Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: The issuer had 29,229,284 shares of common stock outstanding as of November 13, 2009.

 

 

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Betawave Corporation

 

Condensed Consolidated Statements of Operations (Unaudited)

 

		Three				Three				Nine				Nine
		Months				Months				Months				Months
		Ended				Ended				Ended				Ended
		September 30,				September 30,				September 30,				September 30,
		2009				2008				2009				2008
Revenues		$	1,725,499			$	2,786,139			$	5,396,244			$	4,725,728
Cost of revenues and expenses:
Cost of revenues			2,441,052				2,058,456				5,695,477				4,213,193
Sales and marketing			2,033,598				1,630,472				6,243,389				4,726,805
Product development			130,241				248,100				463,586				588,044
General and administrative			1,419,023				1,210,582				4,335,488				4,092,548
Total cost of revenues and expenses			6,023,914				5,147,610				16,737,940				13,620,590
Operating loss			(4,298,415	)			(2,361,471	)			(11,341,696	)			(8,894,862	)
Other income (expense):
Interest income			4,323				5,662				12,876				15,846
Miscellaneous income			502				---				72,376				100
Interest expense			(37,879	)			(893,227	)			(70,482	)			(2,111,570	)
Total other income (expense)			(33,054	)			(887,565	)			14,770				(2,095,624	)
Net loss before provision for income taxes			(4,331,469	)			(3,249,036	)			(11,326,926	)			(10,990,486	)
Provision for income taxes			---				---				---				---
Net loss		$	(4,331,469	)		$	(3,249,036	)		$	(11,326,926	)		$	(10,990,486	)
Net loss per share – basic and diluted		$	(0.15	)		$	(0.13	)		$	(0.39	)		$	(0.43	)
Shares used to compute net loss per share – basic and diluted			29,229,284				25,494,739				29,229,284				25,518,896

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Betawave Corporation

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

		Nine Months				Nine Months
		Ended				Ended
		September 30,				September 30,
		2009				2008
Cash flows from operating activities:
Net loss		$	(11,326,926	)		$	(10,990,486	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on disposal of fixed assets			1,976				---
Depreciation and amortization of property and equipment			159,012				195,118
Amortization of financing costs and convertible note fees			29,843				385,089
Stock-based compensation			2,256,836				1,339,841
Non cash interest expense			---				1,645,863
Changes in operating assets and liabilities:
Trade accounts receivable			1,428,485				(1,122,922	)
Prepaid expenses			719,412				62,681
Other assets			(4,150	)			(2,000	)
Accounts payable			(2,402,297	)			2,303,295
Accrued liabilities			(12,770	)			1,835,455
Deferred revenue			(30,960	)			70,000
Net cash used in operating activities			(9,181,539	)			(4,278,066	)
Cash flows from investing activities:
Funds held as restricted cash			(53,750	)			(550,000	)
Purchase of property and equipment			(28,428	)			(33,396	)
Net cash  used in investing activities			(82,178	)			(583,396	)
Cash flows from financing activities:
Payment of financing costs			(85,579	)			---
Advances from a stockholder			---				610,000
Borrowing on line of credit			1,800,000				---
Payment on line of credit			(300,000	)			---
Proceeds from issuance of unsecured convertible original discount notes due June 2010 and related warrants, net of fees of $101,300			---				3,188,700
Net cash provided by financing activities			1,414,421				3,798,700
Net decrease in cash and cash equivalents			(7,849,296	)			(1,062,762	)
Cash and cash equivalents at beginning of the period			11,863,121				1,108,834
Cash and cash equivalents at the end of the period		$	4,013,825			$	46,072

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Betawave Corporation

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

1.	The Company

General - Betawave Corporation (the “Company,” “we,” “our,” or “us”) sells online advertising for the websites in our network of sites (the “Betawave Network”). We have assembled a network of some of the leading websites in the most popular online categories: immersive casual gaming, virtual world, social play and entertainment. We specialize in helping brand marketers reach the highly attentive audiences on these sites through innovative ad formats.

The Company was incorporated in the State of Nevada on February 2, 2005 as Unibio Inc. On September 14, 2006, the Company changed its name from Unibio Inc. to GoFish Corporation. In January 2009, the Company changed its name from GoFish Corporation to Betawave Corporation and launched a rebranding campaign focused on attention-based digital media. On September 21, 2009, we reincorporated from the State of Nevada to the State of Delaware.

Management's Plan - The Company has incurred operating losses and negative cash flows since inception. Management expects that the Company’s revenues will increase from current levels as a result of increased sales of advertising on the Betawave Network. The Company also expects to incur additional expenses for the development and expansion of the Betawave Network and the continuing integration of its businesses. In addition, the Company anticipates gains in operating efficiencies as a result of the increase to its sales and marketing organization. However, the Company expects that operating losses and negative cash flows will continue for the foreseeable future but anticipates that losses will decrease from current levels to the extent that the Company continues to grow and develop.  The Company’s expectations are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by such expectations, including those identified under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and those discussed in other documents we file with the Securities and Exchange Commission (the “SEC”). While the Company believes that it will be able to expand operations and gain market share, there can be no assurance that such progress will be possible. For example, in the event that the Company requires additional financing, such financing may not be available on terms that are favorable or at all. Failure to generate sufficient cash flows from operations or raise additional capital would have a material adverse effect on the Company’s ability to achieve its intended business objectives. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

Going Concern - The Company's condensed consolidated financial statements have been presented on a basis that contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company continues to face significant risks associated with the successful execution of its strategy given the current market environment for similar companies. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

2.	Summary of Significant Accounting Policies

Basis of Presentation - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements as discussed below. In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for the fair presentation of the financial statements, have been included. The results of operations for any interim period are not necessarily indicative of the results of operations for the full year or any other subsequent interim period. Further, the preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the recorded amounts reported therein. Actual results could differ from those estimates. A change in facts or circumstances surrounding the estimate could result in a change to estimates and impact future operating results.

The condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim financial statements have read or have access to the Company’s audited consolidated financial statements for the preceding fiscal year. Accordingly, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the SEC on March 31, 2009 (our “2008 Form 10-K”).

Comprehensive Loss - The Company has no components of comprehensive loss other than its net loss and, accordingly, comprehensive loss is the same as the net loss for all periods presented.

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Reclassifications - Certain reclassifications were made to the prior period condensed consolidated financial statements in order to conform to the current condensed consolidated financial statement presentation.

 

Net Loss Per Share - Basic net loss per share is calculated based on the weighted-average number of shares of common stock outstanding during the period excluding those shares that are subject to repurchase by the Company. Diluted net loss per share would give effect to the dilutive effect of stock options, warrants, convertible debt and preferred stock. Dilutive securities have been excluded from the diluted net loss per share computations as they have an antidilutive effect due to the Company’s net loss.

 

The following outstanding stock options, warrants, convertible debt and preferred stock (on an as-converted into common stock basis) were excluded from the computation of diluted net loss per share as they had an antidilutive effect for the three and nine months ended September 30, 2009 and 2008:

			Three		Three		Nine		Nine
			Months		Months		Months		Months
			Ended		Ended		Ended		Ended
			September 30,		September 30,		September 30,		September 30,
			2009		2008		2009		2008
	Shares issuable upon exercise of employee and non-employee stock options		243,540		1,854,821		243,540		1,854,821
	Nonvested restricted stock		---		300,000		---		300,000
	Shares issuable upon conversion of convertible notes		---		8,411,358		---		8,411,358
	Total		243,540		10,566,179		243,540		10,566,179

Concentration of Credit Risk - Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company’s credit risk is managed by investing its cash in a certificate of deposit account. The receivables credit risk is controlled through credit approvals, credit limits and monitoring procedures.

The Company places its cash in commercial banks. Accounts in the United States are secured by the Federal Deposit Insurance Corporation. The Company’s total deposits at the commercial banks usually exceed the balances insured.

Accounts Receivable Concentrations - At September 30, 2009, four customers accounted for 20%, 7%, 7% and 6%, respectively, of the Company’s accounts receivable.  At December 31, 2008, three customers accounted for 26%, 13% and 7%, respectively, of the Company’s accounts receivable.

Revenue Concentrations - The Company’s revenues are generated mainly from advertisers who purchase inventory in the form of graphical, text-based or video ads on the Betawave Network. These advertisers’ respective agencies facilitate the purchase of inventory on behalf of their advertisers. For the three months ended September 30, 2009, five customers accounted for 20%, 14%, 10%, 7% and 6%, respectively, of the Company’s revenues. For the nine months ended September 30, 2009, five customers accounted for 18%, 11%, 7%, 6% and 5%, respectively, of the Company’s revenues. For the three months ended September 30, 2008, five customers accounted for 12%, 11% , 9%, 7% and 6%, respectively, of the Company’s revenues. For the nine months ended September 30, 2008, five customers accounted for 21%, 8%, 7%, 7% and 5%, respectively, of the Company’s revenues.

Stock-Based Compensation - Effective January 1, 2006, the Company adopted the fair value recognition provisions of the FASB’s Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”) using the modified prospective transition method. Under that transition method, compensation cost recognized for the periods ended December 31, 2008 and 2007 includes: (a) compensation cost for all stock-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and (b) compensation cost for all stock-based payments granted or modified subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).

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Stock-based compensation expense for performance-based options granted to non-employees is determined in accordance with FASB Accounting Standards Codification (“ASC”) Topic 718, Stock Compensation (“ASC 718”), and ASC 505-50 at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. The fair value of options granted to non-employees is measured as of the earlier of the performance commitment date or the date at which performance is complete (“measurement date”). When it is necessary under U.S. GAAP to recognize the cost for the transaction prior to the measurement date, the fair value of unvested options granted to non-employees is re-measured at the balance sheet date.

The Company currently uses the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as by assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. We estimate the volatility of our common stock at the date of the grant based on a combination of the implied volatility of publicly traded options on our common stock and our historical volatility rate. The dividend yield assumption is based on historical dividend payouts. The risk-free interest rate is based on observed interest rates appropriate for the term of our employee options. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. For options granted, we amortize the fair value on a straight-line basis. All options are amortized over the requisite service periods of the awards, which are generally the vesting periods. If factors change we may decide to use different assumptions under the Black-Scholes option model and stock-based compensation expense may differ materially in the future from that recorded in the current period.

Included in cost of revenues and expenses is $738,918 and $320,327 of stock-based compensation for the three months ended September 30, 2009 and 2008, respectively. For the three months ended September 30, 2009, this amount included $110 of stock-based compensation related to non-employees on the issuance of options, $220 related to warrants and $738,588 related to employees. For the three months ended September 30, 2008, this amount included $24,006 of stock-based compensation related to non-employees on the issuance of options, $9,913 related to warrants, $37,000 on the issuance of restricted stock and $249,408 related to employees.

 

Included in cost of revenues and expenses is $2,256,836 and $1,339,841 of stock-based compensation for the nine months ended September 30, 2009 and 2008, respectively.  At September 30, 2009, this amount included ($8,457) of stock-based compensation related to non-employees, $2,263,452 of stock-based compensation related to employees and $1,841 related to warrants. At September 30, 2008, this amount included $34,495 of stock-based compensation related to non-employees, $1,185,422 of stock-based compensation related to employees, $86,333 related to restricted stock and $33,591 related to the warrants.

 

The following table presents stock-based compensation expense included in the Condensed Consolidated Statements of Operations related to employee and non-employee stock options, restricted shares and warrants as follows for the three months and the nine months ended September 30, 2009 and 2008:

			Three Months Ended September 30, 2009				Three Months Ended September 30, 2008				Nine Months Ended September 30, 2009				Nine Months Ended September 30, 2008
	Cost of revenues		$	---			$	44,538			$	(1,794	)		$	111,767
	Sales and marketing			218,819				86,902				661,141				402,262
	Product development			3,264				13,009				81,846				40,140
	General and administrative			516,835				175,878				1,515,643				785,672
	Total stock-based compensation		$	738,918			$	320,327			$	2,256,836			$	1,339,841

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Stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the service period, generally the vesting period of the equity grant.

The fair value of each option grant has been estimated on the date of grant using the Black-Scholes valuation model with the following assumptions (weighted-average) for the nine months ended September 30, 2009 and 2008:

			Nine Months Ended September 30, 2009				Nine Months Ended September 30, 2008
	Risk free interest rate			2.33	%			3.18	%
	Expected lives			6.02 years				5.80 years
	Expected volatility			71.05	%			70.59	%
	Dividend yields			0	%			0	%

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, expected option term, expected volatility of the stock over the option’s expected term, risk-free interest rate over the option’s expected term, and the expected annual dividend yield. The Company believes that the valuation technique and approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the stock options granted in the nine months ended September 30, 2009 and 2008.

 

Adopted Accounting Pronouncements

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” as codified by Accounting Standards Codification (“ASC”) 105. This standard establishes two levels of GAAP, authoritative and non-authoritative. The FASB Accounting Standards Codification (the “Codification”) became the source of authoritative, non-governmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification became non-authoritative. We adopted ASC 105 in the third quarter of 2009 and include references to the ASC within our Condensed Consolidated Financial Statements. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on our Condensed Consolidated Financial Statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” as codified by ASC 820. This ASC establishes specific criteria for the fair value measurements of financial and nonfinancial assets and liabilities that are already subject to fair value under current accounting rules. ASC 820 also requires expanded disclosures related to fair value measurements. As permitted under ASC 820, we elected a one-year delay in applying certain fair value measurements of non-financial instruments, except for those measured at fair value on at least an annual basis. We fully adopted ASC 820 on January 1, 2009. See Note 3 for information about fair value measurements.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” as amended by FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” as codified by ASC 805. Under ASC 805, an entity is generally required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. In circumstances where the acquisition-date fair value for a contingency cannot be determined during the measurement period, a contingency is recognized as of the acquisition date based on the estimated amount if it is probable that an asset or liability exists as of the acquisition date and the amount can be reasonably estimated. It further requires acquisition-related costs to be recognized separately from the acquisition and expensed as incurred, restructuring costs to be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period to impact the provision for income taxes. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. We adopted ASC 805 on January 1, 2009. The adoption did not have a significant impact on our Condensed Consolidated Financial Statements.

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In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of Accounting Research Bulletin No. 51” as codified by ASC 810-10-65-1, which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. ASC 810-10-65-1 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. ASC 810-10-65-1 is effective for fiscal years beginning after December 15, 2008. We adopted ASC 810-10-65-1 on January 1, 2009. The adoption did not have an impact on our Condensed Consolidated Financial Statements.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” as codified by ASC 815-10-50, which requires enhanced disclosures about an entity’s derivative and hedging activities. ASC 815-10-50 is effective for fiscal years beginning after November 15, 2008. We adopted ASC 815-10-50 on January 1, 2009. The adoption did not have an impact on our Condensed Consolidated Financial Statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1 “Interim Disclosures about Fair Value of Financial Instruments” as codified by ASC 320-10-50. This ASC requires interim disclosures regarding the fair values of financial instruments that are within the scope of ASC 320. This ASC also requires disclosure of the methods and significant assumptions used to estimate the fair value of financial instruments on an interim basis as well as changes in those methods and significant assumptions from prior periods. ASC 320-10-50 does not change the accounting treatment for these financial instruments and is effective for interim reporting periods ending after June 15, 2009. We adopted ASC 320-10-50 on April 1, 2009. The adoption did not have an impact on our Condensed Consolidated Financial Statements.

In April 2009, the FASB issued FSP FAS 115-2 and FSP FAS 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments” as codified by ASC 320-10-65. This ASC amends the requirements for the recognition and measurement of other-than-temporary impairments for debt securities by modifying the pre-existing “intent and ability” indicator. Under ASC 320-10-65, for impaired debt securities, an other-than-temporary impairment is triggered when there is intent to sell the security, it is more likely than not that the security will be required to be sold before recovery, or the security is not expected to recover the entire amortized cost of the security. ASC 320-10-65 also changes the presentation of other-than-temporary impairments in the income statement for those impairments attributed to credit losses. ASC 320-10-65 is effective for interim and annual reporting periods ending after June 15, 2009. We adopted ASC 320-10-65 on April 1, 2009. The adoption did not have an impact on our Condensed Consolidated Financial Statements.

 

In April 2009, the FASB issued FSP FAS 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” as codified by ASC 820. This ASC provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate when a transaction is not orderly. ASC 820 also requires disclosure of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques in interim and annual periods. ASC 820 is effective for interim and annual reporting periods ending after June 15, 2009. We adopted ASC 820 on April 1, 2009. The adoption did not have an impact on our Condensed Consolidated Financial Statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” as codified by ASC 855, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The provisions of ASC 855 are effective for interim and annual reporting periods ending after June 15, 2009. We adopted ASC 855 for our second quarter ended June 30, 2009. The adoption did not have a significant impact on our Condensed Consolidated Financial Statements.

 

Recent Accounting Pronouncements

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, “Measuring Liabilities at Fair Value” (ASU 2009-05). This update provides amendments to ASC 820, “Fair Value Measurements and Disclosure” for the fair value measurement of liabilities. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value of such liability using one or more of the techniques prescribed by the update. ASU 2009-05 is effective for interim and annual periods beginning after August 28, 2009 and will be effective for Betawave beginning in the fourth quarter of 2009. We are currently evaluating the potential impact of ASU 2009-05 on our Condensed Consolidated Financial Statements.

 

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3.	Fair value

FASB ASC 820-10-30 specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the company’s own assumptions of market participant valuation (unobservable inputs). In accordance with FASB ASC 820-10-30, these two types of inputs have created the following fair value hierarchy:

 

·		Level 1 - Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
·		Level 2 - Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
·		Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

 

FASB ASC 820-10-30 requires the use of observable market data if such data is available without undue cost and effort.

Measurement of Fair Value - The Company measures fair value as an exit price using the procedures described below for all assets and liabilities measured at fair value. When available, the company uses unadjusted quoted market prices to measure fair value and classifies such items within Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based or independently-sourced market parameters such as interest rates and currency rates. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be inputs that are readily observable. If quoted market prices are not available, the valuation model used generally depends on the specific asset or liability being valued.

Credit risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value. The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s own credit risk as observed in the credit default swap market.

 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2009:

			Level 1				Level 2				Level 3				Total
	Cash and cash equivalents		$	4,013,825			$	---			$	---			$	4,013,825
	Restricted cash			53,750				---				---				53,750
	Total assets		$	4,067,575			$	---			$	---			$	4,067,575

4.	Property and Equipment

Property and equipment, net consisted of the following at September 30, 2009 and December 31, 2008:

			September 30,				December 31,
			2009				2008
	Computer equipment and software		$	678,651			$	652,877
	Leasehold improvements			145,794				145,794
	Furniture and fixtures			7,737				7,737
	Total property and equipment			832,182				806,408
	Less accumulated depreciation and amortization			(728,294	)			(569,960	)
	Property and equipment, net		$	103,888			$	236,448

Depreciation and amortization expense totaled $45,266 and $65,055 for the three months ended September 30, 2009 and 2008, and $159,012 and $195,118 for the nine months ended September 30, 2009 and 2008, respectively.

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5.	Accrued Liabilities

Accrued liabilities consisted of the following at September 30, 2009 and December 31, 2008:

			September 30,				December 31,
			2009				2008
	Accrued vendor obligations		$	1,075,937			$	687,928
	Accrued compensation			465,888				777,290
	Accrued city and county taxes			16,707				41,836
	Other			30,537				94,786
	Total accrued liabilities		$	1,589,069			$	1,601,840

 

6.	Credit Facility

On March 27, 2009, the Company entered into a Loan and Security Agreement (as amended, the “Loan and Security Agreement”) with Silicon Valley Bank (“SVB”) that provides for a secured revolving credit arrangement to provide advances in an aggregate principal amount of up to $4,000,000 on the terms and conditions set forth in the Loan and Security Agreement. The Loan and Security Agreement consists of a $4,000,000 credit facility with a $500,000 sublimit for stand-by letters of credit, a $500,000 sublimit for cash management services and a $500,000 sublimit for foreign exchange contracts. The borrowings are secured based upon a percentage of certain eligible billed and unbilled receivables. The Company may borrow, repay and reborrow under the line of credit facility at any time. As of March 27, 2009, the advances under the line of credit facility accrue interest at a per annum rate equal to 3.0% above the greater of (i) Silicon Valley Bank’s announced prime rate or (ii) 7.0%. This interest rate shall be adjusted upward at times when the Company’s liquidity ratio (as described in the Loan and Security Agreement) equals less than 2.25 to 1.00. The Company is required to pay a termination fee if the Loan and Security Agreement is terminated prior to March 27, 2011 (the “Maturity Date”) in an amount equal to the interest that would have accrued on an advance of an aggregate principal amount of $1 million through the Maturity Date.

 

The Company’s Loan and Agreement is collateralized by substantially all of the Company’s assets and requires the Company to comply with customary affirmative and negative covenants principally relating to liens, indebtednesss, investments, distributions to shareholders, use and disposition of assets, the satisfaction of a liquidity ratio test and minimum tangible net worth requirements. At September 30, 2009, the Company was in compliance with all covenants, except as set forth in the Amendment. In addition, the Loan and Security Agreement contains customary events of default. Upon occurrence of an uncured event of default, among other things, Silicon Valley Bank may declare that all amounts owing under the credit arrangement are due and payable and the applicable interest rate shall become 4% above the rate that would otherwise apply. The line of credit and facility expire on the Maturity Date. As of September 30, 2009, there is $1,500,000 outstanding under this revolving credit arrangement. At September 30, 2009, we did not have any funds available for borrowing.

 

On November 9, 2009, the Company and SVB entered into a Waiver and Third Amendment to Loan and Security Agreement (the “Waiver and Amendment”). Under the terms of the Waiver and Amendment, SVB agreed: (i) to waive an event of default existing as a result of the Company’s violation of a minimum tangible net worth covenant under the Loan and Security Agreement and (ii) that such minimum tangible net worth covenant would not apply from October 1, 2009 to November 23, 2009. In addition, the Waiver and Amendment amended the Loan and Security Agreement to, among other things: (i) add a covenant to the Loan and Security Agreement that requires the Company to maintain at least $1.5 million in unrestricted cash on deposit in the Company’s unrestricted operating, sweep and other accounts with SVB and its affiliates and (ii) reduce the borrowing base available under the Loan and Security Agreement from $4 million to the lesser of (a) the sum of 80% of eligible accounts and, at SVB’s discretion, 60% of extended eligible accounts and (b) $1.5 million.

 

7.	Stock Options and Warrants

In 2004, the Company’s Board of Directors (the “Board”) adopted a 2004 Stock Plan (the “2004 Plan”). The 2004 Plan authorized the Board of Directors to grant incentive stock options and nonstatutory stock options to employees, directors, and consultants for up to 2,000,000 shares of common stock. Options vested over a period of time according to the Option Agreement, and are exercisable for a maximum period of ten years after date of grant. In May 2006, the Company increased the shares reserved for issuance under the 2004 Plan from 2,000,000 to 4,588,281. Upon completion of the October 2006 mergers, the Company decreased the shares reserved under the 2004 Plan from 4,588,281 to 804,188 and froze the 2004 Plan resulting in no additional options being available for grant under the 2004 Plan.

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In 2006, the Company’s Board of Directors adopted a 2006 Stock Plan (the “2006 Plan”).The 2006 Plan authorized the Board of Directors to grant incentive stock options and nonstatutory stock options to employees, directors, and consultants for up to 2,000,000 shares of common stock. In October 2006, the Board of Directors increased the shares available under the 2006 Plan to 4,000,000 shares. Options vest over a period according to the Option Agreement, and are exercisable for a maximum period of ten years after date of grant. In March 2008, the Board of Directors froze the 2006 Plan resulting in no additional options being available for grant under the 2006 Plan.

 

On October 24, 2007, the Company’s Board of Directors approved the Non-Qualified Stock Option Plan (as amended, the “Non-Qualified Plan”). The purposes of the Non-Qualified Plan are to attract and retain the best available personnel, to provide additional incentives to employees, directors and consultants and to promote the success of our business. The Non-Qualified Plan initially provided for a maximum aggregate of 3,600,000 shares of our common stock that may be issued upon the exercise of options granted pursuant to the Non-Qualified Plan. On November 1, 2007, the Board adopted an amendment to the Non-Qualified Plan to increase the total number of shares of our common stock that may be issued pursuant to the Non-Qualified Plan from 3,600,000 shares to 4,000,000 shares.  On December 18, 2007, the Board adopted a further amendment to the Non-Qualified Plan to increase the total number of shares of our common stock that may be issued pursuant to the Non-Qualified Plan from 4,000,000 shares to 5,500,000 shares. On February 5, 2008, the Board adopted an additional amendment to the Non-Qualified Plan to increase the total plan shares that may be issued from 5,500,000 shares to 10,500,000 shares. On June 4, 2008, the  Board further increased the number of shares reserved under the 2007 Plan to 16,500,000.  On December 2, 2008 the Board increased the number of shares reserved under the 2007 Plan to 69,141,668.  On January 16, 2009, the Board increased the number of shares reserved under the 2007 Plan to 82,963,169.  The Board (or any committee composed of members of the Board appointed by it to administer the Non-Qualified Plan), has the authority to administer and interpret the Non-Qualified Plan. The administrator has the authority to, among other things, (i) select the employees, consultants and directors to whom options may be granted, (ii) grant options, (iii) determine the number of shares underlying option grants, (iv) approve forms of option agreements for use under the Non-Qualified Plan, (v) determine the terms and conditions of the options and (vi) subject to certain exceptions, amend the terms of any outstanding option granted under the Non-Qualified Plan.  The Non-Qualified Plan authorizes grants of nonqualified stock options to eligible employees, directors and consultants. The exercise price for an Option shall be determined by the administrator. The term of each option under the Non-Qualified Plan shall be no more than ten years from the date of grant.  The Non-Qualified Plan became effective upon its adoption by the Board and will continue in effect for a term of ten years, unless sooner terminated. The  Board may at any time amend, suspend or terminate the Non-Qualified Plan.  The Non-Qualified Plan also contains provisions governing: (i) the treatment of options under the Non-Qualified Plan upon the occurrence of certain corporate transactions (including merger, consolidation, sale of all or substantially all the assets of our company, or complete liquidation or dissolution of our company) and changes in control of our company, (ii) transferability of options and (iii) tax withholding upon the exercise or vesting of an option.

 

On March 31, 2008, the Board adopted the Betawave Corporation 2008 Stock Incentive Plan (as amended, the “2008 Plan”). The 2008 Plan permits options and other equity compensation to be awarded to employees, directors and consultants. As originally adopted, the 2008 Plan provided for the issuance of up to 2,400,000 shares of the Company’s common stock pursuant to awards granted thereunder, up to 2,200,000 of which may be issued pursuant to incentive stock options granted thereunder.  On June 4, 2008, the Board adopted an amendment to the 2008 Plan to (i) decrease the maximum aggregate number of shares of Common Stock that may be issued pursuant to awards granted under the plan from 2,400,000 shares to 1,500,000 shares and (ii) decrease the maximum aggregate number of shares of the Company’s common stock that may be issued pursuant to incentive stock options granted under the plan from 2,200,000 shares to 1,500,000 shares. On December 2, 2008 the Board increased the number of shares reserved under the Plan to a maximum of 19,224,774. The 2008 Plan is administered, with respect to grants to employees, directors, officers, and consultants, by the plan administrator (the “Administrator”), defined as the Board or one or more committees designated by the Board. The Board is currently the Administrator for the 2008 Plan.

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A summary of stock option transactions for the period January 1, 2008 through September 30, 2009 is as follows:

							Options Outstanding
			Options available for grant				Number of options				Weighted average exercise price
	Balances at January 1, 2008			3,021,584				7,194,770			$	0.91
	Additional shares reserved			82,866,442				---			$	---
	Shares frozen under the 2004 and 2006 Plans			(3,370,966	)			---			$	---
	Options granted			(75,606,727	)			75,606,727			$	0.39
	Options cancelled			2,754,001				(2,754,001	)		$	1.30
	Balances at January 1, 2009			9,664,334				80,047,496			$	0.41
	Additional shares reserved			13,821,501				---			$	---
	Options granted			(7,921,578	)			7,921,578			$	0.15
	Options cancelled			2,216,556				(3,091,490	)		$	0.62
	Balances at September 30, 2009			17,780,813				84,877,584			$	0.38

 

    The following table summarizes information concerning outstanding options as of September 30, 2009:

 

				Options Outstanding										Options Exercisable
Exercise price				Number of Options				Weighted Average Remaining Contractual Life (in Years)				Aggregate Intrinsic Value		Number of Options				Weighted Average Remaining Contractual Life (in Years)				Aggregate Intrinsic Value
$	0.06				139,100				4.74						136,404				4.71
$	0.07				215,000				9.95						---				8.82
$	0.08				617,000				9.86						307,000				9.89
$	0.16				6,927,078				9.70						146,687				4.71
$	0.19				29,765				9.14						11,536				9.14
$	0.20				48,027,092				9.17						15,186,645				9.18
$	0.23				4,825,000				8.53						2,920,834				8.47
$	0.24				102,000				8.68						58,625				8.68
$	0.25				65,000				8.84						38,333				8.84
$	0.27				400,000				8.08						255,556				8.08
$	0.29				100,000				8.50						100,000				8.50
$	0.35				4,840,000				8.34						3,844,862				8.34
$	0.37				1,742,650				8.04						1,417,046				8.05
$	0.42				130,000				8.28						54,167				8.28
$	0.60				2,777,309				9.17						---				---
$	0.80				5,277,309				8.94						1,041,667				8.68
$	1.00				2,777,309				9.17						---				---
$	1.20				2,777,309				9.17						---				---
$	1.40				2,777,309				9.17						---				---
$	3.08				40,000				7.22						26,667				7.22
$	3.65				64,271				7.12						64,271				7.12
$	3.78				15,000				7.64						8,750				7.64
$	3.80				65,000				7.55						39,271				7.55
$	5.79				147,083				7.34						106,667				7.34
					84,877,584				9.08		$	239,354			25,764,988				8.82		$	11,596

 

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The weighted-average grant date fair value of the options granted during the three month periods ended September 30, 2009 and 2008 were $0.07 and $0.17, respectively.

 

On December 2, 2008, the Company granted (under the Non-Qualified Plan) certain employees options to purchase 14,991,620 shares of Company common stock.  These options will only vest with a change in control of the Company, as defined in the option agreement.  As the condition for vesting is not probable, the Company has not recognized any compensation expense related to these options at September 30, 2009.  At September 30, 2009, 13,886,545 of these options remain outstanding.

At September 30, 2009, there was $5,383,040 of total unrecognized compensation cost related to nonvested stock-based compensation arrangements granted under the plans.  This cost is expected to be recognized over the weighted average period of 2.21 years.

 

The Company did not realize any tax benefits from tax deductions of stock-based payment arrangements during the nine month periods ended September 30, 2009 and 2008.

Stock-based compensation expense related to stock options granted to non-employees is recognized as earned. In accordance with ASC 505-50, the Company re-values the non-employee stock-based compensation, at each reporting date, using the Black-Scholes pricing model. As a result, stock-based compensation expense will fluctuate as the estimated fair market value of the Company’s common stock fluctuates. The Company recorded stock-based compensation expense related to non-employees of ($6,616) and $154,419 for the nine month periods ended September 30, 2009 and 2008, respectively.

    A summary of outstanding Common Stock Warrants included those issued as non-employee compensation as of September 30, 2009 is as follows:

	Securities into which warrants are convertible and reference		Shares				Exercise Price			Expiration Date
	Common Stock-Non-employee compensation			300,000			$	1.75		February 2013
	Common Stock-Non-employee compensation			80,000			$	0.20		February 2013
	Common Stock-Non-employee compensation			3,133,333			$	1.72		October 2011
	Common Stock-Series A preferred stock units			56,522,344			$	0.20		December 2013
	Common Stock-Non-employee compensation			6,665,343			$	0.20		December 2013
	Common Stock-Non-employee compensation			50,000			$	0.20		November 2013
	Common Stock			600,000			$	0.20		March 2014
	Total			67,351,020

ITEM 1A.

RISK FACTORS.

We face a variety of risks that may affect our financial condition, results of operations or business, and many of those risks are driven by factors that we cannot control or predict. The following discussion addresses those risks that management believes are the most significant, although there may be other risks that could arise, or may prove to be more significant than expected, that may affect our financial condition, results of operations or business.

RISKS RELATED TO OUR COMPANY

We have a history of operating losses which we expect to continue, and we may not be able to achieve profitability.

 

    We have a history of losses and expect to continue to incur operating and net losses for the foreseeable future. We incurred a net loss of approximately $17.0 million for the year ended December 31, 2008, a net loss of approximately $16.4 million for the year ended December 31, 2007 and a net loss of approximately $11.3 million for the nine months ended September 30, 2009. As of September 30, 2009, our accumulated deficit was approximately $52.4 million. We have not achieved profitability on a quarterly or on an annual basis. We may not be able to achieve profitability. Our revenues for the three months ended September 30, 2009 were approximately $1.7 million. If our revenues grow more slowly than anticipated or if our operating expenses exceed expectations, then we may not be able to achieve profitability in the near future or at all, which may depress the price for our common stock.

The effects of the current global economic crisis may impact our business, operating results, or financial condition.

 

    The current global economic crisis has caused significant disruptions and extreme volatility in global financial markets and increased rates of default and bankruptcy, and has significantly impacted levels of consumer spending. The current deterioration in economic conditions has caused and could cause additional decreases in or delays in advertising spending in general. In addition, many industry forecasts are predicting negative growth or a decrease in the rate of growth in certain channels of online advertising in 2009. These developments could negatively affect our business, operating results, or financial condition in a number of ways. Current or potential customers such as advertisers may delay or decrease spending with us or may not pay us or may delay paying us for previously purchased services. For example, the sales cycle in our industry has recently shortened significantly. The sales cycle in our business traditionally ranged from three to nine months due to the general practice for all advertiser categories to plan at least one quarter in advance. However, as a result of the current global economic crisis, advertising buys in all mediums have shortened significantly. In addition, if consumer spending continues to decrease, this may affect consumer’s behavior on the Internet and online advertising spending.

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A limited number of advertisers account for a significant percentage of our revenue, and a loss of one or more of these advertisers could materially adversely affect our results of operations.

 

    We generate almost entirely all of our revenues from advertisers on our network. For the nine months ended September 30, 2009 and the year ended December 31, 2008, revenues from our five largest advertisers accounted for 35% and 36%, respectively, of our revenues. For the nine months ended September 30, 2009 and the year ended December 31, 2008, our largest advertiser accounted for 9% and 12%, respectively, of our revenues. Our advertisers can generally terminate their contracts with us at any time. The loss of one or more of the advertisers that represent a significant portion of our revenues could materially adversely affect our results of operations. In addition, our relationships with publishers participating in our network require us to bear the risk of non-payment of advertising fees from advertisers. Accordingly, the non-payment or late payment of amounts due to us from a significant advertiser could materially adversely affect our financial condition and results of operations.

 

A small number of publishers account for a substantial percentage of our revenues and our failure to develop and sustain long-term relationships with our publishers, or the reduction in traffic of a current publisher in our network, could limit our ability to generate revenues.

 

    For the nine months ended September 30, 2009 and the year ended December 31, 2008, advertising revenues connected to our largest publisher accounted for approximately 53% and 66%, respectively, of our revenues. Until the sales cycle on the newest sites in our publisher network matures, a small number of publishers will account for a substantial percentage of our revenues. We cannot assure you that any of the publishers participating in our network will continue their relationships with us. Moreover, we may lose publishers to competing publisher networks that have longer operating histories, the ability to attract higher ad rates, greater brand recognition, or the ability to generate greater financial, marketing and other resources. Furthermore, we cannot assure you that we would be able to replace a departed publisher with another publisher with comparable traffic patterns and demographics, if at all. Accordingly, our failure to develop and sustain long-term relationships with publishers or the reduction in traffic of a current publisher in our network could limit our ability to generate revenues.

Our future financial results, including our expected revenues, are unpredictable and difficult to forecast.

 

    Our revenues, expenses and operating results fluctuate from quarter to quarter and are unpredictable which could increase the volatility of the price of our common stock. We expect that our operating results will continue to fluctuate in the future due to a number of factors, some of which are beyond our control.

 

    These factors include:

 

	●	our ability to attract and incorporate publishers into our network;
	●	the ability of the publishers in our network to attract visitors to their websites;
	●	the amount and timing of costs relating to the expansion of our operations, including sales and marketing expenditures;
	●	our ability to control our gross margins;
	●	our ability to generate revenues through third-party advertising and our ability to be paid fees for advertising on our network; and
	●	our ability to obtain cost-effective advertising throughout our network.

 

    Due to all of these factors, our operating results may fall below the expectations of investors, which could cause a decline in the price of our common stock. In addition, since we expect that our operating results will continue to fluctuate in the future, it is difficult for us to accurately forecast our revenues.

Our limited operating history in the operation of an online entertainment and media network of websites makes evaluation of our business difficult, and our revenues are currently insufficient to generate positive cash flows from our operations.

 

    We have limited historical financial data upon which to base planned operating expenses or forecast accurately our future operating results. We formally launched our website in October 2004 and only began building our network during 2007. We formally launched our network in February 2008 and we rebranded as Betawave Corporation in January 2009. Our revenues are currently insufficient to generate positive cash flows from our operations.

 

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We will likely need to raise additional capital to meet our business requirements in the future and such capital raising may be costly or difficult to obtain and could dilute current stockholders’ ownership interests.

 

    We will likely need to raise additional capital in the future, which may not be available on reasonable terms or at all, especially in light of the recent downturn in the economy and dislocations in the credit and capital markets. The raising of additional capital will likely dilute our current stockholders’ ownership interests. We may need to raise additional funds through public or private debt or equity financings to meet various objectives including, but not limited to:

	●	pursuing growth opportunities, including more rapid expansion;
	●	acquiring complementary businesses;
	●	growing our network, including the number of publishers and advertisers in our network;
	●	hiring qualified management and key employees;
	●	responding to competitive pressures; and
	●	maintaining compliance with applicable laws.

    In addition, the raising of any additional capital through the sale of equity or equity-backed securities would dilute our current stockholders’ ownership percentages and would also result in a decrease in the fair market value of our equity securities because our assets would be owned by a larger pool of outstanding equity. The terms of those securities issued by us in future capital transactions may be more favorable to new investors, and may include preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect.

 

    If we are unable to obtain required additional capital, we may have to curtail our growth plans or cut back on existing business and, further, we may not be able to continue operating if we do not generate sufficient revenues from operations needed to stay in business.

 

    We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we issue, such as convertible notes and warrants, which may adversely impact our financial condition.

Our auditors have indicated that there are a number of factors that raise substantial doubt about our ability to continue as a going concern.

 

    Our audited consolidated financial statements for the fiscal year ended December 31, 2008 were prepared on a going concern basis in accordance with U.S. GAAP. The going concern basis of presentation assumes that we will continue in operation for the foreseeable future and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. However, the report of our independent registered public accounting firm on our audited consolidated financial statements for the fiscal year ended December 31, 2008 has indicated that we have incurred net loss since our inception, have experienced liquidity problems, negative cash flows from operations, and a working capital deficit at December 31, 2008, that raise substantial doubt about our ability to continue as a going concern.

If we acquire or invest in other companies, assets or technologies and we are not able to integrate them with our business, or we do not realize the anticipated financial and strategic goals for any of these transactions, our financial performance may be impaired.

 

    As part of our growth strategy, we occasionally consider acquiring or making investments in companies, assets or technologies that we believe are strategic to our business. We do not have extensive experience in integrating new businesses or technologies, and if we do succeed in acquiring or investing in a company or technology, we will be exposed to a number of risks, including:

 

	●	we may find that the acquired company or technology does not further our business strategy, that we overpaid for the acquired company or technology or that the economic conditions underlying our acquisition decision have changed;
	●	we may have difficulty integrating the assets, technologies, operations or personnel of an acquired company, or retaining the key personnel of the acquired company;
	●	our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises;
	●	we may encounter difficulty entering and competing in new markets or increased competition, including price competition or intellectual property litigation; and
	●	we may experience significant problems or liabilities associated with technology and legal contingencies relating to the acquired business or technology, such as intellectual property or employment matters.

 

    If we were to proceed with one or more significant acquisitions or investments in which the consideration included cash, we could be required to use a substantial portion of our available cash. To the extent we issue shares of capital stock or other rights to purchase capital stock, including options and warrants, existing stockholders might be diluted.

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Our recently-announced refined business model and rebranding of our business using the “Betawave” name carry a number of risks that could adversely affect our company, business prospects and operating results.

 

    We recently refined our business model to become an attention-based media company and launched a campaign to rebrand our business using the “Betawave” name, including changing the name of our company from GoFish Corporation to Betawave Corporation. If we are unable to effectively implement our refined business model and rebranding campaign, it would adversely affect our company, business prospects and operating results. Our future success will depend in significant part on our ability to forge contractual relationships with additional third-party websites (“publishers”) under which we assume responsibility for selling their inventory of available advertising opportunities, as well as syndicating video content to them. We are susceptible to the risks of operating an advertising-supported business. There is no guarantee that we will be able to enter into contracts with such publishers and, if we are unable to enter into such contractual relationships, our business and revenues will be adversely affected. In addition, as a result of our rebranding campaign, we may lose any brand recognition associated with the “GoFish” name that we previously established with advertisers, publishers in our network and other partners. We may not be able to establish, maintain or enhance brand recognition associated with the “Betawave” name that is comparable to the brand recognition that we may have previously had associated with the “GoFish” name. If we fail to establish, maintain and enhance brand recognition associated with the “Betawave” name, it could affect our ability to attract advertisers, publishers in our network and other partners, which could adversely affect our ability to generate revenues and could impede our business plan.  Furthermore, in connection with the development and implementation of our refined business model and rebranding campaign, we have spent, and continue to expect to spend, additional time and costs, including those associated with advertising and marketing efforts and building a network that includes other publishers.

Our business model is unproven and may not be viable.

 

    Our business model is new and unproven and reflects our belief that brand advertisers will alter their advertising strategy in light of the changes in online consumer behavior and will spend advertising dollars differently than they traditionally have – with the large Internet portals. In addition, we believe that having few quality publishers which allows us to execute advertising campaigns efficiently, is beneficial to having a large number of medium and small publishers. If we are mistaken in our beliefs, it could adversely affect our ability to generate revenues.

Our business depends on enhancing our brand, and any failure to enhance our brand would hurt our ability to expand our base of advertisers and publishers in our network.

 

    Enhancing our brand is critical to expanding our base of advertisers, publishers in our network, and other partners. We believe that the importance of brand recognition will increase due to the relatively low barriers to entry in the Internet market. If we fail to enhance our brand, or if we incur excessive expenses in this effort, our business, operating results and financial condition will be materially and adversely affected. Enhancing our brand will depend largely on our ability to provide high-quality products and services, which we may not do successfully.

We intend to expand our operations and increase our expenditures in an effort to grow our business. If we are unable to achieve or manage significant growth and expansion, or if our business does not grow as we expect, our operating results may suffer.

 

    Our business plan anticipates continued additional expenditure on development and other growth initiatives. We may not achieve significant growth. If achieved, significant growth would place increased demands on our management, accounting systems, network infrastructure and systems of financial and internal controls. We may be unable to expand associated resources and refine associated systems fast enough to keep pace with expansion. If we fail to ensure that our management, control and other systems keep pace with growth, we may experience a decline in the effectiveness and focus of our management team, problems with timely or accurate reporting, issues with costs and quality controls and other problems associated with a failure to manage rapid growth, all of which would harm our results of operations.

Payments to certain of our publishers have exceeded the related fees we receive from our advertisers.

We are obligated under certain agreements to make non-cancelable guaranteed minimum revenue share payments to certain of our publishers. In these agreements, we promise to make these minimum payments to the publisher for a pre-negotiated period of time. At September 30, 2009, our aggregate outstanding non-cancelable guaranteed minimum revenue share commitments totaled $4.05 million through 2010. It is difficult to forecast with certainty the fees that we will earn under agreements with guarantees, and sometimes the fees we earn fall short of the guaranteed minimum payment amounts.

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Losing key personnel or failing to attract and retain other highly skilled personnel could affect our ability to successfully grow our business.

 

    Our future performance depends substantially on the continued service of our senior management, sales and other key personnel. We do not currently maintain key person life insurance. If our senior management were to resign or no longer be able to serve as our employees, it could impair our revenue growth, business and future prospects. In addition, the success of our monetization and sales plans depends on our ability to retain people in direct sales and to hire additional qualified and experienced individuals into our sales organization.

 

    To meet our expected growth, we believe that our future success will depend upon our ability to hire, train and retain other highly skilled personnel. Competition for quality personnel is intense among technology and Internet-related businesses such as ours. We cannot be sure that we will be successful in hiring, assimilating or retaining the necessary personnel, and our failure to do so could cause our operating results to fall below our projected growth and profit targets.

Decreased effectiveness of equity compensation could adversely affect our ability to attract and retain employees and harm our business.

 

    We have historically used stock options as a key component of our employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage employee retention, and provide competitive compensation packages. Volatility or lack of positive performance in our stock price may adversely affect our ability to retain key employees, many of whom have been granted stock options, or to attract additional highly-qualified personnel. As of August 10, 2009, a majority of our outstanding employee stock options have exercise prices in excess of the stock price on that date.

Rules issued under the Sarbanes-Oxley Act of 2002 may make it difficult for us to retain or attract qualified officers and directors, which could adversely affect the management of our business and our ability to retain the trading status of our common stock on the OTC Bulletin Board.

 

    We may be unable to attract and retain those qualified officers, directors and members of board committees required to provide for our effective management because of rules and regulations that govern publicly held companies, including, but not limited to, certifications by principal executive officers. The enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of rules and regulations and the strengthening of existing rules and regulations by the SEC. The perceived increased personal risk associated with these recent changes may deter qualified individuals from accepting roles as directors and executive officers.

 

    We may have difficulty attracting and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified officers and directors, the management of our business and our ability to retain the quotation of our common stock on the OTC Bulletin Board or obtain a listing of our common stock on a stock exchange or NASDAQ could be adversely affected.

Our management has identified a number of material weaknesses in our internal control over financial reporting as of December 31, 2008, which, if not sufficiently remediated, could result in material misstatements in our annual or interim financial statements in future periods and the ineffectiveness of our disclosure controls and procedures.

 

    In connection with our management’s assessment of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, our management identified a number of material weaknesses in our internal control over financial reporting as of December 31, 2008. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis by our internal controls. As a result, our management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2008. In addition, based on the evaluation and the identification of these material weaknesses in our internal control over financial reporting, our Chief Executive Officer and our Chief Accounting Officer concluded that, as of September 30, 2009, our disclosure controls and procedures were not effective.

 

    We are in the process of implementing remediation efforts with respect to our control environment and these material weaknesses. However, if these remediation efforts are insufficient to address these material weaknesses, or if additional material weaknesses in our internal control over financial reporting are discovered in the future, we may fail to meet our future reporting obligations, our consolidated financial statements may contain material misstatements and our financial condition and results of operations may be adversely impacted. Any such failure could also adversely affect our results of periodic management assessment regarding the effectiveness of our internal control over financial reporting, as required by the SEC’s rules under Section 404 of the Sarbanes-Oxley Act of 2002. The existence of a material weakness could result in errors in our consolidated financial statements that could result in a restatement of financial statements or failure to meet reporting obligations, which in turn could cause investors to lose confidence in reported financial information leading to a decline in our stock price.

 

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    Although we believe that these remediation efforts will enable us to improve our internal control over financial reporting, we cannot assure you that these remediation efforts will remediate the material weaknesses identified or that any additional material weaknesses will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting. Furthermore, there are inherent limitations to the effectiveness of controls and procedures, including the possibility of human error and circumvention or overriding of controls and procedures.

We may have undisclosed liabilities that could harm our revenues, business, prospects, financial condition and results of operations.

 

    Our present management had no affiliation with Unibio Inc. (which changed its name to GoFish Corporation on September 14, 2006 and subsequently to Betawave Corporation on January 20, 2009) prior to the October 27, 2006 mergers, in which we acquired GoFish Technologies, Inc. as a wholly-owned subsidiary in a reverse merger transaction and IDT Acquisition Corp., a wholly-owned subsidiary of the Company, simultaneously merged with and into Internet Television Distribution, Inc. as a wholly-owned subsidiary. Pursuant to the mergers, the officers and board members of Betawave Corporation resigned and were replaced by officers of GoFish Technologies, Inc. along with newly elected board members.

 

    Although the October 27, 2006 Agreement and Plan of Merger contained customary representations and warranties regarding our pre-merger operations and customary due diligence was performed, all of our pre-merger material liabilities may not have been discovered or disclosed. We do not believe this to be the case but can offer no assurance as to claims which may be made against us in the future relating to such pre-merger operations. The Agreement and Plan of Merger and Reorganization contained a limited, upward, post-closing, adjustment to the number of shares of common stock issuable to pre-merger GoFish Technologies Inc. and Internet Television Distribution Inc. shareholders as a means of providing a remedy for breaches of representations made by us in the Agreement and Plan of Merger and Reorganization, including representations related to any undisclosed liabilities, however, there is no comparable protection offered to our other stockholders. Any such undisclosed pre-merger liabilities could harm our revenues, business, prospects, financial condition and results of operations upon our acceptance of responsibility for such liabilities.

Regulatory requirements may materially adversely affect us.

 

    We are subject to various regulatory requirements, including the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 requires the evaluation and determination of the effectiveness of a company’s internal control over its financial reporting. In connection with management’s assessment of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, we identified material weaknesses in our internal control over financial reporting as of December 31, 2008. As a result, we have incurred additional costs and may suffer adverse publicity and other consequences of this determination.

We may be subject to claims relating to certain actions taken by our former external legal counsel.

 

    In February 2007, we learned that approximately half of the three million shares of our common stock issued as part of a private placement transaction we consummated in October 2006 to entities controlled by Louis Zehil, who at the time of the purchase was a partner of our former external legal counsel for the private placement transaction, McGuire Woods LLP, may have been improperly traded. We believe that Mr. Zehil improperly caused our former transfer agent not to place a required restrictive legend on the certificate for these three million shares and that Mr. Zehil then caused the entities he controlled to resell certain of these shares. Mr. Zehil’s conduct was reported to the SEC, and the SEC recently sued Mr. Zehil in connection with this matter and further alleged that Mr. Zehil engaged in a similar fraudulent scheme with respect to six additional public companies represented at the relevant time by McGuire Woods LLP. Mr. Zehil also is the subject of criminal charges brought by federal prosecutors in connection with the fraudulent scheme.

 

    In December 2008, Sunrise Equity Partners, L.P. (“Sunrise”) brought an action against us in the United States District Court in the Southern District of New York on behalf of itself and all other purchasers of our securities in our 2006 private placement. In the complaint, Sunrise alleged, among other things, that we breached the representation in the subscription agreement for the 2006 private placement which provided that no purchaser in the private placement had an agreement or understanding on terms that differed substantially from those of any other investor. Sunrise claimed that we breached this representation because Mr. Zehil’s entities received certificates without any restrictive legend while all other investors in the private placement received certificates with such restrictive legends. In February 2009, the complaint was dismissed without prejudice. We have learned that Sunrise refiled the lawsuit in New York state court in August 2009. As of this date, we have not been served with the complaint, but we believe it is likely that the nature of the allegations will be similar to those contained in the December 2008 filing. In addition, one or more other stockholders could also claim that they somehow suffered a loss as a result of Mr. Zehil’s conduct and attempt to hold us responsible for their losses. If any such claims are successfully made against us and we are not adequately indemnified for those claims from available sources of indemnification, then such claims could have a material adverse effect on our financial condition. We also may incur significant costs resulting from our investigation of this matter, defending any litigation against us relating to this matter, and our cooperation with governmental authorities. We may not be adequately indemnified for such costs from available sources of indemnification.

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RISKS RELATED TO OUR BUSINESS

We may be unable to attract advertisers to our network.

 

    Advertising revenues comprise, and are expected to continue to comprise, almost entirely all of our revenues. Most large advertisers have fixed advertising budgets, only a small portion of which have traditionally been allocated to Internet advertising. In addition, the overall market for advertising, including Internet advertising, has been generally characterized in recent periods by softness of demand, reductions in marketing and advertising budgets, and by delays in spending of budgeted resources. Advertisers may continue to focus most of their efforts on traditional media or may decrease their advertising spending. If we fail to convince advertisers to spend a portion of their advertising budgets with us, we will be unable to generate revenues from advertising as we intend.

 

    Even if we initially attract advertisers to our network, they may decide not to advertise to our community if their investment does not have the desired result, or if we do not deliver their advertisements in an appropriate and effective manner. If we are unable to provide value to our advertisers, advertisers may reduce the rates they are willing to pay or may not continue to place ads with us.

 

We generate almost entirely all of our revenues from advertising, and the reduction in spending by, or loss of, advertisers could seriously harm our business.

   

    We generate almost entirely all of our revenues from advertisers on our network. Our advertisers can generally terminate their contracts with us at any time. If we are unable to remain competitive and provide value to our advertisers, they may stop placing ads with us, which would negatively affect our revenues and business. In addition, expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns. Any decreases in or delays in advertising spending due to general economic conditions could reduce our revenues or negatively impact our ability to grow our revenues. We also may encounter difficulty collecting from our advertisers. We are a relatively small company and advertisers may choose to pay our bills after paying debts owed to their larger clients.

 

If we fail to compete effectively against other Internet advertising companies, we could lose customers or advertising inventory and our revenues and results of operations could decline.

 

    The Internet advertising markets are characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions, and changing customer demands. The introduction of new products and services embodying new technologies and the emergence of new industry standards and practices could render our existing products and services obsolete and unmarketable or require unanticipated technology or other investments. Our failure to adapt successfully to these changes could harm our business, results of operations and financial condition.

 

    The market for Internet advertising and related products and services is highly competitive. We expect this competition to continue to increase, in part because there are no significant barriers to entry to our industry. Increased competition may result in price reductions for advertising space, reduced margins and loss of market share. We compete against well-capitalized advertising companies as well as smaller companies.

 

    We compete against self-serve advertising networks such as Google AdSense, Valueclick, Advertising.com and Tribal Fusion that serve impressions onto a wide variety of mostly small and medium sites. We compete against behavioral networks, such as Tacoda and Blue Lithium, which serve the same inventory as general networks, but add behavioral targeting. We also compete against other full-service advertising networks that provide a more complete service when selling advertising, such as Gorilla Nation and Glam.

 

    If existing or future competitors develop or offer products or services that provide significant performance, price, creative or other advantages over those offered by us, our business, results of operations and financial condition could be negatively affected. Many current and potential competitors enjoy competitive advantages over us, such as longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales and marketing resources. As a result, we may not be able to compete successfully. If we fail to compete successfully, we could lose customers or advertising inventory and our revenues and results of operations could decline.

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We face competition from websites catering to consumers, as well as traditional media companies, and we may not be included in the advertising budgets of large advertisers, which could harm our revenues and results of operations.

 

    In the online advertising market, we compete for advertising dollars with all websites catering to consumers, including portals, search engines and websites belonging to other advertising networks. We also compete with traditional advertising media, such as direct mail, television, radio, cable, and print, for a share of advertisers’ total advertising budgets. Most large advertisers have fixed advertising budgets, a small portion of which is allocated to Internet advertising. We expect that large advertisers will continue to focus most of their advertising efforts on traditional media. If we fail to convince these companies to spend a portion of their advertising budgets with us, or if our existing advertisers reduce the amount they spend on our programs, our revenues and results of operations would be harmed.

We may be unable to attract and incorporate high quality publishers into our network.

 

    Or future revenues and success depend upon, among other things, our ability to attract and contract with high-quality publishers to participate in our network. We cannot assure you that publishers will want to participate, or continue to participate, in our network. If we are unable to successfully attract publishers to our network, it could adversely affect our ability to generate revenues and could impede our business plan. Even if we do successfully attract publishers, there can be no assurance that we will be able to incorporate these publishers into our network without substantial costs, delays or other problems.

Our services may fail to maintain the market acceptance they have achieved or to grow beyond current levels, which would adversely affect our competitive position.

 

    We have not conducted any independent studies with regard to the feasibility of our proposed business plan, present and future business prospects and capital requirements. Our services may fail to gain market acceptance and our infrastructure to enable such expansion is still limited. Even if adequate financing is available and our services are ready for market, we cannot be certain that our services will find sufficient acceptance in the marketplace to fulfill our long and short-term goals. Failure of our services to achieve or maintain market acceptance would have a material adverse effect on our business, financial condition and results of operations.

We may fail to select the best publishers for our network.

 

    The number of websites has increased substantially in recent years. Our publishers’ websites face numerous competitors both on the Internet, and in the more traditional broadcasting arena. Some of these companies have substantially longer operating histories, significantly greater financial, marketing and technical expertise, and greater resources and name recognition than we do. Moreover, the offerings on our network may not be sufficiently distinctive or may be copied by others. If we fail to attain commercial acceptance of our services and to be competitive with these companies, we may not ever generate meaningful revenues. In addition, new companies may emerge at any time with services that are superior, or that the marketplace perceives are superior, to ours.

 

If we fail to anticipate, identify and respond to the changing tastes and preferences of consumers, our business is likely to suffer.

 

    Our business and results of operations depend upon the appeal of the sites in our network to consumers. The tastes and preferences of our consumers frequently change, and our success depends on our ability to anticipate, identify and respond to these changing tastes and preferences by incorporating appropriate publishers into our network. If we are unable to successfully anticipate, identify or respond to changing tastes and preferences of consumers or misjudge the market for our network, we may not be able to establish relationships with the most popular publishers, which may cause our revenues to decline.

 

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We may be subject to market risk and legal liability in connection with the data collection capabilities of the publishers in our network.

 

    Many components of websites on our network are interactive Internet applications that by their very nature require communication between a client and server to operate. To provide better consumer experiences and to operate effectively, many of the websites on our network collect certain information from users. The collection and use of such information may be subject to U.S. state and federal privacy and data collection laws and regulations, as well as foreign laws such as the EU Data Protection Directive. Recent growing public concern regarding privacy and the collection, distribution and use of information about Internet users has led to increased federal, state and foreign scrutiny and legislative and regulatory activity concerning data collection and use practices. Any failure by us to comply with applicable federal, state and foreign laws and the requirements of regulatory authorities may result in, among other things, in liability and materially harm our business.

 

    The websites on our network post privacy policies concerning the collection, use and disclosure of user data, including that involved in interactions between our client and server products. Because of the evolving nature of our business and applicable law, such privacy policies may now or in the future fail to comply with applicable law. The websites on our network are subject to various federal and state laws concerning the collection and use of information regarding individuals. These laws include the Children’s Online Privacy Protection Act, the Federal Drivers Privacy Protection Act of 1994, the privacy provisions of the Gramm-Leach-Bliley Act, the Federal CAN-SPAM Act of 2003, as well as other laws that govern the collection and use of information. We cannot assure you that the websites on our network are currently in compliance, or will remain in compliance, with these laws and their own privacy policies. Any failure to comply with posted privacy policies, any failure to conform privacy policies to changing aspects of the business or applicable law, or any existing or new legislation regarding privacy issues could impact the market for our publishers’ websites, technologies and products, and this may adversely affect our business.

 

Activities of advertisers or publishers in our network could damage our reputation or give rise to legal claims against us.

 

    The promotion of the products and services by publishers in our network may not comply with federal, state and local laws, including but not limited to laws and regulations relating to the Internet. Failure of our publishers to comply with federal, state or local laws or our policies could damage our reputation and adversely affect our business, results of operations or financial condition. We cannot predict whether our role in facilitating our customers’ marketing activities would expose us to liability under these laws. Any claims made against us could be costly and time-consuming to defend. If we are exposed to this kind of liability, we could be required to pay substantial fines or penalties, redesign our business methods, discontinue some of our services or otherwise expend resources to avoid liability.

 

    We also may be held liable to third parties for the content in the advertising we deliver on behalf of our publishers. We may be held liable to third parties for content in the advertising we serve if the music, artwork, text or other content involved violates the copyright, trademark or other intellectual property rights of such third parties or if the content is defamatory, deceptive or otherwise violates applicable laws or regulations. Any claims or counterclaims could be time consuming, result in costly litigation or divert management’s attention.

We depend on third-party Internet, telecommunications and technology providers for key aspects in the provision of our services and any failure or interruption in the services that third parties provide could disrupt our business.

 

    We depend heavily on several third-party providers of Internet and related telecommunication services, including hosting and co-location facilities, as well as providers of technology solutions, including software developed by third party vendors, in delivering our services. In addition, we use third party vendors to assist with product development, campaign deployment, video streaming for Betawave TV and support services for some of our products and services. These companies may not continue to provide services or software to us without disruptions in service, at the current cost or at all.

 

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    If the products and services provided by these third-party vendors are disrupted or not properly supported, our ability to provide our products and services would be adversely impacted. In addition, any financial or other difficulties our third party providers face may have negative effects on our business, the nature and extent of which we cannot predict. While we believe our business relationships with our key vendors are good, a material adverse impact on our business would occur if a supply or license agreement with a key vendor is materially revised, is not renewed or is terminated, or the supply of products or services were insufficient or interrupted. The costs associated with any transition to a new service provider could be substantial, require us to reengineer our computer systems and telecommunications infrastructure to accommodate a new service provider and disrupt the services we provide to our customers. This process could be both expensive and time consuming and could damage our relationships with customers.

   

    In addition, failure of our Internet and related telecommunications providers to provide the data communications capacity in the time frame we require could cause interruptions in the services we provide. Unanticipated problems affecting our computer and telecommunications systems in the future could cause interruptions in the delivery of our services, causing a loss of revenues and potential loss of customers.

More individuals are using non-PC devices to access the Internet. We may be unable to capture market share for advertising on these devices.

 

    The number of people who access the Internet through devices other than personal computers, including mobile telephones, smart phones, handheld computers and video game consoles, has increased dramatically in the past few years. Most of the publishers in our network originally designed their services for rich, graphical environments such as those available on desktop and laptop computers. The lower resolution, functionality and memory associated with alternative devices make the use of these websites difficult and the publishers in our network developed for these devices may not be compelling to users of alternative devices. In addition, the creative advertising solutions that thrive in rich environments may be less attractive to advertisers on these devises. The use of such creative advertising is part what makes our services attractive to advertisers and is what most contributes to our margins. If we are slow to develop services and technologies that are more compatible with non-PC communications devices or if we are unable to attract and retain a substantial number of publishers that focus on alternative device users to our online services, we will fail to capture a significant share of an increasingly important portion of the market for online services, which could adversely affect our business.

RISKS RELATED TO OUR INDUSTRY

Anything that causes users of websites on our network to spend less time on their computers, including seasonal factors and national events, may impact our profitability.

 

    Anything that diverts users of our network from their customary level of usage could adversely affect our business. Geopolitical events such as war, the threat of war or terrorist activity, and natural disasters such as hurricanes or earthquakes all could adversely affect our profitability. Similarly, our results of operations historically have varied seasonally because many of our users reduce their activities on our website with the onset of good weather during the summer months, and on and around national holidays.

If the delivery of Internet advertising on the Web is limited or blocked, demand for our services may decline.

 

    Our business may be adversely affected by the adoption by computer users of technologies that harm the performance of our services. For example, computer users may use software designed to filter or prevent the delivery of Internet advertising; block, disable or remove cookies used by our ad serving technologies; prevent or impair the operation of other online tracking technologies; or misrepresent measurements of ad penetration and effectiveness. We cannot assure you that the proportion of computer users who employ these or other similar technologies will not increase, thereby diminishing the efficacy of our products and services. In the event that one or more of these technologies became more widely adopted by computer users, demand for our products and services would decline.

Advertisers may be reluctant to devote a portion of their budgets to marketing technology and data products and services or online advertising.

 

    Companies doing business on the Internet, including us, must compete with traditional advertising media, including television, radio, cable and print, for a share of advertisers' total marketing budgets. Potential customers may be reluctant to devote a significant portion of their marketing budget to online advertising or marketing technology and data products and services if they perceive the Internet to be a limited or ineffective marketing medium. Any shift in marketing budgets away from marketing technology and data products or services or online advertising spending, or our offerings in particular, could materially and adversely affect our business, results of operations or financial condition. In addition, online advertising could lose its appeal to those advertisers using the Internet as a result of its ad performance relative to other media.

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The lack of appropriate measurement standards or tools may cause us to lose customers or prevent us from charging a sufficient amount for our products and services.

 

    Because many online marketing technology and data products and services remain relatively new disciplines, there is often no generally accepted methods or tools for measuring the efficacy of online marketing and advertising as there are for advertising in television, radio, cable and print. Therefore, many advertisers may be reluctant to spend sizable portions of their budget on online marketing and advertising until more widely accepted methods and tools that measure the efficacy of their campaigns are developed.

 

    We could lose customers or fail to gain customers if our services do not utilize the measuring methods and tools that may become generally accepted. Further, new measurement standards and tools could require us to change our business and the means used to charge our customers, which could result in a loss of customer revenues and adversely impact our business, financial condition and results of operation.

We may infringe on third-party intellectual property rights and could become involved in costly intellectual property litigation.

 

    Other parties claiming infringement by the advertisements or video content on the sites in our network could sue us. We may be liable to third parties for elements of advertising campaigns designed by us, which may violate the copyright, trademark, or other intellectual property rights of such third parties.

 

    In addition, any future claims, with or without merit, could impair our business and financial condition because they could:

 

	●	result in significant litigation costs;
	●	divert the attention of management;
	●	divert resources;
	●	require us to enter into royalty and licensing agreements that may not be available on terms acceptable to us or at all; or
	●	require us to stop using the intellectual property that is the subject of the claim.

 

We may experience unexpected expenses or delays in service enhancements if we are unable to license third-party technology on commercially reasonable terms.

 

    We rely on a variety of technology that we license from third parties. These third-party technology licenses might not continue to be available to us on commercially reasonable terms or at all. If we are unable to obtain or maintain these licenses on favorable terms, or at all, our ability to efficiently deliver advertisements at the best rates available might be impaired and this would adversely impact our business.

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It is not yet clear how laws designed to protect children that use the Internet may be interpreted and enforced, and whether new similar laws will be enacted in the future which may apply to our business in ways that may subject us to potential liability.

 

    The Children’s Online Privacy Protection Act (“COPPA”) imposes civil penalties for collecting personal information from children under the age of 13 without complying with the requirements of COPPA. Publishers in our network may violate COPPA on their websites. Although COPPA is a relatively new law, the Federal Trade Commission (the “FTC”) has recently been more active in enforcing violations with COPPA. In the last two years, the FTC has brought a number of actions against website operators for failure to comply with COPPA requirements, and has imposed fines of up to $3 million. Future legislation similar to these Acts could subject us to potential liability if we were deemed to be noncompliant with such rules and regulations.

Increasing governmental regulation of the Internet could harm our business.

 

    The publishers in our network are subject to the same federal, state and local laws as other companies conducting business on the Internet. Today there are relatively few laws specifically directed towards conducting business on the Internet. However, due to the increasing popularity and use of the Internet, many laws and regulations relating to the Internet are being debated at the state and federal levels. These laws and regulations could cover issues such as user privacy, freedom of expression, pricing, fraud, quality of products and services, advertising, intellectual property rights and information security. Furthermore, the growth and development of Internet commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies conducting business over the Internet.

 

    Applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, libel, obscenity and personal privacy could also harm our business. The majority of these laws were adopted before the advent of the Internet, and do not contemplate or address the unique issues raised by the Internet. The courts are only beginning to interpret those laws that do reference the Internet, such as the Digital Millennium Copyright Act and COPPA, and their applicability and reach are therefore uncertain. These current and future laws and regulations could harm our business, results of operation and financial condition.

 

    In addition, several telecommunications carriers have requested that the Federal Communications Commission regulate telecommunications over the Internet. Due to the increasing use of the Internet and the burden it has placed on the current telecommunications infrastructure, telephone carriers have requested the FCC to regulate Internet service providers and impose access fees on those providers. If the FCC imposes access fees, the costs of using the Internet could increase dramatically which could result in the reduced use of the Internet as a medium for commerce and have a material adverse effect on our Internet business operations.

We depend on the growth of the Internet and Internet infrastructure for our future growth, and any decrease or less than anticipated growth in Internet usage could adversely affect our business prospects.

 

    Our future revenues and profits, if any, depend upon the continued widespread use of the Internet as an effective commercial and business medium. Factors which could reduce the widespread use of the Internet include:

 

	●	possible disruptions or other damage to the Internet or telecommunications infrastructure;
	●	failure of the individual networking infrastructures of our merchant advertisers and distribution partners to alleviate potential overloading and delayed response times;
	●	a decision by merchant advertisers to spend more of their marketing dollars in offline areas;
	●	increased governmental regulation and taxation; and
	●	actual or perceived lack of security or privacy protection.

 

    In addition, websites have experienced interruptions in their service as a result of outages and other delays occurring throughout the Internet network infrastructure, and as a result of sabotage, such as electronic attacks designed to interrupt service on many websites. The Internet could lose its viability as a commercial medium due to reasons including increased governmental regulation or delays in the development or adoption of new technologies required to accommodate increased levels of Internet activity. If use of the Internet does not continue to grow, or if the Internet infrastructure does not effectively support our growth, our revenues and results of operations could be materially and adversely affected.

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RISKS RELATED TO OUR COMMON STOCK

You may have difficulty trading our common stock as there is a limited public market for shares of our common stock.

 

    Our common stock is currently quoted on the NASD’s OTC Bulletin Board under the symbol “BWAV.OB.” Our common stock is not actively traded and there is a limited public market for our common stock. As a result, a stockholder may find it difficult to dispose of, or to obtain accurate quotations of the price of, our common stock. This severely limits the liquidity of our common stock, and would likely have a material adverse effect on the market price for our common stock and on our ability to raise additional capital. An active public market for shares of our common stock may not develop, or if one should develop, it may not be sustained.

Applicable SEC rules governing the trading of “penny stocks” may limit the trading and liquidity of our common stock which may affect the trading price of our common stock.

 

    Our common stock is currently quoted on the NASD’s OTC Bulletin Board. On November 13, 2009, the closing bid price of our common stock was $0.04 per share. Stocks such as ours which trade below $5.00 per share are generally considered “penny stocks” and subject to SEC rules and regulations which impose limitations upon the manner in which such shares may be publicly traded. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.

There is a limited public market for shares of our common stock, which may make it difficult for investors to sell their shares.

 

    There is a limited public market for shares of our common stock. An active public market for shares of our common stock may not develop, or if one should develop, it may not be sustained. Therefore, investors may not be able to find purchasers for their shares of our common stock.

The price of our common stock has been and is likely to continue to be highly volatile, which could lead to losses by investors and costly securities litigation.

 

    The trading price of our common stock has been and is likely to continue to be highly volatile and could fluctuate in response to factors such as:

 

	●	actual or anticipated variations in our operating results;
	●	actual or anticipated variations in our operating results;
	●	announcements of technological innovations by us or our competitors;
	●	announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
	●	adoption of new accounting standards affecting our industry;
	●	additions or departures of key personnel ;
	●	introduction of new services by us or our competitors;
	●	sales of our common stock or other securities in the open market;
	●	conditions or trends in the Internet and online commerce industries; and
	●	other events or factors, many of which are beyond our control.

 

    The stock market has experienced significant price and volume fluctuations, and the market prices of stock in technology companies have been highly volatile. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been initiated against the Company. Litigation initiated against us, whether or not successful, could result in substantial costs and diversion of our management’s attention and resources, which could harm our business and financial condition.

We do not anticipate dividends to be paid on our common stock, and stockholders may lose the entire amount of their investment.

 

    A dividend has never been declared or paid in cash on our common stock, and we do not anticipate such a declaration or payment for the foreseeable future. We expect to use future earnings, if any, to fund business growth. Therefore, stockholders will not receive any funds absent a sale of their shares. We cannot assure stockholders of a positive return on their investment when they sell their shares, nor can we assure that stockholders will not lose the entire amount of their investment.

Securities analysts may not initiate coverage or continue to cover our common stock, and this may have a negative impact on our market price.

 

    The trading market for our common stock will depend, in part, on the research and reports that securities analysts publish about us and our business. We do not have any control over these analysts. There is no guarantee that securities analysts will cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect its market price. If we are covered by securities analysts, and our stock is downgraded, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

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You may experience dilution of your ownership interests because of the future issuance of additional shares of our common stock and our preferred stock.

 

    In the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our present stockholders. We are currently authorized to issue an aggregate of 410,000,000 shares of capital stock consisting of 400,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of "blank check" preferred stock, par value $0.001 per share, of which we have designated 8,003,000 of such shares of Series A preferred stock. As of November 13, 2009, there were: (i) 29,229,284 shares of common stock outstanding; (ii) 7,065,293 shares of Series A preferred stock outstanding; (iii) 102,658,397 shares reserved for issuance upon the exercise of options granted or available for grant under our 2004 stock plan, our 2006 equity incentive plan, our 2007 non-qualified stock option plan and our 2008 stock incentive plan; and (iv) 67,351,020 shares reserved for issuance upon the exercise of outstanding warrants.

 

    We may also issue additional shares of our common stock or other securities that are convertible into or exercisable for common stock in connection with hiring or retaining employees or consultants, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes. The future issuance of any such additional shares of our common stock or other securities may create downward pressure on the trading price of our common stock. There can be no assurance that we will not be required to issue additional shares, warrants or other convertible securities in the future in conjunction with hiring or retaining employees or consultants, future acquisitions, future sales of our securities for capital raising purposes or for other business purposes, including at a price (or exercise prices) below the price at which shares of our common stock are currently quoted on the OTC Bulletin Board.

Even though we are not a California corporation, our common stock could still be subject to a number of key provisions of the California General Corporation Law.

 

    Under Section 2115 of the California General Corporation Law (the “CGCL”), corporations not organized under California law may still be subject to a number of key provisions of the CGCL. This determination is based on whether the corporation has significant business contacts with California and if more than 50% of its voting securities are held of record by persons having addresses in California. In the immediate future, we will continue the business and operations of GoFish Technologies Inc. and a majority of our business operations, revenues and payroll will be conducted in, derived from, and paid to residents of California. Therefore, depending on our ownership, we could be subject to certain provisions of the CGCL. Among the more important provisions are those relating to the election and removal of directors, cumulative voting, standards of liability and indemnification of directors, distributions, dividends and repurchases of shares, shareholder meetings, approval of certain corporate transactions, dissenters’ and appraisal rights, and inspection of corporate records.

Panorama Capital, L.P., Rembrandt Venture Partners Fund Two, L.P., Rembrandt Venture Partners Fund Two-A, L.P. and Rustic Canyon Ventures III, L.P., whose interests may not be aligned with yours, collectively control approximately 66% of our company, which could result in actions of which you or other stockholders do not approve.

 

    In two closings that occurred on December 3, 2008 and December 12, 2008, we completed a $22.5 million preferred stock financing pursuant to the terms of a securities purchase agreement dated December 3, 2008 that we entered into with Panorama Capital, L.P. (“Panorama”), Rembrandt Venture Partners Fund Two, L.P. (“Rembrandt Fund Two”), Rembrandt Venture Partners Fund Two-A, L.P. (“Rembrandt Fund Two-A” and, together with Rembrandt Fund Two, “Rembrandt”) and Rustic Canyon Ventures III, L.P. (“Rustic” and, together with Panorama and Rembrandt, the “Lead Investors”). The Lead Investors currently own, collectively, approximately 66% of our outstanding shares of common stock, assuming the conversion of Series A preferred stock. Prior to the December 2008 financing, the Lead Investors did not own any shares of our common stock.

 

    In addition, pursuant to the investors’ rights agreement we entered into with the Lead Investors in connection with the December 2008 financing, we granted the following rights: (i) Panorama has the right to designate one board member for so long as Panorama shall own not less than 16,666,667 shares of common stock issued or issuable upon conversion of Series A preferred stock, (ii) Rustic has the right to designate one board member for so long as Rustic shall own not less than 12,500,000 shares of common stock issued or issuable upon conversion of Series A preferred stock, (iii) Rembrandt has the right to designate one board member for so long as Rembrandt shall own not less than 8,333,333 shares of common stock issued or issuable upon conversion of Series A preferred stock and (iv) Internet Television Distribution, Inc. and its affiliates have the right to appoint one board member for so long as Internet Television Distribution, Inc. shall own not less than 3,088,240 shares of common stock issued or issuable upon conversion of Series A preferred stock. The investors’ rights agreement also provides that each investor party to the investors’ rights agreement shall take all actions necessary within its control so that for as long as Panorama owns at least 16,666,667 shares of common stock issued or issuable upon conversion of Series A preferred stock, (i) the compensation committee of the board of directors shall consist of three members, at least two of which shall be directors appointed by the Lead Investors as stated above, and (ii) each committee of the board of directors shall include, at the option of Panorama, the member of the board of directors designated by Panorama.

 

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    As a result of the foregoing, and provided that the Lead Investors do vote their shares together, they will be able to determine a significant part of the composition of our board of directors, will hold significant voting power with respect to matters requiring stockholder approval and will be able to exercise significant influence over our operations. The interests of the Lead Investors may be different than the interests of other stockholders on these and other matters. This concentration of ownership also could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could reduce the price of our common stock.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

    During the period July 1, 2009 through September 30, 2009, we issued an aggregate of 562,500 stock options under our 2007 Non-Qualified Stock Plan to two individuals. The options have exercise prices between $0.08 and $0.20. The issuance of the options was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof and Regulation D promulgated thereunder. None of the securities were sold through an underwriter and accordingly, there were no underwriting discounts or commissions involved in the sale of the Series A Preferred and the Related Warrants.

 
 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

 

    None.

 
 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

On September 17, 2009, we held our 2009 Annual Meeting of Stockholders (the “2009 Annual Meeting”).  The results of the proposals voted on at the 2009 Annual Meeting were as follows:

1. Each of the following director nominees was re-elected to our board of directors to serve until his respective successor is duly elected and qualified:

	Nominee		For				Withheld
	John Durham			133,098,855				1,616,471
	Matt Freeman			134,254,953				460,373
	Michael Jung			133,098,855				1,616,471
	Richard Ling			133,098,855				1,616,471
	Mark Menell			133,118,855				1,596,471
	James Moloshok			134,264,953				450,373
	Riaz Valani			134,254,953				460,373
	Tabreez Verjee			134,254,953				460,373

2. Our stockholders ratified the selection of Rowbotham & Company LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2009 (with 133,356,666 shares voting for, 1,188,660 shares voting against and 170,000 shares abstaining).

 

3. Our stockholders approved the reincorporation of the Company from the State of Nevada to the State of Delaware (including the form of the plan of conversion to accomplish such reincorporation, together with the exhibits thereto, and the transactions contemplated thereby) (with 134,529,295 shares voting for, 188,031 shares voting against and 1,000 shares abstaining).

 

ITEM 5.

OTHER INFORMATION.

    On November 16, 2009, we issued a press release regarding our results for the quarter ended September 30, 2009. The text of this press release is attached hereto as Exhibit 99.1. The information in this Item 5 and Exhibit 99.1 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filing under the Securities Act or the Exchange Act, regardless of any general incorporation language in such filing.

ITEM 6.

EXHIBITS.