SB-2.
We are subject to the information and reporting requirements of the
Securities Exchange Act of 1934, and, in accordance with these requirements, we
file periodic reports, proxy statements and other information with the SEC.
You may read and copy all or any portion of the registration statement or
any other information that we file at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C., 20549. You can request copies of these
documents upon payment of a duplicating fee, by writing to the SEC. Please call
the SEC at 1-800-SEC-0330 for further information about the public reference
rooms. Our filings, including the registration statement, are also available on
the SEC website (http://www.sec.gov).
34
DWANGO NORTH AMERICA CORP. AND SUBSIDIARY
(a development stage company)
Index
- ---------------------------------------------------------------------------------------------------------------------------
Condensed Consolidated Balance Sheet as of September 30, 2003 (Unaudited) F-2
- ---------------------------------------------------------------------------------------------------------------------------
Condensed Consolidated Statements of Operations for the nine months ended September 30, 2003 (Unaudited) and F-3
September 30, 2002 (Unaudited) and for the period November 20, 2000
(Inception) to September 30, 2003 (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
Condensed Consolidated Statements of Stockholders' Equity (Capital Deficit) for the period November 20, 2000 F-4
(Inception) to September 30, 2003 (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002, and for the period from November 20,
2000 (Inception) to September 30, 2003 (Unaudited) F-5
- ---------------------------------------------------------------------------------------------------------------------------
Notes to Condensed Consolidated Financial Statements F-6
- ---------------------------------------------------------------------------------------------------------------------------
Independent Auditors' Report F-11
- ---------------------------------------------------------------------------------------------------------------------------
Balance Sheet as of December 31, 2002 F-12
- ---------------------------------------------------------------------------------------------------------------------------
Statements of Operations for the years ended December 31, 2002 and 2001, and for the period from November 20, 2000 F-13
(Inception) to December 31, 2002
- ---------------------------------------------------------------------------------------------------------------------------
Statements of Stockholders' Equity (Capital Deficit) for the years ended
December 31, 2002 and 2001, and for the period from November 20,
2000 (Inception) to December 31, 2002 F-14
- ---------------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows for the years ended December 31, 2002 and 2001, and for the period from November 20, 2000 F-15
(Inception) to December 31, 2002
- ---------------------------------------------------------------------------------------------------------------------------
Notes to the Financial Statements F-16
- ---------------------------------------------------------------------------------------------------------------------------
See notes to the condensed consolidated financial statements
F-1
DWANGO NORTH AMERICA CORP. AND SUBSIDIARY
(a development stage company)
Condensed Consolidated Balance Sheet as of September 30, 2003 (Unaudited)
(Note B)
ASSETS
Current assets:
Cash $ 123,000
Prepaid expenses --
Other current assets 34,000
-----------
Total current assets 157,000
Fixed assets, net 127,000
Deferred acquisition costs 34,000
Deferred financing costs 497,000
-----------
$ 815,000
===========
LIABILITIES AND CAPITAL DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 494,000
-----------
Total current liabilities 494,000
Senior convertible notes payable, net of debt
discount of $1,713,000 787,000
-----------
Total liabilities 1,281,000
-----------
Capital deficit:
Preferred stock, $.001 par value; 10,000,000 shares authorized;
no shares issued and outstanding --
Common stock, $.001 par value; 50,000,000 shares authorized;
issued and outstanding 5,623,000 5,000
Additional paid-in capital 3,780,000
Deficit accumulated during the development stage (4,251,000)
-----------
Total capital deficit (466,000)
-----------
$ 815,000
===========
See notes to the consolidated financial statements
F-2
DWANGO NORTH AMERICA CORP. AND SUBSIDIARY
(a development stage company)
Condensed Consolidated Statements of Operations (Unaudited)
(Note B)
Period
From
November 20,
2000
Nine-Month Period Ended (Inception)
September 30, to
--------------------------- September 30,
2003 2002 2003
----------- ----------- -----------
Revenue $ 10,000 $ -- $ 10,000
Expenses:
Research and development 84,000 -- 84,000
General and administrative 2,453,000 728,000 3,863,000
Interest expense 247,000 51,000 314,000
----------- ----------- -----------
Net loss $(2,774,000) $ (779,000) $(4,251,000)
=========== =========== ===========
Common share data -- revised:
Basic and diluted loss per share $ (0.57) $ (0.21)
=========== ===========
Weighted average number of basic and diluted
common shares outstanding 4,880,847 3,626,845
=========== ===========
See notes to the consolidated financial statements
F-3
DWANGO NORTH AMERICA CORP. AND SUBSIDIARY
(a development stage company)
Condensed Consolidated Statements of Stockholders' Equity (Capital Deficit)
(Unaudited) (Note B)
Common Stock Deficit
$.001 Par Value Accumulated
---------------------- Additional During The
Number of Paid-in Development
Shares Amount Capital Stage Total
--------- -------- ---------- ----------- ------------
Shares issued in connection with the
formation of the Company, November 20,
2000, adjusted to reflect the
recapitalization 3,408,000 $ 4,000 $ 4,000
Net loss for the year ended December 31, 2000 $ (1,000) (1,000)
--------- --------- ------------- -----------
Balance at December 31, 2000 3,408,000 4,000 (1,000) 3,000
Capital contribution by majority
stockholder in 2001 $ 61,000 61,000
Sale of stock, December 27, 2001 125,000 100,000 100,000
Net loss for the year ended December 31, 2001 (206,000) (206,000)
--------- --------- ----------- ------------- -----------
Balance at December 31, 2001 3,533,000 4,000 161,000 (207,000) (42,000)
Common stock issued in payment for
rent, June 1, 2002 45,000 54,000 54,000
Conversion of note payable, August 14, 2002 85,000 103,000 103,000
Warrant issued in connection with note payable 46,000 46,000
Sale of stock, August 14, 2002 335,000 370,000 370,000
Capital contribution by majority
stockholder, August 14, 2002 57,000 57,000
Exercise of stock options, September 20, 2002 8,000 6,000 6,000
Common stock issued in October 2002,
in connection with private financing, net 835,000 1,000 776,000 777,000
Net loss for the year ended December 31, 2002 (1,270,000) (1,270,000)
--------- --------- ----------- ------------- -----------
Balance at December 31, 2002 4,841,000 5,000 1,573,000 (1,477,000) 101,000
Warrants issued in connection with notes
payable 2,059,000 2,059,000
Conversion of note payable from stockholder
July 7, 2003 83,000 100,000 100,000
Stock issued in connection with
employment agreements 39,000 48,000 48,000
Net loss for the nine-month period ended
September 30, 2003 (2,774,000) (2,774,000)
Shares of acquired company deemed issued
In connection with capital transaction 660,000
--------- --------- ----------- ------------- -----------
Balance at September 30, 2003 (unaudited) 5,623,000 $ 5,000 $ 3,780,000 $ (4,251,000) $ (466,000)
========= ========= =========== ============= ===========
See notes to the consolidated financial statements
F-4
DWANGO NORTH AMERICA CORP. AND SUBSIDIARY
(a development stage company)
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Note B)
Period
From
November 20,
2000
Nine-Month Period Ended (Inception)
September 30, to
-------------------------- September 30,
2003 2002 2003
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
Cash flows from operating activities:
Net loss $(2,774,000) $ (779,000) $(4,251,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation expense 48,000 84,000
Common stock issued for rent 17,000 14,000 54,000
Common stock issued as compensation 48,000 48,000
Amortization of debt discount 207,000 46,000 253,000
Amortization of deferred financing cost 85,000 85,000
Changes in:
Prepaid expenses 14,000 (45,000) --
Other assets (26,000) (5,000) (34,000)
Amortization of deferred acquisition costs (34,000) (34,000)
Accounts payable and accrued expenses 283,000 59,000 504,000
----------- ----------- -----------
Net cash used in
operating activities (2,132,000) (710,000) (3,291,000)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (95,000) (4,000) (211,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from line of credit 50,000 45,000 150,000
Repayment of line of credit (50,000) (13,000) (150,000)
Proceeds from loan 54,000 54,000
Warrant issued in connection with note payable 46,000 46,000
Proceeds from related party loan 150,000 200,000
Repayment of related party loan 50,000 (50,000)
Proceeds from issuance of notes
payable and warrants 2,500,000 (50,000) 2,500,000
Financing costs in connection
with convertible notes (443,000) (443,000)
Proceeds from issuance of
common stock, net of expenses 406,000 1,318,000
----------- ----------- -----------
Net cash provided
by financing activities 2,057,000 688,000 3,625,000
----------- ----------- -----------
Net (decrease) increase in cash (170,000) (26,000) 123,000
Cash at beginning of period 293,000 106,000
----------- ----------- -----------
Cash at end of period $ 123,000 $ 80,000 $ 123,000
=========== =========== ===========
Supplementary disclosure of cash
flow information:
Interest paid $ 2,000 $ 1,000 $ 5,000
Noncash transactions:
Conversion of note payable - related
party to common stock $ 100,000 $ 103,000 $ 203,000
Warrants issued as financing costs, net of expenses $ 139,000 $ 139,000
Notes and accrued interest contributed as capital $ 57,000 $ 57,000
Debt discount recorded for warrants
issued with convertible notes $ 1,920,000 $ 1,920,000
See notes to the consolidated financial statements
F-5
DWANGO NORTH AMERICA CORP. AND SUBSIDIARY
(a development stage company)
Notes to Condensed Consolidated Financial Statements
Note A - Summary of Significant Accounting Policies
[1] Basis of Reporting
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, such statements include all adjustments (consisting only
of normal recurring items except for the capital transaction discussed in Note
B) which are considered necessary for a fair presentation of the consolidated
financial position of Dwango North America Corp. ("dwango" or the "Company") as
of September 30, 2003, the results of its operations for nine-month periods
ended September 30, 2003 and 2002 and cash flows for the nine-month periods
ended September 30, 2003 and 2002. The results of operations for the nine-month
periods ended September 30, 2003 and 2002 are not necessarily indicative of the
operating results for the full year.
The condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern, contemplating continuity
of operations, and realization of assets and satisfaction of liabilities in the
ordinary course of business. The accompanying financial statements do not
include any adjustments relating to the recoverability of assets and the
classification of the carrying amount of recorded assets or the amount and
classification of liabilities that might result from the Company's inability to
continue as a going concern. These financial statements should be read in
conjunction with the financial statements and related disclosures for the year
ended December 31, 2002 included in the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 7, 2003.
[2] Revision
The weighted average number of outstanding shares of common stock has been
revised to reflect shares on the exchanged basis and to reduce for the shares of
the acquired company deemed issued on September 29, 2003.
Note B - Recapitalization
On September 29, 2003, the Company acquired a majority of the outstanding
common stock of Dwango North America, Inc., a Texas corporation ("DNA, Inc."),
pursuant to an exchange offer consummated with the stockholders of DNA, Inc. The
stockholders of DNA, Inc. that elected to participate in the exchange received
stock of the Company based on an exchange ratio of 1.3934814 shares of common
stock of the Company for each share of Common stock of DNA, Inc. surrendered for
exchange. Shares of common stock underlying DNA, Inc.'s outstanding stock
options, warrants and convertible notes are similarly effected and will be
exercisable into the number of shares based on the exchange ratio. Following the
recapitalization, the Company changed its name to Dwango North America Corp.
Pursuant to the recapitalization, DNA, Inc. became a majority-owned subsidiary
of the Company. The stock holders of DNA, Inc. acquired a majority of the voting
stock of the Company pursuant to the exchange, and DNA, Inc. was deemed to be
the accounting acquiror. Such exchange is treated for accounting purposes as a
capital transaction with an inactive shell company. Accordingly, purchase
accounting treatment was not applicable and no goodwill resulted from this
transaction. Therefore, all historical financial information and financial
statements for the periods presented are those of DNA, Inc. and give retroactive
effect as if the recapitalization occurred at the beginning of the periods
presented.
F-6
DWANGO NORTH AMERICA CORP. AND SUBSIDIARY
(a development stage company)
Prior to the exchange, in connection with the recapitalization, the
Company effected a one-for-4.5 reverse stock split of its common stock. In
addition, in exchange for the surrender and cancellation of 1,888,889 shares of
common stock of the Company (on a post-reverse stock split basis) owned by Cody
T. Winterton, the former President and principal stockholder of the Company and
the assumption by Mr. Winterton of all of the pre-closing liabilities of the
Company, all of the pre closing assets of the Company were transferred to Mr.
Winterton and he was paid $50,000. Accordingly, Mr. Winterton assumed all assets
and liabilities of the Company existing immediately prior to the closing.
Immediately after closing, on a consolidated basis, the only assets and
liabilities of the Company were those of DNA, Inc.
Note C - 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:
Nine-Months
Ended
September 30,
---------------------------
2003 2002
----------- -----------
(unaudited) (unaudited)
Options 1,699,000 514,000
Warrants 2,628,000 42,000
Convertible notes 2,083,000 84,000
--------- ------
Total dilutive shares 6,410,000 640,000
========= =======
F-7
DWANGO NORTH AMERICA CORP. AND SUBSIDIARY
(a development stage company)
Note D - Stock Options
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):
Nine-Month Period Ended
September 30,
--------------------------
2003 2002
----------- -----------
(unaudited) (unaudited)
Net loss $(2,774,000) $ (779,000)
Stock-based employee compensation included
in the net loss, net of related tax effect -- --
Stock-based employee compensation determined
under the fair value based method, net of related
tax effect (133,000) (33,000)
----------- -----------
Pro forma net loss $(2,907,000) $ (812,000)
=========== ===========
Net loss per share - revised (basic and diluted):
As reported $ (0.57) $ (0.21)
=========== ===========
Pro forma $ (0.60) $ (0.22)
=========== ===========
Note E - Issuance of Senior Subordinated Convertible Promissory Notes
During the nine-month period ended September 30, 2003, dwango issued
Senior Subordinated Convertible Promissory Notes totaling $2,500,000. In
connection with the issuance of the notes, the Company also issued warrants to
the note holders and the placement agents to purchase 2,083,333 and 417,208
shares of common stock, respectively, exercisable at $1.20 per share until
September 15, 2006. The notes bear interest at 8% and are convertible, at the
option of the holder, at any time into shares of common stock at $1.20 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. The notes may be prepaid, and the warrants may be redeemed for $.01 per
share of common stock underlying the warrants, on 30 days prior written notice
to the holder thereof if the closing sales price (or closing bid price) of the
Company's common stock on its principal trading market is at least twice the
then current conversion or exercise price, as applicable, for a period of ten
consecutive trading days ending within 20 days prior to the date of the notice
of prepayment or redemption, as applicable.
F-8
DWANGO NORTH AMERICA CORP. AND SUBSIDIARY
(a development stage company)
Note F - Subsequent Events
In October, November, and December 2003, to fund operations, two
individuals (the Chairman, President and Chief Executive Officer of the Company
and an outside Director of the Company) advanced the Company $392,000 and
$50,000, respectively. It is expected that these advances will be converted into
326,927 and 41,667 shares of common stock, respectively, and an equal quantity
of warrants exercisable at $1.20 per share until January 2007.
In December 2003, we concluded a private placement pursuant to which we
issued to one accredited investor 250,000 shares of common stock for a purchase
price of $300,000. In connection with the offering, we also issued (i) warrants
to purchase 250,000 shares of common stock at an exercise price of $1.20 per
share to such accredited investor, and (ii) warrants to purchase 50,000 shares
of common stock at an exercise price of $1.20 per share to the placement agents
for such offering.
In January 2004, we concluded a private placement pursuant to which we
issued to one accredited investor a $1,700,000 principal amount 9% senior
convertible note due 2007 convertible into 1,416,667 shares of common stock and
warrants to purchase 708,333 shares of common stock at an exercise price of
$1.20 per share. In connection with such offering, we issued to the placement
agents five-year warrants to purchase 212,500 shares of common stock at an
exercise price of $1.20 per share.
F-9
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Contents
Page
----
Financial Statements
Independent auditors' report F-11
Balance sheet as of December 31, 2002 F-12
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 F-13
Statements of stockholders' equity (capital deficit) for the period from November 20, 2000
(inception) to December 31, 2000, and for the years ended December 31, 2002 and 2001 F-14
Statements of cash flows for the years ended December 31, 2002 and 2001, and
for the period from November 20, 2000 (inception) to December 31, 2002 F-15
Notes to financial statements F-16
F-10
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Dwango North America, Inc.
We have audited the accompanying balance sheet of Dwango North America, Inc. (a
subsidiary of Dwango North America Corp.) (the "Company"), a development stage
company, as of December 31, 2002, and the related statements of operations,
stockholders' equity (capital 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. 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
- -----------------------------------
Eisner LLP
New York, New York
June 30, 2003,
with respect to Notes C and I, August 29, 2003, and
with respect to Note A [2],
September 29, 2003
F-11
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Balance Sheet as of December 31, 2002
ASSETS
Current assets:
Cash $ 293,000
Prepaid expenses 31,000
Other current assets 8,000
-----------
Total current assets 332,000
Fixed assets, net 80,000
-----------
$ 412,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 211,000
Notes payable - Dwango Japan 100,000
-----------
Total current liabilities 311,000
-----------
Total liabilities 311,000
-----------
Stockholders' equity:
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;
4,841,000 shares issued and outstanding 5,000
Additional paid-in capital 1,573,000
Deficit accumulated during development stage (1,477,000)
-----------
Total stockholders' equity 101,000
-----------
$ 412,000
===========
See notes to financial statements
F-12
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Statements of Operations
Period
From
November 20,
2000
Year Ended (Inception)
December 31, to
-------------------------- 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 $ (0.33) $ (0.06)
=========== ===========
Weighted average number of basic and diluted
common shares outstanding 3,861,754 3,409,377
=========== ===========
See notes to financial statements
F-13
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Statements of Stockholders' Equity (Capital Deficit)
Common Stock Deficit
$.001 Par Value Accumulated
---------------------- Additional During The
Number of Paid-in Development
Shares Amount Capital Stage Total
--------- --------- ----------- ------------- -----------
Shares issued in connection with the
formation of the Company, November 20,
2000, adjusted to reflect the
recapitalization 3,408,000 $ 4,000 $ 4,000
Net loss for the year ended December 31, 2000 $ (1,000) (1,000)
--------- --------- ------------- -----------
Balance at December 31, 2000 3,408,000 4,000 (1,000) 3,000
Capital contribution by majority
stockholder in 2001 $ 61,000 61,000
Sale of stock, December 27, 2001 125,000 100,000 100,000
Net loss for the year ended December 31, 2001 (206,000) (206,000)
--------- --------- ----------- ------------- -----------
Balance at December 31, 2001 3,533,000 4,000 161,000 (207,000) (42,000)
Common stock issued in payment for
rent, June 1, 2002 45,000 54,000 54,000
Conversion of note payable, August 14, 2002 85,000 103,000 103,000
Warrant issued in connection with note payable 46,000 46,000
Sale of stock, August 14, 2002 335,000 370,000 370,000
Capital contribution by majority
stockholder, August 14, 2002 57,000 57,000
Exercise of stock options, September 20, 2002 8,000 6,000 6,000
Common stock issued in October 2002,
in connection with private financing, net 835,000 1,000 776,000 777,000
Net loss for the year ended December 31, 2002 (1,270,000) (1,270,000)
--------- --------- ----------- ------------- -----------
Balance at December 31, 2002 4,841,000 $ 5,000 $ 1,573,000 $ (1,477,000) $ 101,000
========= ========= =========== ============= ===========
See notes to financial statements
F-14
DWANGO NORTH AMERICA, INC.
(formerly known as Dwango U.S.A., Inc.)
(a development stage company)
Statements of Cash Flows
Period
From
November 20,
2000
Year Ended (Inception)
December 31, to
--------------------------- December 31,
2002 2001 2002
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(1,270,000) $ (206,000) $(1,477,000)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation expense 36,000 36,000
Common stock issued for rent 37,000 37,000
Amortization of debt discount 46,000 46,000
Changes in:
Prepaid expenses (14,000) (14,000)
Other assets (8,000) (8,000)
Accounts payable and
accrued expenses 164,000 58,000 221,000
----------- ----------- -----------
Net cash used in
operating activities (1,009,000) (148,000) (1,159,000)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (116,000) (116,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from line of credit 45,000 55,000 100,000
Repayment of line of credit (88,000) (12,000) (100,000)
Proceeds from loan 54,000 54,000
Warrant issued in connection with
note payable 46,000 46,000
Proceeds from related party loan 150,000 50,000 200,000
Repayment of related party loan (50,000) (50,000)
Proceeds from issuance of
common stock, net of expenses 1,155,000 161,000 1,318,000
----------- ----------- -----------
Net cash provided
by financing
activities 1,312,000 254,000 1,568,000
----------- ----------- -----------
Net increase (decrease) in cash 187,000 106,000 293,000
Cash at beginning of period 106,000
----------- ----------- -----------
Cash at end of period $ 293,000 $ 106,000 $ 293,000
=========== =========== ===========
Supplementary disclosure of cash
flow information:
Interest paid $ 3,000 $ 3,000
Noncash transactions:
Conversion of debt to common stock $ 103,000 $ 103,000
Notes and accrued interest
contributed as capital $ 57,000 $ 57,000
See notes to financial statements
F-15
DWANGO NORTH AMERICA CORP. AND SUBSIDIARY
(a development stage company)
Notes to Financial Statements
December 31, 2002 and 2001
Notes to the Consolidated Financial Statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Description of business:
Dwango North America, Inc. ("DNA, Inc." or 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] Recapitalization:
On September 29, 2003, Woodland Hatchery, Inc. ("Woodland") acquired a
majority of the outstanding common stock of DNA, Inc., pursuant to an
exchange offer. The stockholders of DNA, Inc. that elected to participate
in the exchange received stock based on an exchange ratio of 1.3934814
shares of common stock for each share of common stock of DNA, Inc.
surrendered for exchange. Shares of common stock underlying DNA, Inc.'s
outstanding stock options, warrants and convertible notes are similarly
effected and will be exercisable into the number of shares based on the
exchange ratio. Following the recapitalization, Woodland changed its name
to Dwango North America Corp. ("Corp."). Pursuant to the recapitalization,
DNA, Inc. became a majority-owned subsidiary of Corp. The stockholders of
DNA, Inc. acquired a majority of the voting stock of Corp. pursuant to the
exchange, and DNA, Inc. was deemed to be the accounting acquiror. Such
exchange is treated for accounting purposes as a capital transaction with
an inactive shell company. Accordingly, purchase accounting treatment was
not applicable and no goodwill resulted from this transaction. Therefore,
all historical financial information and financial statements for the
periods presented are those of DNA, Inc. and give retroactive effect as if
the recapitalization occurred at the beginning of the periods presented.
Prior to the exchange, in connection with the recapitalization, Woodland
effected a one-for-4.5 reverse stock split of its common stock. In
addition, in exchange for the surrender and cancellation of 1,888,889
shares of common stock of Corp. (on a post-reverse stock split basis)
owned by Cody T. Winterton, the former President and principal stockholder
of Corp., and the assumption by Mr. Winterton of all of the pre-closing
liabilities of Corp., all of the pre-closing assets of Corp. were
transferred to Mr. Winterton and he was paid $50,000. Accordingly, Mr.
Winterton assumed all assets and liabilities of existing immediately prior
to the closing. Immediately after closing, on a consolidated basis, the
only assets and liabilities of Corp. were those of DNA, Inc.
[3] 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.
See notes to financial statements
F-16
DWANGO NORTH AMERICA CORP. AND SUBSIDIARY
(a development stage company)
[4] 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.
[5] 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.
[6] 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.
F-17
DWANGO NORTH AMERICA CORP. AND SUBSIDIARY
(a development stage company)
[7] 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
December 31,
2002
------------
Net loss $(1,270,000)
Stock-based employee compensation determined
under the fair value based method, net of related
tax effect (160,000)
-----------
Pro forma net loss $(1,430,000)
===========
Net loss per share (basic and diluted):
As reported $ (0.33)
===========
Pro forma $ (0.37)
===========
The per share weighted average fair value of stock options granted during
2002 was $0.96, 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.
[8] Loss per share:
The Company's basic and diluted net loss per share is computed by dividing
the 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 their inclusion would have been
anti-dilutive, are as follows:
Year Ended
December 31,
2002
------------
Options 730,000
Warrants 124,000
Convertible notes 84,000
-------
Total dilutive shares 938,000
=======
F-18
DWANGO NORTH AMERICA CORP. AND SUBSIDIARY
(a development stage company)
[9] Concentration of credit risk:
The Company maintains a portion of its cash balances in accounts which at
times exceed the federally insured limits.
[10] 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.
[11] 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.
[12] Advertising costs:
Advertising costs, which are expensed as incurred, are not significant for
2002 and 2001.
[13] Stock splits:
All share and per share amounts give retroactive effect to a 3:1 stock
split on April 1, 2002.
[14] 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 royalty expense
was $25,000, based upon the minimum.
NOTE B - FIXED ASSETS
Fixed assets consist of the following:
Year Ended
Estimated December 31,
Useful Lives 2002
------------ ------------
Furniture and fixtures 7 years $ 9,000
Computer and office equipment 3 years 103,000
Leasehold improvements 2-3 years 4,000
--------
116,000
Less accumulated depreciation and
amortization 36,000
--------
$ 80,000
========
F-19
DWANGO NORTH AMERICA CORP. AND SUBSIDIARY
(a development stage company)
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 December 31, 2002, no balance was
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 83,444 shares of common stock (see Note I). For the year ended
December 31, 2002 the interest expense on the note was $2,000.
Subsequent to December 31, 2002, 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 17,418 shares of common stock at $1.20 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. The financing costs will be
allocated as deferred financing costs, to be amortized over 13 months, or
earlier if retired before maturity.
The Company received $1,670,000 from May 1, 2003 through August 29, 2003
in proceeds from the issuance of 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 41,721 shares of common stock at $1.20
per share until September 15, 2006. The Company allocated the proceeds
between the convertible notes and the warrants based on their relative
fair values. The proceeds allocated to the warrants will be recorded as
debt discount. Additionally, the difference between the proceeds allocated
to, and relative fair value of the convertible notes, will be recorded as
additional debt discount. The debt discount will be amortized over the
life of the convertible notes. The notes and any accrued interest can be
converted, at the option of the holder at any time, into shares of common
stock, 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.
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.
F-20
DWANGO NORTH AMERICA CORP. AND SUBSIDIARY
(a development stage company)
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 125,413 shares of common stock to
Dwango Japan for $100,000.
On April 25, 2002, the Company issued a convertible note to a stockholder
for $100,000, due on April 25, 2004, with a warrant to purchase 41,722
shares of common stock at $1.20 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. On August
14, 2002, the principal and interest totaling $103,000 were converted into
85,727 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.
On May 31, 2002, the Company issued 44,819 shares of its common stock,
valued at $1.20 per share, for the first year's rent of $54,000 of its
Seattle office.
On August 14, 2002, the Company sold 333,768 shares of common stock at
$1.20 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 8,000
common shares at $0.80 each for proceeds of $6,000.
[2] Private placement:
In October 2002, the Company received net proceeds of $779,000 from the
sale of 834,465 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 83,444 shares of common
stock at $1.20 per share that expire in October 2007. These warrants
remain unexercised as of December 31, 2002. Other costs of the private
placement approximated $95,000.
F-21
DWANGO NORTH AMERICA CORP. AND SUBSIDIARY
(a development stage company)
[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. Stock option activity for the period April 1, 2002
(inception of Plan) to December 31, 2002 is as follows:
Period Ended
December 31,
2002
--------------------
Weighted
Average
Exercise
Shares Price
------- --------
Options outstanding at beginning of period 0
Granted 738,000 $0.92
Exercised 8,000 $0.80
-------
Outstanding at end of period 730,000 $0.91
=======
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
- ----------- -------- -------- --------- ----------- --------
514,000 $ 0.80 $ 0.80 9.26 177,000 $0.80
216,000 $ 1.20 $ 1.20 9.84 56,000 $1.20
------- -------
730,000 233,000 $0.90
======= =======
F-22
DWANGO NORTH AMERICA CORP. AND SUBSIDIARY
(a development stage company)
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.
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 41,804 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 215,300 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 $1.20 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 83,444 shares of common stock.
F-23
================================================================================
Prospective investors may rely only on the information contained in this
prospectus. We have not authorized anyone to provide prospective investors with
different or additional information. This prospectus is not an offer to sell nor
is it seeking an offer to buy in any jurisdiction where such offer, or sale is
not permitted. The information contained in this prospectus is correct only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of these shares.
---------------
TABLE OF CONTENTS
Page
----
Prospectus Summary ................................................... 2
Summary Financial Information ........................................ 3
Risk Factors ......................................................... 4
Forward-Looking Statements ........................................... 10
Use of Proceeds ...................................................... 10
Price Range of Common Stock .......................................... 10
Dividend Policy ...................................................... 11
Selected Financial Data .............................................. 11
Management's Discussion and Analysis
of Financial Condition and Results
of Operations .................................................... 12
Business ............................................................. 15
Management ........................................................... 21
Beneficial Ownership of Securities ................................... 25
Certain Transactions ................................................. 26
Selling Securityholders .............................................. 27
Description of Securities ............................................ 31
Plan of Distribution ................................................. 32
Legal Matters ........................................................ 33
Experts .............................................................. 33
Where you can Find Additional
Information ...................................................... 34
Index to Consolidated Financial Statements ........................... F-1
================================================================================
================================================================================
13,695,247 shares
DWANGO NORTH AMERICA CORP.
----------
PROSPECTUS
----------
, 2004
================================================================================
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of directors and officers.
The Company's articles of incorporation provide that the Company will
indemnify any person who is or was a director, officer, employee, agent or
fiduciary of the Company to the fullest extent permitted by applicable law.
Nevada law permits a Nevada corporation to indemnify its directors, officers,
employees and agents against liabilities and expenses they may incur in such
capacities in connection with any proceeding in which they may be involved, if
(i) such director of officer is not liable to the corporation or its
stockholders due to the fact that his or her acts or omissions constituted a
breach of his or her fiduciary duties as a director or officer and the breach of
those duties involved intentional misconduct, fraud or a knowing violation of
law, or (ii) he or she acted in good faith and in a manner reasonably believed
to be in or not opposed to the best interests of the Company, or that with
respect to any criminal action or proceeding, he or she had reasonable cause to
believe that his or her conduct was unlawful.
In addition, the Company's bylaws include provisions to indemnify its
officers and directors and other persons against expenses, judgments, fines and
amounts incurred or paid in settlement in connection with civil or criminal
claims, actions, suits or proceedings against such persons by reason of serving
or having served as officers, directors, or in other capacities, except in any
action, suit or proceeding in which it is adjudged that such person was liable
for negligence or misconduct in the performance of his duty. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere or its equivalent will not, of itself, create a
presumption that the person is liable for negligence or misconduct on the
performance of his or her duties.
Item 25. Other expenses of issuance and distribution
The estimated expenses of the distribution, all of which are to be borne
by the Registrant, are as follows:
SEC Registration Fee .......................................... $ 2,261
Blue Sky Fees and Expenses .................................... *
Accounting Fees and Expenses .................................. *
Legal Fees and Expenses ....................................... *
Miscellaneous ................................................. *
-------------
Total .................................................. $ *
=============
- ----------
* To be provided by amendment.
Item 26. Recent sales of unregistered securities
All of the share calculations set forth below have been adjusted for the
one-for-4.5 reverse stock split effected and the exchange offer consummated in
September 2003.
In February 2001, Woodland Hatchery, Inc. issued 2,222,222 shares of
common stock to Cody T. Winterton, the then President and Director of Woodland
for $10,000. The issuance of these shares was exempt from registration pursuant
to Section 4(2) of the Securities Act. In connection with the consummation of
the exchange offer with Dwango North America, Inc., Mr. Winterton surrendered
for cancellation 1,888,889 of such shares.
In April 2002, Dwango North America, Inc. issued to one accredited
investor a Convertible Promissory Note in the principal amount of $100,000 and
warrants to purchase preferred stock. In August 2002, such note (and accrued
interest) and warrants converted into 85,727 shares of common stock and warrants
to purchase 41,722 shares of common stock. The issuance of these shares was
exempt from registration pursuant to Section 4(2) of the Securities Act.
In July 2002, Dwango North America, Inc. issued to Sabey Corporation
44,819 shares of common stock in payment of certain rental payments owing for
space leased by Dwango North America, Inc. in Seattle, Washington. The issuance
of these shares was exempt from registration pursuant to Section 4(2) of the
Securities Act.
II-1
In July 2002, Dwango Co., Ltd. invested $100,000 in Dwango North America,
Inc. in consideration for a one-year convertible note, bearing interest at 4%
per annum. Such note was converted into 83,443 shares of common stock of Dwango
North America, Inc. on July 7, 2003. The issuance of these securities was exempt
from registration pursuant to Section 4(2) of the Securities Act.
In August 2002, Dwango North America, Inc. issued to Dwango Co., Ltd.
333,768 shares of common stock for $400,000. The issuance of these shares was
exempt from registration pursuant to Section 4(2) of the Securities Act.
In October 2002, Dwango North America, Inc. sold 834,465 shares of common
stock pursuant to a private placement offering to 24 accredited investors for an
aggregate of approximately $1,000,000. In connection with the offering, Dwango
North America, Inc. issued to the placement agents and their designees warrants
to purchase an aggregate of 83,444 shares of common stock. The issuance of these
securities was exempt from registration pursuant to Rule 506 promulgated under
Section 4(2) of the Securities Act.
In July 2003, Dwango North America, Inc. issued an aggregate of 39,714
shares of common stock to three individuals pursuant to employment agreements
between Dwango North America, Inc. and such individuals. The issuance of these
shares was exempt from registration pursuant to Section 4(2) of the Securities
Act.
In September 2003, Dwango North America, Inc. concluded a private
placement pursuant to which it issued to 42 accredited investors $2,500,000 in
principal amount of senior convertible promissory notes convertible into
2,083,333 shares of common stock and warrants to purchase 2,086,037 shares of
common stock. In connection with such offering, Dwango North America, Inc.
issued to the placement agents warrants to purchase 417,208 shares of common
stock. The issuance of these securities was exempt from registration pursuant to
Rule 506 promulgated under Section 4(2) of the Securities Act.
In December 2003, we concluded a private placement pursuant to which we
issued to one accredited investor 250,000 shares of common stock for purchase
price of $300,000. In connection with the offering, we also issued (i) warrants
to purchase 250,000 shares of common stock at an exercise price of $1.20 per
share to such accredited investor, and (ii) warrants to purchase 25,000 shares
of common stock at an exercise price of $1.20 per share to the placement agents
for such offering. The issuance of these securities was exempt from registration
pursuant to Rule 506 promulgated under Section 4(2) of the Securities Act.
In January 2004, we concluded a private placement pursuant to which we
issued, in consideration of $1,700,000, to one accredited investor a $1,700,000
principal amount 9% senior convertible note due 2007, convertible into 1,416,667
shares of common stock, and warrants to purchase 708,333 shares of common stock.
In connection with such offering, we issued to the placement agents warrants to
purchase 212,500 shares of common stock. The issuance of these securities was
exempt from registration pursuant to Rule 506 promulgated under Section 4(2) of
the Securities Act.
Item 27. Exhibits
Number Description
- ------ -----------
2 Agreement and Plan of Reorganization, dated September 19, 2003, among
Woodland Hatchery, Inc., Dwango North America, Inc. and the
securityholders of Dwango listed therein (incorporated by reference to
Exhibit 2.1 to the Registrant's Current Report on Form 8-K (Date of
Report: September 29, 2003) filed with the Securities and Exchange
Commission on October 7, 2003)
3.1 Articles of Incorporation, as amended to date (incorporated by
reference to Exhibits 3.1 to the Registration Statement on Form SB-2
filed with the Securities and Exchange Commission on September 6, 2001
and Exhibit 3.1 to the Registrant's Current Report on Form 8-K (Date of
Report: September 29, 2003) filed with the Securities and Exchange
Commission on October 7, 2003)
3.2 Bylaws of the Registrant (as amended through December 30, 2003)
(incorporated by reference to Exhibit 2 the Form 8-A filed with the
Securities and Exchange Commission on December 30, 2003)
II-2
4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit
3 the Form 8-A filed with the Securities and Exchange Commission on
December 30, 2003)
4.2 Form of 8% Senior Convertible Promissory Note due 2006 (incorporated by
reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K
(Date of Report: September 29, 2003) filed with the Securities and
Exchange Commission on October 7, 2003)
4.3 9% Senior Convertible Note due 2007 (incorporated by reference to
Exhibit 4.4 to the Registrant's Current Report on Form 8-K (Date of
Report: December 12, 2003) filed with the Securities and Exchange
Commission on January 16, 2004)
4.4 Form of Warrants to purchase 41,722 shares of common stock issued in
August 2002 (incorporated by reference to Exhibit 4.2 to the
Registrant's Current Report on Form 8-K (Date of Report: September 29,
2003) filed with the Securities and Exchange Commission on October 7,
2003)
4.5 Form of Warrants to purchase an aggregate of 83,444 shares of common
stock (incorporated by reference to Exhibit 4.3 to the Registrant's
Current Report on Form 8-K (Date of Report: September 29, 2003) filed
with the Securities and Exchange Commission on October 7, 2003)
4.6 Form of Warrants to purchase an aggregate of 2,083,333 shares of common
stock (incorporated by reference to Exhibit 4.4 to the Registrant's
Current Report on Form 8-K (Date of Report September 29, 2003) filed
with the Securities and Exchange Commission on October 7, 2003)
4.7 Form of Warrants to purchase an aggregate of 417,208 shares of common
stock (incorporated by reference to Exhibit 4.4 to the Registrant's
Current Report on Form 8-K (Date of Report: September 29, 2003) filed
with the Securities and Exchange Commission on October 7, 2003)
4.8 Form of Warrants to purchase an aggregate of 250,000 shares of common
stock (incorporated by reference to Exhibit 4.2 to the Registrant's
Current Report on Form 8-K (Date of Report: December 12, 2003) filed
with the Securities and Exchange Commission January 16, 2004)
4.9 Form of Warrants to purchase an aggregate of 272,784 shares of common
stock
4.10 Warrant to purchase 708,333 shares of common stock (incorporated by
reference to Exhibit 4.5 to the Registrant's Current Report on Form 8-K
(Date of Report: December 12, 2003) filed with the Securities and
Exchange Commission January 16, 2004)
5 Opinion of Moomjian & Waite, LLP
10.1 2003 Equity Incentive Plan
10.2 Bridge Agreement, dated December 12, 2003, between Dwango North America
Corp. and Alexandra Global Master Fund Ltd. (incorporated by reference
to Exhibit 4.1 to the Registrant's Current Report on Form 8-K (Date of
Report: December 12, 2003) filed with the Securities and Exchange
Commission January 16, 2004)
10.3 Note Purchase Agreement, dated January 8, 2004, between Dwango North
America Corp. and Alexandra Global Master Fund Ltd. (incorporated by
reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K
(Date of Report: December 12, 2003) filed with the Securities and
Exchange Commission January 16, 2004)
23.1 Consent of Moomjian & Waite, LLP (included in legal opinion filed as
Exhibit 5)
23.2 Consent of Eisner, LLP
24 Power of Attorney (set forth on the signature page of this Registration
Statement on Form SB-2)
Item 28. Undertakings.
The Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts of events which, individually or
together, represent a fundamental change in the information in the
registration statement; and
(iii) Include any additional or changed material information on the plan
of distribution.
II-3
(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new registration statement for the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of New
York, State of New York on the 30th day of January, 2004.
Dwango North America Corp.
By: /s/ Robert E. Huntley
-------------------------------------
Robert E. Huntley
Chairman, President, and CEO
Each person whose signature appears below constitutes and appoints Robert
E. Huntley, with full power of substitution, his/her true and lawful
attorney-in-fact and agent to do any and all acts and things in his/her name and
on his/her behalf in his/her capacities indicated below which he may deem
necessary or advisable to enable Dwango North America Corp. to comply with the
Securities Act of 1933, as amended, and any rules, regulations and requirements
of the Securities and Exchange Commission, in connection with this Registration
Statement, including specifically, but not limited to, power and authority to
sign for him/her in his/her name in the capacities stated below, any and all
amendments (including post-effective amendments) thereto, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in such connection, as
fully to all intents and purposes as we might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities
indicated on January 30, 2004.
Signatures Title
/s/ Robert E. Huntley Chairman of the Board, Chief Executive
- ----------------------------------- Officer and President
Robert E. Huntley (Principal Executive Officer)
/s/ Jacques Faust Chief Financial Officer
- ----------------------------------- (Principal Financial and Accounting
Jacques Faust Officer)
/s/ Joseph Allen Director
- -----------------------------------
Joseph Allen
/s/ L. Derrick Ashcroft Director
- -----------------------------------
L. Derrick Ashcroft
/s/ Paul Eibeler Director
- -----------------------------------
Paul Eibeler
/s/ Jay F. Higgins Director
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Jay F. Higgins
/s/ Vishal Bhutani Director
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Vishal Bhutani
/s/ Rick Hennessey Director
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Rick Hennessey
II-5