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EX-31.2 - CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER - Betawave Corp.exhibit_312.htm
EX-32.2 - CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER - Betawave Corp.exhibit_322.htm
EX-31.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER - Betawave Corp.exhibit_311.htm
EX-32.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER - Betawave Corp.exhibit_321.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2009
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to _____________
 
Commission file number: 333-131651
 
BETAWAVE CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
20-2471683
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
706 Mission Street, 10th Floor
San Francisco, CA 94103
(Address of principal executive offices) (Zip Code)
 
(415) 738-8706
(Registrant’s telephone number, including area code)
                 
Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.o Yes    x No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  o Yes  x No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes    x No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x Yes    o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
   
Non-accelerated filer (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 Act).  o Yes  x No
 
The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the last sales price on the OTC Bulletin Board of the National Association of Securities Dealers, Inc. (“NASD”) on June 30, 2009, was approximately $2,354,670.  For purposes of this calculation, the registrant has assumed that only shares beneficially held by executive officers and directors of the registrant are deemed shares held by affiliates of the registrant.  This assumption of affiliate status is not necessarily a conclusive determination of affiliate status for any other purpose.
 
The number of shares outstanding of the registrant’s common stock, $0.001 par value per share, as of March 26, 2010 was 29,230,284 shares.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
None.
 
 

 
TABLE OF CONTENTS
 
Page
 
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I
   
 
ITEM 1.
BUSINESS
 1
 
ITEM 1A.
RISK FACTORS
 7
 
ITEM 1B.
UNRESOLVED STAFF COMMENTS
 21
 
ITEM 2.
PROPERTIES
 21
 
ITEM 3.
LEGAL PROCEEDINGS
 22
 
ITEM 4.
(REMOVED AND RESERVED)
 22
PART II
   
 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 22
 
ITEM 6.
SELECTED FINANCIAL DATA
 26
 
ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 27
 
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 38
 
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 39
 
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 39
 
ITEM 9A.
CONTROLS AND PROCEDURES
 39
 
ITEM 9B.
OTHER INFORMATION
 41
PART III
   
  ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE  42
  ITEM 11. EXECUTIVE COMPENSATION  45
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS  50
  ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE  52
  ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES  53
PART IV
   
 
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
53
 SIGNATURES  S-1
 EXHIBIT INDEX  S-2
 FINANCIAL STATEMENTS   F-1
 
 
 

 
 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
    This Annual Report on Form 10-K contains forward-looking statements.  This Annual Report on Form 10-K includes statements regarding our plans, goals, strategies, intentions, beliefs or current expectations.  These statements are expressed in good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved or accomplished.  These forward-looking statements can be identified by the use of terms and phrases such as “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions “may,” “could,” “should,” etc.  Items contemplating or making assumptions about, actual or potential future sales, market size, collaborations, and trends or operating results also constitute such forward-looking statements.  Forward-looking statements in this Annual Report on Form 10-K include, but are not limited to, statements regarding the following subject matters:
 
 •   expectations and estimates about our market and the trends in our market, including, among other things, the buying power of our targeted demographics;
 •
 
  expectations about our revenues, expenses and operating results; and
 •   expectations about our growth and future success.
 
    Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our management, forward-looking statements are inherently subject to known and unknown risks, business, economic and other risks and uncertainties that could cause actual results to be materially different from those expressed or implied in these forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Annual Report on Form 10-K, and in particular, the risks discussed under the heading “Risk Factors” in Item 1A of this Annual Report on Form 10-K and those discussed in other documents we file with the Securities and Exchange Commission (the “SEC”).
 
    Given these risks and uncertainties, readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K.  We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.  Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the SEC which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows.  If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results could vary materially from those expected or projected.
 
PART I
 
  ITEM 1.
BUSINESS.
 
Company Overview
   
    Betawave Corporation (the “Company,” “we,” “our,” or “us”) sells online advertising for a portfolio of websites (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.

 
1

 
Our History
 
    Our business was originally conducted by GoFish Technologies, Inc. (“GoFish Technologies”), which was originally incorporated in California in May 2003.  GoFish Technologies originally operated a multimedia search service, delivering targeted results for Internet searches conducted on digital media content from the entertainment and media sectors.  During the third quarter of 2005, due to the increasing popularity of user-generated video, GoFish Technologies refined its focus to aggregating original short-form and user-generated video.
 
   In order to obtain additional financing to continue its operations, in October 2006, GoFish Technologies completed a reverse merger and related transactions, which also resulted in the business of GoFish Technologies being acquired by a publicly-traded company.  These transactions consisted principally of three parts.  In the first part of these transactions, GoFish Technologies merged with and into GF Acquisition Corp. (“GF Acquisition Corp.”), a wholly-owned subsidiary of Betawave Corporation (formerly known as Unibio Inc. until September 14, 2006 and then as GoFish Corporation until January 20, 2009) (“Betawave Corporation”), which was originally a publicly-traded “shell company” as that term is defined in Rule 405 of the Securities Act of 1933, as amended, and Rule 12b-2 of the Securities Exchange Act of 1934, as amended.  In the second part of these transactions, ITD Acquisition Corp., a wholly-owned subsidiary of Betawave Corporation, merged with and into Internet Television Distribution Inc., a Delaware corporation (“ITD”) (collectively both the GoFish Technologies and the ITD mergers are referred to herein as the “mergers”).  In the third part of these transactions, Betawave Corporation split off a wholly-owned subsidiary, GF Leaseco, Inc. (“GF Leaseco”), through the sale of all of the outstanding capital stock of GF Leaseco to the former owners of Betawave Corporation.
 
    As a result of the mergers, Betawave Corporation acquired the business of GoFish Technologies and continued its business operations as a publicly-traded company whose common stock is quoted on the NASD’s OTC Bulletin Board.  Also, as a result of the mergers, GoFish Technologies and ITD became wholly-owned subsidiaries of Betawave Corporation. ITD has since been merged with and into Betawave Corporation and no longer exists as a separate corporate entity.
 
    During 2007, Betawave Corporation made a strategic decision to focus on a segment of its business where it saw an attractive market opportunity and began building a network of youth oriented websites for which it could sell advertising and deliver premium content.  As a result of its success in the youth market, the Company expanded its focus to include “moms.”  In December 2008, Betawave Corporation completed a $22.5 million preferred stock financing. In January 2009, Betawave Corporation changed its name from GoFish Corporation to Betawave Corporation. In September 2009, Betawave Corporation reincorporated from the State of Nevada to the State of Delaware. In March 2010, Betawave Corporation completed a convertible debt and warrant financing under which it has raised approximately $2.4 million and, under the terms of the financing, has 45 days to raise additional funds to bring the total financing up to $3 million.
 
Business Operations
 
    Betawave represents a portfolio of high quality websites and sells their advertising inventory. We specialize in delivering quality advertising to large audiences of highly-engaged users through innovative ad formats that go “beyond the banner.”  We offer marketers broad reach into a targeted audience in desirable editorial environments.  We combine the scale of a portal or advertising network, with the custom programs and client focus of a niche publisher.
 
 
2

 
    The Betawave Network delivers scale with a unique monthly audience of over 38 million domestically.  Publishers in the Betawave Network represent leaders in the most popular categories of websites enjoyed by Internet users today, including virtual worlds, online games, educational, informational and photo sharing sites.  We work with publishers to ensure that their brand is well positioned and their website is maximized for monetization through standard and immersive advertising experiences.
 
    To ensure that we consistently offer the highest level of service to publishers and advertisers, we are highly discriminate in our selection of publishers.  We ensure that the Betawave Network is comprised of quality publishers that have unique value propositions for marketers and advertisers trying to reach youth and moms.  Some of the publishers in the Betawave portfolio are:
 
·  
Spil Games (www.girlsgames.com, agame.com, a10.com, girlsgogames.com), the world’s #1 global gaming site and one of the top 50 most visited online properties in the world;
 
·  
Shutterfly (www.shutterfly.com) the leading site for publishing, sharing and printing memories and has an audience primarily composed of moms and families: memory makers; and
 
·  
Juice Box Jungle (www.juiceboxjungle.com), the creator of a new type of online advertising unit, the “JuiceBox”, a widget that is prominently displayed on over 360 of the top mom blogs (including almost half the Nielsen Power 50 blogs).
 
    We enter into agreements with our publishers where we are responsible for selling their advertising inventory. Generally, these relationships are exclusive and allow us to decide how we sell the advertising inventory, what we sell and to whom we sell it. Our publishers are able to take advantage of several distinctive attributes of the Company that are not easily found in our competitors, including highly interactive and customized digital advertising products, creative cooperation with our publishers that allows us to tightly integrate brand messaging with online publisher environments and our commitment to editorial partnerships with our publishers to guarantee premium placement and target audience viewership.
 
    Our advertisers also benefit from those corporate attributes. In addition, we provide advertising effectiveness research to ascertain campaign success, beyond the click-through-rate, demonstrating the value Betawave creates as a platform for effective branding. As a result, we have secured advertising buys from strong brands, including four of the biggest spenders against kids and moms online.  Our advertisers fall into various categories, including consumer packaged goods (e.g. Kellogg’s, General Mills, Procter & Gamble), entertainment (e.g. Disney, Cartoon Network, Lionsgate), consumer electronics and software (e.g. Sony, Electronics Arts, Nintendo, Ubisoft) and retail (e.g. Lego, Hasbro, Sears).
 
    The advertising that we sell on the publisher sites in the Betawave Network can be divided into two categories: Direct Sales and Remnant Inventory.
 
Direct Sales
 
    The majority of our revenues come from direct sales to brand advertisers. Direct sales of advertising can take the following two forms:
 
·  
IAB Graphical Advertising – IAB graphical advertising is standard banner and text ads where advertisers pay a cost per thousand impressions (“CPM”) fee directly to us.  Banners are ad graphics hyperlinked to the URL of the advertiser or to a custom landing page within the Betawave portfolio.  This form of online advertising entails embedding an advertisement on a web page.  It is intended to attract traffic to the advertiser’s website by linking them from the ad on a website to the website of the advertiser, to initiate an action within the site where the banner is embedded (i.e. watch a movie trailer), or to increase metrics on brand awareness.  The banner advertisement is constructed from an image (GIF, JPEG, PNG), JavaScript program or multimedia object employing technologies such as Java, Shockwave or Flash.
 
·  
Rich Media/Immersive Advertising – We also provide custom marketing opportunities to brands by tailoring advertising solutions to specific needs and leveraging the rich, immersive environments of publishers in the Betawave portfolio.  These include roadblocks, front page takeovers, rich media ads, video and interstitial ads, custom integration in leading virtual worlds, advergames and custom sponsorships.  These opportunities provide for the highest CPMs, which start at $10, and are developed on a custom basis with the goal of productizing the solution for future advertisers and campaigns. These custom advertisements represent the company’s specialty and a significant focus of our sales efforts to advertisers.
 
    Our blended CPM on direct sales advertising is currently over $5.
 
 
3

 
Remnant Inventory
 
    Advertising inventory on a website that is not sold directly to an advertiser is referred to as “remnant inventory.”  Publishers typically monetize this inventory, at a small fraction of direct sales, through third-party ad networks (ValueClick, Tribal Fusion, and Advertising.com) and ad network exchanges (Right Media and ContextWeb).  We offer our publishers the ability to achieve a higher rate of return on their remnant inventory through our network of partnerships.  Our service is designed to be easy to implement and lifts the operational minutia and complexity for publishers of having to monetize remnant inventory.
 
    In addition, we may monetize a percentage of remnant inventory through cost per click (“CPC”) or cost per action (“CPA”) campaigns.  In the case of CPC advertisements, advertisers will pay fees per click-throughs to their site generated from ads placed throughout the website.  CPA banners placed throughout the website generate fees only when an action occurs as a result of the click-through on an individual advertisement.  That action may be a purchase, a registration, or some other transaction.  We do not currently have, or plan to have, any CPC or CPA campaigns.  However, we may choose to include these formats in the future.
 
Sales and Marketing
 
    We sell our inventory and marketing services in the United States through a sales and marketing organization that consisted of 23 employees as of March 31, 2010.  These employees are located at our headquarters in San Francisco (California) and New York (New York) and also are based in our sales offices in Los Angeles (California) and Chicago (Illinois).  The team is focused on selling advertising space on the websites in the Betawave Network to top quality brands and their advertising agencies.
 
    In addition, we operate a business development team tasked with sourcing, securing and retaining quality publishers into the Betawave Network.  These employees are located at our headquarters in San Francisco.  They keep current with the latest online trends in our targeted demographics and are responsible for finding and securing relationships with a broad network of sites that extends the reach of the Betawave portfolio.
 
Market
 
    Our market consists of publishers that operate websites with large, deeply engaged audiences and advertisers interested in reaching consumers online within our target demographics.  Publisher websites provide a platform for effective and targeted advertising to Internet users.  Our advertisers provide us with revenue by paying us to promote their brands, products and services on the websites in the Betawave Network.
 
    Due to the economic downturn, eMarketer decreased their forecast for online ad spending in 2009 to $22.4 billion, down 4.7% from $23.4 billion in 2008. This marks the first drop in online advertising spending since 2002. eMarketer believes the economic cycle has reached bottom for the online advertising industry and projects that it will return to growth in 2010 and will increase to $31.0 billion by 2013. Online advertising spending was affected less than other areas of US Total Media AD Spending, which decreased 14.6% in 2009.
 
 
4

 
    We believe that advertisers must reach consumers online as this is where they are increasingly spend more of their time compared to other media.  eMarketer projects that Internet ad spend growth will eventually surpass all other major media. According to Outsell, a research group, spending on online advertising and marketing will overtake print in 2010 for the first time.
 
    Betawave breaks down its advertising opportunities into demographic categories, which is how brand advertisers tend to view their audiences. Originally, Betawave served the 6-17 year old demographic and later expanded to a second demographic of “moms” when it found a high concentration of women in the same websites that their children used.  The youth demographic tends to be on the cusp of the most recent online trends, including gaming, virtual worlds and social networking.  Kids and teens also represent an important consumer segment.  According to Packaged Facts, a consumer goods market research company, teens alone have an estimated total annual aggregate income of $80 billion, while the buying power of kids is expected to total $21.4 billion in 2010.  Combined, kids and teens influence an estimated additional $225 billion in spending by their parents.
 
    There are an estimated 31.5 million 6 to 17 year old Internet users per month in the U.S (source: comScore Media Metrix) and eMarketer estimates that 82% of US teens ages 12 to 17 and 43.5% of children ages 3 to 11 will used the Internet on a monthly basis in 2009. Approximately 48% of consumers between the ages of 8 and 12 spend two hours online every day, according to eMarketer, while 24% of teens between 13 and 17 spend more than 15 hours online each week. An article by AdAge suggests that the rise of social-networking sites, online video and applications for portable media devices will further drive up the hours young consumers spend with, eroding the advertising base of television.
 
    In addition, there are an estimated 50 million moms in the U.S. today with spending power estimated at $2.1 trillion.  This is projected to grow to $3 trillion by 2012.  According to Nielsen NetRatings, 32 million of these women in the U.S. who have children under 18 go online, which translates to about 64% of all moms and 40% of all women online in the U.S. today. Although moms go online for their own enjoyment, many spend time monitoring their child’s behavior, including as much as 47% of women with children ages 12-17 who use social networking sites, according to a study by Razorfish and CafeMom.
 
    For publishers, Betawave is designed to provide scale, thus increasing mindshare among marketers, while delivering more relevant advertising at premium rates.  We offer our publishers established relationships with brand advertisers and expertise in high impact, cross-network takeovers and sponsorships and immersive experiences. Generally, the publishers in the Betawave Network would not have access to the type and quality of advertising that they receive as a result of their inclusion in the Betawave Network.
 
Competition
 
    We compete against well-capitalized advertising companies as well as smaller companies.  The market for our services is highly competitive.
 
    Advertisers have several options for how to reach consumers online.  Advertisers must first select between the various mediums, including television, radio, direct mail, print media and the Internet, as well as others.  In the online advertising market, we compete for advertising dollars with all websites catering to our target demographics, including portals, large independent sites, and websites belonging to other advertising networks.
 
    Historically, the portals have been a primary vehicle for big brands to reach big audiences online.  However, the portals have largely devolved into utility environments that offer reach rather than attention and engagement. Although advertising networks were once perceived as being less effective than other online channels, MediaPost News reports that the quality of the sales organizations of such networks, in terms of their knowledge, customer service and professionalism, has been closing in on the perceived quality of major publishers, and has actually surpassed that of the major online portals.
 
 
5

 
    Betawave offers an alternative for brand advertisers who are seeking both scale and attention at competitive rates. Betawave has several attributes which we believe allow it to compete very effectively for online advertising dollars.  With over 38 million unique users in the United States, we reach more kids than any other online property (including Nick and Disney) and we are second in reach to moms, according to the comScore Lifestyles category (which excludes portals and social networks).
 
    Publishers have several options to monetize the traffic on their websites.  They can build a direct sales organization to sell the advertising space on their website directly. However, the high cost to build, train and operate such an organization is significant and cost prohibitive for many but the largest websites.  In addition, it requires substantial traffic to achieve advertiser mindshare.
 
    Publishers can also partner with a third party advertising network to sell their advertising.  There are several ways to categorize advertising networks, but they can generally be divided into several categories based on how they target consumers.  The first is performance-based networks, such as Google (AdSense), Valueclick and Advertising.com, which try to use a variety of optimization tools to increase the value of a publisher’s ad inventory.  However, in general, these companies tend to deliver low CPMs, low quality advertisers with low relevance to the sites themselves.  Behavioral-targeting networks, such as Tacoda and Blue Lithium, use a consumer’s past web-surfing habits to target them with relevant ads.  Contextual networks try to match an ad's subject to that of the page on which it appears.  Video and widget networks sell-in videos and widgets.
 
    Finally, publishers can choose to use full-service advertising representation networks that provide a more robust solution when selling advertising.  Some companies, such as Glam and Gorilla Nation, incorporate hundreds of mostly smaller sites into their network.  Betawave, on the other hand, focuses on approximately 20 premium publishers, each one viable as a stand-alone site, and in this way offers a level of service to our publishers and advertisers that is difficult for our competitors to match.  
 
    We believe our company is attractive to publishers in our targeted demographics because of our ability to attract relevant, high quality advertisers at higher CPMs than can otherwise be obtained, similar to a vertical network.  We also believe that we are uniquely positioned with our focus on experience and attention-based media.  Betawave is the only online media company targeted to youth and moms that offers the level of transparency and integration on partner sites.  Alloy Media + Marketing has an online vertical ad network targeting teens, college students and 18-34 year olds.  Glam Media has an online vertical ad network targeting a female audience.  Neither offers the same combination of scale, transparency, and custom advertising opportunities that websites on the Betawave Network offer.
 
Intellectual Property
 
    We currently rely on a combination of copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights.  We also enter into proprietary information and confidentiality agreements with our employees, consultants and commercial partners and generally control access to and distribution of our confidential and proprietary information.  We rely on the technology of third parties to assist us with several aspects of our business.  When doing so, we obtain appropriate licenses which allow us to use that technology.  We have applied for registration of the service mark “BETAWAVE” in the United States.  On March 9, 2010, the U.S. Patent and Trademark Office ("USPTO") issued us a Notice of Allowance for the mark. We intend to promplty file a Statement of Use so that the USPTO will issue a Certificate of Registration for "BETAWAVE."
 
 
6

 
Government Regulation
 
    We are subject to a number of foreign and domestic laws and regulations that affect companies conducting business on the Internet.  Laws applicable to e-commerce, online privacy and the Internet generally are becoming more prevalent and it is possible that new laws and regulations may be adopted regarding the Internet or other online services in the United States and foreign countries.  Such new laws and regulations may address user privacy, advertising, freedom of expression, pricing, content and quality of products and services, taxation, intellectual property rights and information security.  The nature of such legislation and the manner in which it may be interpreted and enforced cannot be fully determined at this time.  Such legislation could subject us and/or our customers to potential liability or restrict our present business practices, which, in turn, could have an adverse effect on our business, results of operations and financial condition.  In addition, the FTC has investigated the privacy practices of several companies that collect information about individuals on the Internet.  The adoption of any such laws or regulations might also decrease the rate of growth of Internet use generally, which, in turn, could decrease the demand for our service or increase our cost of doing business or in some other manner have a material adverse effect on our business, results of operations and financial condition.
 
    The Children’s Online Privacy Protection Act (“COPPA”) imposes civil and criminal penalties on persons distributing material harmful to minors (such as obscene material) over the Internet to persons under the age of 17, or collecting personal information from children under the age of 13.  We do not knowingly collect personal information from children under the age of 13.  We work with our publishers to ensure that they are compliant with both of COPPA and we currently require all new publishers to protect us from any violation of these laws on their website.
 
Employees
 
    As of December 31, 2009, we had 36 full-time employees and 1 part-time employee.  None of our employees is represented by a labor union, and we consider our employee relations to be good.  We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel.
 
Seasonality
 
    Both seasonal fluctuations in internet usage and traditional retail seasonality have affected, and are likely to continue to affect, our business.  Advertisers generally place fewer advertisements during the first and third calendar quarters of each year, which directly affects our business.  Further, Internet user traffic typically drops during the summer months, which reduces the amount of online advertising.  Online advertising has, in the past, peaked during the fourth quarter holiday season.  Advertising expenditures tend to vary in cycles that reflect overall economic conditions as well as budgeting and buying patterns.  Our revenue has been, and will continue to be, affected by these fluctuations.  Our revenue has been, and will continue to be, materially affected by the recent decline in the economic prospects of our customers and the economy and our industry in general, which has had the effect of altering our current and prospective customers’ spending priorities and budget cycles and extending our sales cycle.
 
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 $15.5 million for the year ended December 31, 2009 and a net loss of approximately $17.0 million for the year ended December 31, 2008. As of December 31, 2009, our accumulated deficit was approximately $56.6 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 year ended December 31, 2009 were approximately $7.7 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.

 
7

 
The effects of the recent global economic crisis has impacted and may continue to impact our business, operating results, or financial condition.
 
    The recent 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 recent 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 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.

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 years ended December 31, 2009 and 2008, revenues from our five largest advertisers accounted for 30% and 36%, respectively, of our revenues. For the years ended December 31, 2009 and 2008, our largest advertiser accounted for 7% 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 years ended December 31, 2009 and 2008, advertising revenues connected to our largest publisher accounted for approximately 58% 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.

We recently replaced the largest publisher in our network.
 
    Our advertising agreement with Miniclip, Ltd. (“Miniclip”) expired in accordance with its terms on December 31, 2009.  Although we replaced Miniclip with Spil Games, a publisher with more users and an offering which can be, in many ways, superior to advertisers, it may be difficult for us to implement this change without suffering a loss in our revenues. Miniclip was the Company’s longest tenured publisher and historically accounted for the majority of our revenue. Therefore, the loss of the site may have a materially adverse effect on our financial condition and results of operations.

 
8

 
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 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.
 
We may 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 may 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.
 
    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.

 
9

 
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, 2009, 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, 2009, 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, 2009, 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.

Our 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.
 
During 2009, we 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.

 
10

 
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 allows us to execute advertising campaigns efficiently and 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.

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 common 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 March 26, 2010, a majority of our outstanding employee stock options had exercise prices in excess of our common stock price on that date.

 
11

 
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, 2009, 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, 2009. 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, 2009. 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 December 31, 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.

    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.

 
12

 
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, 2009. 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. On March 15, 2010, Mr. Zehil plead guilty to criminal charges of conspiracy and securities fraud. Mr. Zehil has admitted that he instructed a junior associate at his law firm to send legal opinion letters to the Company’s transfer agent, instructing it to not 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 also admitted engaging in a similar fraudulent scheme with respect to six additional public companies represented at the relevant time by McGuire Woods LLP. Mr. Zehil’s sentencing in the matter is pending. A civil case brought by the SEC is also still pending.
 
    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. In August 2009, Sunrise refiled the lawsuit in New York state court and the company was served with the complaint in January 2010 and has until April 2010 to respond.

    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.

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.
 
 
13

 
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 only 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.

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 or maintain 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 and to maintain those publishers 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, or maintain publishers in, 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.

 
14

 
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.
 
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.
 
 
15

 
    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.
 
    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 devices. 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.

 
16

 
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.
 
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.
 
 
17

 
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.

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 (the “FCC”) 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.
 
 
18

 
    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.

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 March 26, 2010, the closing bid price of our common stock was $0.06 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.
 
 
19

 
    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.

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 7,065,293 of such shares of Series A preferred stock and 2,400,000 of such shares as Series B preferred stock. As of March 26, 2010, there were: (i) 29,230,284 shares of common stock outstanding; (ii) 7,065,293 shares of Series A preferred stock outstanding; (iii) 102,651,233 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) 91,235,379 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.

 
20

 
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 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”). In March 2010, we sold notes and warrants to the Lead Investors for $2,388,436. As a result, the Lead Investors currently own, collectively, approximately 66% of our outstanding shares of common stock, assuming the conversion of Series A preferred stock, in addition to notes which are convertible into Series B preferred stock and warrants to purchase additional common stock of the Company. 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.
 
    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 1B.
UNRESOLVED STAFF COMMENTS.
 
    Not applicable.
 
  ITEM 2.
PROPERTIES.
 
    Our executive offices are located at 706 Mission Street, 10th Floor, San Francisco, California 94103, and our telephone number is (415) 738-8706.  Our executive offices in San Francisco consist of approximately 10,000 square feet, and we currently lease the facilities for $20,010 per month under a lease expiring in April 2010.  Our New York office is located at 120 Wooster Street, 5th Floor, New York, New York.  The New York office consists of approximately 5,000 square feet, and we currently lease it for $17,917 per month under a lease expiring in June 2014.  We have an office in Los Angeles at 4571 Wilshire Blvd. 3rd.  Floor, Los Angeles, California.  The office is approximately 250 square feet plus common areas, and we lease it for approximately $2,900 per month on a month-to-month basis.  We also have an office in Chicago at 221 North LaSalle Street.  The office is approximately 1,100 square feet and we currently lease the facilities for $1,700 per month under a lease expiring in December 31, 2011.
 
 
21

 
  ITEM 3.
LEGAL PROCEEDINGS.
 
    From time to time we may be named in claims arising in the ordinary course of business.  Currently, no legal proceedings, government actions, administrative actions, investigations or claims are pending against us or involve us that, in the opinion of our management, would reasonably be expected to have a material adverse effect on our business and financial condition.
 
    In January 2010, Sunrise Equity Partners, L.P. (“Sunrise”) brought an action against us in the Supreme Court of the State of New York, County 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.  Sunrise had originally filed this suit in United States District Court, Southern District of new York, but later dismissed this suit without prejudice in February 2009. We were served with the complaint in January 2010 and we have until April 2010 to respond to the matter. In the opinion of our management, we do not reasonably expect this case to have a material adverse effect on our business and financial condition.
 
  ITEM 4.
(REMOVED AND RESERVED).
 
 
PART II
 
  ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
    Our common stock is quoted on the OTC Bulletin Board of the National Association of Securities Dealers, Inc. under the symbol “BWAV.OB.” From July 3, 2006 until mid-September 2006 our stock was quoted under the symbol “UBIO.” From mid-September 2006 to February 26, 2009, our stock was quoted under the symbol “GOFH.OB.” From February 27, 2009 to the present, our stock has been quoted under the symbol “BWAV.OB.” The following table sets forth, for the fiscal quarters indicated, the high and low closing bid prices per share of our common stock as reported by the National Association of Securities Dealers composite feed or other qualified interdealer quotation medium.  Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.  Where applicable, the prices set forth below give retroactive effect to our 8.333334-for-1 forward stock split which was effected on October 9, 2006.
 
Quarter Ended
 
High Bid
 
Low Bid
March 31, 2008
 
$
0.57
 
$
0.23
June 30, 2008
 
$
0.42
 
$
0.20
September 30, 2008
 
$
0.37
 
$
0.18
December 31, 2008
 
$
0.32
 
$
0.08
March 31, 2009
 
$
0.24
 
$
0.10
June 30, 2009
 
$
0.18
 
$
0.06
September 30, 2009
 
$
0.12
 
$
0.05
December 31, 2009
 
$
0.14
 
$
0.03
March 31, 2010 (through March 26, 2010)
 
$
0.19
 
$
0.05
 
    As of December 31, 2009, there were 29,230,284 shares of our common stock issued and outstanding.
 
    As of December 31, 2009, there were 89 holders of record of shares of our common stock.
 
 
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Dividend Policy
 
    We have never declared or paid dividends.  We intend to retain earnings, if any, to support the development of the business and therefore do not anticipate paying cash dividends for the foreseeable future.  Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
    As of December 31, 2009, we had the following securities authorized for issuance under (i) the 2004 stock plan, which was the stock option plan that was adopted by GoFish Technologies, Inc. prior to the merger in 2006 merger, (ii) the 2006 equity incentive plan, (iii) the 2007 non-qualified stock option plan (as hereinafter defined) and (iv) the 2008 stock incentive plan (as hereinafter defined):
 
Plan category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)
 
Weighted-average exercise price of outstanding options, warrants and rights
(b)
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
Equity compensation plans approved by security holders
 
3,810,348
 
$
0.16
 
15,414,426
Equity compensation plans not approved by security holders
 
70,977,096
 
$
0.39
 
12,499,363
Total
 
74,787,444
 
$
0.38
 
27,863,789
 
 
    In 2004, the board of directors of GoFish Technologies, Inc. adopted the 2004 stock plan.  The 2004 stock plan authorized the board of directors to grant incentive stock options and non-statutory stock options to employees, directors, and consultants for up to 2,000,000 shares of common stock.  Under the plan, incentive stock options and nonqualified stock options were to be granted at a price that is no less than 100% of the fair value of the stock at the date of grant.  Options will be vested over a period according to the option agreement, and are exercisable for a maximum period of ten years after date of grant.
 
    In May 2006, GoFish Technologies increased the shares reserved for issuance under the 2004 stock plan from 2,000,000 to 4,588,281.  Upon completion of the merger in 2006, we decreased the shares reserved under the 2004 stock plan from 4,588,281 to 804,188 and suspended the 2004 stock plan. There are currently only 138,561 shares outstanding under the 2004 stock plan.
 
2006 Equity Incentive Plan
 
    Immediately prior to the merger in 2006, our board of directors and a majority of our stockholders approved and adopted the 2006 equity incentive plan.  Initially a total of 2,000,000 shares of our common stock was reserved for issuance under the 2006 equity incentive plan.  On October 30, 2006, in accordance with the terms of the 2006 equity incentive plan, our board of directors increased the number of shares reserved under the 2006 equity incentive plan to 4,000,000 shares, subject to approval by our stockholders within one year of such date.  In March 2008, our board of directors suspended the 2006 equity incentive plan. There are currently only 325,729 shares outstanding under the 2006 equity incentive plan stock plan.
 
 
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2007 Non-Qualified Stock Option Plan
 
    On October 24, 2007, our board of directors approved and adopted the 2007 non-qualified stock option plan.  Initially, a total of 3,600,000 shares of our common stock was reserved for issuance under the 2007 non-qualified stock option plan.  In accordance with the terms of the 2007 non-qualified stock option plan, on October 31, 2007, our board of directors increased the number of shares reserved under the 2007 non-qualified stock option plan to 4,000,000; on December 18, 2007, our board of directors increased the number of shares reserved under the 2007 non-qualified stock option plan to 5,500,000 shares; on February 5, 2008, our board of directors further increased the number of shares reserved under the 2007 non-qualified stock option plan to 10,500,000; on June 4, 2008, our board of directors further increased the number of shares reserved under the 2007 non-qualified stock option plan to 16,500,000; on December 2, 2008, our board of directors increased the number of shares reserved under the 2007 non-qualified stock option plan to 69,141,668; and on January 16, 2009, our board of directors increased the number of shares reserved under the 2007 non-qualified stock option plan to 82,963,169 shares, of which 82,962,169 remain outstanding or available for grants.  If an incentive award granted under the 2007 non-qualified stock option plan expires, terminates, is unexercised or is forfeited, or if any shares are surrendered to us in connection with an incentive award, the shares subject to such award and the surrendered shares will become available for further awards under the 2007 non-qualified stock option plan.
 
    Administration.  Our board of directors (or any committee composed of members of our board of directors appointed by our board of directors to administer the 2007 non-qualified stock option plan), administers the 2007 non-qualified stock option 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 2007 non-qualified stock option 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 2007 non-qualified stock option plan.
 
    The 2007 non-qualified stock option plan also contains provisions governing: (i) the treatment of options under the 2007 non-qualified stock option plan upon the occurrence of certain corporate transactions (including merger, consolidation, sale of all or substantially all the assets of the Company, or complete liquidation or dissolution of the Company) and changes in control of the Company, (ii) transferability of options and (iii) tax withholding upon the exercise or vesting of an option.
 
    Grants.  The 2007 non-qualified stock option plan authorizes grants of nonqualified stock options to eligible employees, directors and consultants.  The term of each option under the 2007 non-qualified stock option plan may be no more than ten years from the date of grant.  Options granted under the 2007 non-qualified stock option plan entitle the grantee, upon exercise, to purchase a specified number of shares from us at a specified exercise price per share.  The exercise price for an Option is determined by the administrator, but it cannot be less than the fair market value of our common stock on the date of grant unless agreed to otherwise at the time of the grant.
 
    Duration, Amendment, and Termination.  The 2007 non-qualified stock option plan will continue in effect for a term of ten years, unless sooner terminated.  Our board of directors may at any time amend, suspend or terminate the 2007 non-qualified stock option plan.
 
2008 Stock Incentive Plan
 
    On March 31, 2008, in connection with the suspension of our 2006 equity incentive plan, our board of directors adopted the 2008 stock incentive plan.  As originally adopted, the 2008 stock incentive plan provided for the issuance of up to 2,400,000 shares of 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, our board of directors adopted an amendment to the 2008 stock incentive 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 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, our board of directors adopted an amendment to the 2008 stock incentive plan to increase the maximum aggregate number of shares of common stock that may be issued pursuant to awards granted under the plan from 1,500,000 shares to 19,224,774 shares.  On December 11, 2008, holders of a majority of the outstanding shares of our capital stock approved of the 2008 stock incentive plan, as amended through such date.
 
 
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    Purpose.  The purpose of the 2008 stock incentive plan is to provide our employees (including officers), consultants and directors, whose present and potential contributions are important to our success, an incentive, through ownership of common stock, to continue in service to us, and to help us compete effectively with other enterprises for the services of qualified individuals.
 
    Administration.  The 2008 stock incentive plan is administered, with respect to grants to employees, directors, officers, and consultants, by the plan administrator (the “Administrator”), defined as our board of directors or one or more committees designated by the board.
 
    Terms and Conditions of Awards.  The 2008 stock incentive plan provides for the grant of stock options, restricted stock, restricted stock units, and stock appreciation rights (collectively referred to as “awards”).  Stock options granted under the 2008 stock incentive plan may be either incentive stock options under the provisions of Section 422 of the Internal Revenue Code of 1986, as amended, or nonqualified stock options.  Incentive stock options may be granted only to employees.  Awards other than incentive stock options may be granted to our employees, directors and consultants or to employees, directors and consultants of our related entities.  Each award granted under the 2008 stock incentive plan shall be designated in an award agreement.
 
    Subject to applicable laws, the Administrator has the authority, in its discretion, to select employees, directors and others to whom awards may be granted from time to time, to determine whether and to what extent awards are granted, to determine the number of shares of common stock or the amount of other consideration to be covered by each award (subject to the limitations set forth above under “Shares Reserved for Issuance under the 2008 Stock Incentive Plan”), to approve award agreements for use under the 2008 stock incentive plan, to determine the terms and conditions of any award (including the vesting schedule applicable to the award), to amend the terms of any outstanding award granted under the 2008 stock incentive plan, to construe and interpret the terms of the 2008 stock incentive plan and awards granted, to establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable non-U.S. jurisdictions and to take such other action not inconsistent with the terms of the 2008 stock incentive plan, as the Administrator deems appropriate.
 
    The 2008 stock incentive plan provides that stockholder approval is required in order to (i) reduce the exercise price of any option or the base appreciation amount of any stock appreciation right awarded under the 2008 stock incentive plan or (ii) cancel any option or stock appreciation right awarded under the 2008 stock incentive plan in exchange for another award at a time when the exercise price exceeds the fair market value of the underlying shares unless the cancellation and exchange occurs in connection with a Corporate Transaction (defined below).  However, canceling an option or stock appreciation right in exchange for another option, stock appreciation right, restricted stock or other award, with an exercise price, purchase price or base appreciation amount (as applicable) that is equal to or greater than the exercise price or base appreciation amount (as applicable) of the original option or stock appreciation right will not require stockholder approval.
 
    Change in Capitalization.  Subject to any required action by our stockholders, the number of shares of common stock covered by outstanding awards, the number of shares of common stock that have been authorized for issuance under the 2008 stock incentive plan, the exercise or purchase price of each outstanding award, the maximum number of shares of common stock that may be granted subject to awards to any participant in a calendar year, and the like, shall be proportionally adjusted by the Administrator in the event of (i) any increase or decrease in the number of issued shares of common stock resulting from a stock split, stock dividend, combination or reclassification or similar event affecting common stock, (ii) any other increase or decrease in the number of issued shares of common stock effected without receipt of consideration by the Company or (iii) any other transaction with respect to common stock including a corporate merger, consolidation, acquisition of property or stock, separation (including a spin-off or other distribution of stock or property), reorganization, liquidation (whether partial or complete), distribution of cash or other assets to stockholders other than a normal cash dividend, or any similar transaction; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.”
 
    Corporate Transaction or Change in Control.  Effective upon the consummation of a Corporate Transaction (as defined in the 2008 stock incentive plan), all outstanding awards shall terminate.  However, all such awards shall not terminate to the extent the contractual obligations represented by the awards are assumed by the successor entity.  Except as provided in an individual award agreement, the Administrator shall have the authority to provide for the full or partial automatic vesting and exercisability of one or more outstanding unvested awards under the 2008 stock incentive plan and the release from restrictions on transfer and repurchase or forfeiture rights of such awards in connection with a Corporate Transaction or Change in Control (as defined in the 2008 stock incentive plan), on such terms and conditions as the Administrator may specify.
 
 
25

 
    Under the 2008 stock incentive plan, a Corporate Transaction is generally defined as:
 
·  
acquisition of 50% or more of our stock by any individual or entity including by tender offer or a reverse merger;
 
·  
a sale, transfer or other disposition of all or substantially all of the assets of the Company;
 
·  
a merger or consolidation in which the Company is not the surviving entity; or
 
·  
a complete liquidation or dissolution.
 
Under the 2008 stock incentive plan, a Change in Control is generally defined as:
 
·  
acquisition of 50% or more of the Company’s stock by any individual or entity which a majority of our board members (who have served on our board for at least twelve months) do not recommend our stockholders accept; or
 
·  
a change in the composition of our board of directors over a period of twelve months or less such that a majority of our board members ceases, by reason of one or more contested elections for board membership, to be comprised of individuals who have either been board members continuously for a period of at least twelve months or have been board members for less than twelve months and were elected or nominated for election by at least a majority of board members who have served on our board of directors for at least twelve months.
 
    Amendment, Suspension or Termination of the 2008 Stock Incentive Plan.  Our board of directors may at any time amend, suspend or terminate the 2008 stock incentive plan.  The 2008 stock incentive plan will be for a term of ten years unless sooner terminated by the board.  To the extent necessary to comply with applicable provisions of federal securities laws, state corporate and securities laws, the Internal Revenue Code of 1986, as amended, the rules of any applicable stock exchange or national market system, and the rules of any non-U.S. jurisdiction applicable to awards granted to residents therein, we shall obtain stockholder approval of any such amendment to the 2008 stock incentive plan in such a manner and to such a degree as is required.
 
  ITEM 6.
SELECTED FINANCIAL DATA.
 
Not applicable.
 
 
26

 
  ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
    This Management’s Discussion and Analysis of Financial Condition and Results of Operations provides information that we believe is relevant to an assessment and understanding of our financial condition and results of operations.  This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the audited consolidated financial statements and related notes thereto included in this Annual Report on Form 10-K beginning on page F-1.
 
    This Annual Report on Form 10-K, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains, in addition to historical information, forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions.  Any statements that are not statements of historical fact are forward-looking statements.  When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (e.g., “will,” “may,” “could,” “should,” etc.) or similar expressions identify certain of these forward-looking statements.
 
    These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Annual Report on Form 10-K.  Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Annual Report on Form 10-K, and in particular, the risks discussed under the heading “Risk Factors” in Item 1 of this Annual Report on Form 10-K and those discussed in other documents we file with the SEC.  We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.  Given these risks and uncertainties, readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K.
 
Overview
   
    Betawave is a young and rapidly growing company that sells online advertising for a portfolio of websites.  We have assembled some of the leading immersive casual gaming, virtual world, social play and entertainment websites into a network of sites (the “Betawave Network”).  We generate revenue by selling innovative, accountable and attention-grabbing advertising campaigns on those sites to brand advertisers.
 
    During most of fiscal year 2008, the Company sold advertising on a network of websites focused on children ages 6-17 and their co-viewing parents.  In December 2008, the Company completed a $22.5 million preferred stock financing.  In January 2009, the Company changed its name from GoFish Corporation to Betawave Corporation and launched a rebranding campaign and changed its focus to selling advertising and providing content for websites in high attention environments.
 
Results of Operations
 
    The following discussion of the results of our operations and financial condition should be read in conjunction with our audited consolidated financial statements and related notes thereto included in this Annual Report on Form 10-K beginning on page F-1.
 
 
27

 
Summary of 2009 Results
   
    Our total revenues were $7,682,939 for the year ended December 31, 2009, which was nearly equivalent to the prior year amount of $7,701,599.  According to comScore Media Metrix, the Betawave Network averaged 31 million unique U.S. users per month compared to just under 25 million at the end of 2008.
 
    Total costs of revenues and expenses for the year ended December 31, 2009 were approximately $23.2 million in 2009, increasing 3% from the prior year amount of approximately $22.5 million.  This increase was primarily due to direct payments to publishers on advertising revenues and compensation related expenses offset by $2.7 million loss on debt extinguishment that did not occur in 2009.
 
    Our operating loss for the year ended December 31, 2009 was approximately $15.5 million, increasing 5% from the prior year amount of approximately $14.8 million in 2008. This increase in operating loss was primarily the result of the increase in cost of revenues and expenses.
 
    Our net loss for the year ended December 31, 2009, was approximately $15.5 million, decreasing 9% from the prior year amount of approximately $17.0 million. This decrease in net loss was primarily the result of the loss on the extinguishment of debt and interest on the convertible debt that was retired in 2008, which was partly offset by an increase in cost of revenues, sales and marketing and general and administrative expenses in 2009.
 
Recent Developments
 
    On March 25, 2010, we entered into a Note and Warrant Purchase Agreement (the “March 2010 Purchase Agreement”) by and among the Company, Panorama Capital, L.P. (“Panorama Capital”), Rustic Canyon Ventures III, L.P. (“Rustic”), Rembrandt Venture Partners Fund Two, L.P. (“Rembrandt Fund Two”) and Rembrandt Venture Partners Fund Two-A, L.P. (“Rembrandt Fund Two-A” and, together with Rembrandt Fund Two, Panorama Capital and Rustic, the “Lead Investors”). Pursuant to the Purchase Agreement, we may issue and sell, in one or more closings, up to $2,985,000 in aggregate principal amount of subordinated secured convertible promissory notes (“Notes”) and related warrants (“Warrants”) to purchase up to an aggregate of 30,000,000 shares of the Company’s common stock for an aggregate total consideration of $3,000,000 (the “Total Offering”).

    At the initial closing on March 26, 2010 (the “First Closing”), the Company sold to the Lead Investors (i) Notes in the aggregate principal amount of $2,376,494 and (ii) Warrants to purchase 23,884,359 shares of common stock. The Company received approximately $2.4 million in gross proceeds at the First Closing. At one or more subsequent closings (“Subsequent Closings” and together with the First Closing, collectively, the “Closings” and individually, a “Closing”) to be held prior to May 10, 2010, the Company may sell additional Notes in the aggregate principal amount of $608,506.21 and Warrants to purchase 6,115,641 shares of Common Stock. Only current holders of outstanding shares of the Company’s Series A preferred stock, par value $0.001 per share (“Series A Preferred”), and such additional investors as are acceptable to investors holding then outstanding Notes representing at least 66-2/3% of the then outstanding aggregate principal amount of all Notes issued under the Purchase Agreement may participate in any Subsequent Closings.

    Each Note issuable to an investor under the March 2010 Purchase Agreement has a principal amount equal to 99.5% of the total consideration paid by that investor. Each Note is convertible into shares of a new series of preferred stock, par value $0.001 per share, designated as Series B Preferred Stock (“Series B Preferred”). The initial conversion price for any Note issuable prior to the effectiveness of the Reverse Stock Split (as defined below) is $1.00 per share. The Notes are secured by a first priority security interest in substantially all of the Company’s assets pursuant to a Security Agreement entered into between the Company and the collateral agent for the investors. Pursuant to a Subordination Agreement between Silicon Valley Bank and the collateral agent for the investors, the security interest securing the Notes is subordinate to the lien of Silicon Valley Bank under the Amended and Restated Loan and Security Agreement, by and between the Company and Silicon Valley Bank, dated as of November 25, 2009, as amended. The Notes require the Company to comply with certain negative covenants relating to, among other things, the creation of liens, incurring of indebtedness, use of proceeds to pay senior debt and entering into or engaging in any business other than that carried on at the date of the First Closing. In addition, the Notes contain customary events of default. Upon the occurrence of an uncured event of default, among other things, the Lead Investors may declare that all amounts owing under the Notes are due and payable.
 
    The Company filed an 8-K with additional information on the March 2010 Purchase Agreement with the SEC on March 31, 2010.
 
Revenue
 
    We derive almost entirely all of our revenues from fees we receive from our advertisers.  We believe an opportunity exists to provide advertisers with a cost-effective way to deliver ads on the Betawave Network through enhanced targeting, sponsorship and integrated means that only exist through the interactive nature of the Internet media.  Factors that we believe will influence the success of our advertising programs include:
 
 
growth in the number of users populating the websites on the Betawave Network;
 
 
growth in the amount of time spent per user on the websites on the Betawave Network;
 
 
the number of advertisers and the variety of products available;
 
 
advertisers’ return on investment and the efficacy of click-through conversions;
 
 
enhanced ad vehicles, products, services and sponsorships; and
 
 
our fees and rates.
 
    We believe that Internet advertising currently represents a small segment of the overall advertising market and that the growth in Internet usage and consumers’ behavioral changes will eventually lead to a dramatic shift in ad revenues from traditional media to the Internet.  To take advantage of this, the main focus of our advertising programs is to provide usefulness to our advertisers, and relevancy to our users.  We are continuing to take steps to increase our revenue by offering a comprehensive solution for advertising across the Betawave Network.
 
 
28

 
 The following table presents our revenues for the periods presented:
 
Revenues -- Comparison of the Years Ended December 31, 2009 and 2008
 
   
Year
 
Year
     
   
Ended
 
Ended
     
   
December 31,
 
December 31,
 
Percent
 
   
2009
 
2008
 
Change
 
Revenues
 
$
7,682,939
 
$
7,701,599
   
(0.3)
%
 
    Our revenues decreased $18,660 in 2009 from 2008.  The slight decrease in 2009 indicates that sales from advertising that was sold across our network of owned and affiliate publisher websites were flat.  Revenues in both periods consisted of advertising fees, primarily from banner and text-based ads.  As we begin to add publisher websites into the Betawave Network, we have been able to generate a greater number of user impressions for our advertisers.  Accordingly, our flat sales corresponded with our maintaining a sales organization of about 13 employees at the end of 2009 compared to 14 at the end of 2008.
 
Cost of Revenues -- Comparison of the Years Ended December 31, 2009 and 2008
 
   
Year
 
Year
     
   
Ended
 
Ended
     
   
December 31,
 
December 31,
 
Percent
 
   
2009
 
2008
 
Change
 
Cost of Revenues
 
$
7,284,970
 
$
6,551,870
   
11
%
 
    Cost of revenues consist primarily of direct payments to publishers on advertising revenues, costs associated with hosting our websites, ad serving costs for impressions delivered in connection with advertising revenues and production costs for Betawave TV.
 
    Cost of revenues increased $733,100  in 2009 from 2008.  The increase included $945,052 of payments to publishers and $118,194 for custom media player and game design. These increases were offset by a reduction of $130,670 in web hosting costs, $102,323 for licensing expenses, $85,899 for stock-based compensation related to ASC 718 and $11,254 for ad serving costs.
 
 
29

 
Sales and Marketing -- Comparison of the Years Ended December 31, 2009 and 2008
 
 
 
Year
 
Year
 
 
 
 
 
Ended
 
Ended
 
 
 
 
 
December 31,
 
December 31,
 
Percent
 
 
 
2009
 
2008
 
Change
 
Sales and Marketing
 
$
8,715,930
 
$
6,480,550
 
 
34
%
 
    Sales and marketing expenses consist primarily of advertising and other marketing related expenses, compensation related expenses, sales commissions, and travel costs.
   
    Sales and marketing expenses increased $2,235,380 in 2009 from 2008.  The increase was attributable to a $1,741,478 increase in personnel and other benefits related costs, including a $571,845 increase in stock-based compensation expenses related to ASC 718, a $148,160 increase in professional services for public relations and related development research expense, a $35,495 increase in travel expenses, a $13,478 increase in advertising and other marketing related expenses and a $296,769 increase in allocation of facilities, IT and other operating expenses.  While the number of employees were primarily responsible overall for the increases in personnel and related benefits expenses and allocated costs, we scaled back the sales and marketing organizations to show a net reduction of 7 employees by the end of 2009. Employees in sales and marketing at December 31, 2009 and 2008 were 27 and 34, respectively.
 
Product Development -- Comparison of the Years Ended December 31, 2009 and 2008
 
   
Year
 
Year
     
   
Ended
 
Ended
     
   
December 31,
 
December 31,
 
Percent
 
   
2009
 
2008
 
Change
 
Product Development
 
$
581,057
 
$
713,964
   
(19)
%
   
    Product development expenses consist primarily of compensation related expenses incurred for the development of, and enhancement to systems that enable us to drive and support revenue generating activities across our network of websites.
 
    Product development expenses decreased $132,907 in 2009 from 2008.  The decrease was attributed to a decrease in compensation related expenses of $20,564 including a $66,464 increase in stock-based compensation expenses related to ASC 718, and the reduction in the allocation of approximately $112,343 of facilities, IT and other operating expenses.  The decrease in expenses reflects the scaleback of product development projects which resulted in a reduction of employees from 5 at the beginning of 2008 to 2 at the end of 2009.
 
    Employees in product development at December 31, 2009 and 2008 were 2 and 5, respectively.
 
 
30

 
General and Administrative -- Comparison of the Years Ended December 31, 2009 and 2008
 
   
Year
 
Year
     
   
Ended
 
Ended
     
   
December 31,
 
December 31,
 
Percent
 
   
2009
 
2008
 
Change
 
General and Administrative
 
$
6,617,112
 
$
6,024,801
   
10
%
 
    General and administrative expenses consist primarily of compensation related expenses (including stock-based compensation expenses) related to our executive management, finance and human resource organizations and legal, accounting, insurance, investor relations and other operating expenses to the extent not otherwise allocated to other functions.
 
    General and administrative expenses increased $592,311 in 2009 from 2008.  The increase was attributable to a $1,589,990 increase in compensation related expenses, including a $1,012,257 increase in stock-based compensation expenses related to ASC 718, and a $49,308 increase in unallocated facilities, IT and other operating expenses.  These increases were offset by a $545,420 decrease in legal, accounting, D&O insurance, investor relations and other professional services, a $463,730 decrease  in the amortization of deferred financing costs related to the debt issuance costs of the June 2007 Notes and the 2008 Notes, and a $37,837 decrease in travel expenses.  The issuance of employee options was primarily responsible for the increase in stock-based compensation.
 
    Employees in general and administrative at December 31, 2009 and 2008 were 8 and 7, respectively.
 
Loss on debt extinguishment -- Comparison of the Years Ended December 31, 2009 and 2008
 
   
Year
 
Year
     
   
Ended
 
Ended
     
   
December 31,
 
December 31,
 
Percent
 
   
2009
 
2008
 
Change
 
Loss on debt extinguishment
 
$
-
 
$
2,736,832
   
N/A
 
 
    In December 2008, we used proceeds from our $22.5 million preferred stock financing to repurchase the remaining, unconverted portion of our outstanding convertible debt and related detachable warrants.  The repurchase occurred with a combination of cash payments and exchanges of convertible debt and warrants for either new Series A preferred stock and warrants or common stock.  The transaction resulted in a loss on the extinguishment of debt.
 
Other Income and Expenses -- Comparison of the Years Ended December 31, 2009 and 2008
 
   
Year
 
Year
     
   
Ended
 
Ended
     
   
December 31,
 
December 31,
 
Percent
 
   
2009
 
2008
 
Change
 
Interest income
 
$
14,910
 
$
23,238
   
(36)
%
Miscellaneous income
   
72,405
   
278,740
   
(74)
%
Interest expense
 
 
(105,904
)
 
(2,465,545
)
 
(96)
%
Total other income (expense)
 
$
(18,589
)
$
(2,163,567
)
 
(99)
%
 
 
31

 
    Other expense decreased $2,144,978 in 2009 from 2008.
 
    Interest income is derived primarily from short-term interest earned on operating cash balances.
 
    Miscellaneous income in 2009 represents income from the settlement of a claim with the receivership of a company against whom we had filed a claim, while miscellaneous income in 2008 was derived from the settlement of a legal claim with a third party.
 
    Interest expense recorded in fiscal 2009 relates to the financing costs for the Company’s directors and officers insurance policy and line of credit with Silicon Valley Bank. Interest expenses recorded in 2008 relates to financing costs for the Company’s directors and officers insurance policy and the Company’s convertible debt, which was retired in December 2008.
 
Liquidity and Capital Resources
   
    To date, we have funded our operations primarily through private sales of securities and borrowings.  As of December 31, 2009, we had $681,847 in cash and cash equivalents.  We may need to raise additional capital in the future, which may not be available on reasonable terms or at all.  The raising of additional capital may dilute our current stockholders’ ownership interests.
 
    Net cash used in operating activities was $12,250,030 and $7,077,358 for the years ended December 31, 2009 and 2008, respectively.   For the year ended December 31, 2009, the cash used in operating activities was primarily due to a net loss of $10,976,112, which is net of non cash expenses of $4,558,607, and a negative change in working capital of $1,273,918. The non cash expense items included loss on disposal of fixed assets of $4,898, depreciation and amortization of $201,990, amortization of line of credit fees of $44,765, stock-based compensation of $4,288,044 and the write-off of notes receivable from stockholders of $18,910. For the year ended December 31, 2008, the cash used in operating activities was primarily due to a net loss of $8,804,358, which is net of non cash expenses of $8,165,627 and a change in working capital of $1,727,000.  The non cash expense items included loss on debt extinguishment of $2,736,832, loss on disposal of fixed assets of $1,959, depreciation and amortization of $260,028, amortization of convertible note fees of $474,618, stock-based compensation of $2,723,377, non cash interest expense of $1,866,537 and non cash cost of revenues of $102,000.
 
    Net cash used in investing activities was $82,178 and $41,118 for the year ended December 31, 2009 and  2008, respectively. For the year ended December 31, 2009, net cash used in investing activities consisted of funds held as restricted cash for $53,750 and the purchase of property and equipment in the amount of $28,428. For the year ended December 31, 2008, net cash used in investing activities consisted of the purchase of property and equipment in the amount of $41,118 and funds of $550,000 held as restricted cash which were equally offset by release of such funds from restricted cash.
 
    Net cash provided by financing activities was $1,150,934 and $17,872,763 for the year ended December 31, 2009 and 2008, respectively.  The net cash provided by financing activities for the year ended December 31, 2009 was derived from the proceeds from the exercise of employee stock options of $370, borrowings on the line of credit of $3,235,359 and payment on the line of credit of $2,084,795. The net cash provided by financing activities for the year ended December 31, 2008 was derived from the proceeds from the issuance of Series A Preferred Stock of $21,022,438 (net of issuance cost of $1,477,562), advances of $610,000 from a shareholder, proceeds from issuance of unsecured convertible original issue discount notes in the amount of $3,188,700, repayment to shareholder of $400,000, repayment of convertible notes in the amount of $6,414,187 and purchase of warrants of $134,188.
 
 
32

 
Critical Accounting Policies
 
    Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities.  We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates.
 
    An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements.  We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.
 
Revenue Recognition
 
    We recognize revenue from the display of graphical advertisements on the websites of the publishers in Betawave’s Network as “impressions” are delivered up to the amount contracted for by the advertiser.  An “impression” is delivered when an advertisement appears in pages viewed by users.  Arrangements for these services generally have terms of less than one year.
 
    We recognize these revenues as such because the services have been provided, and the other criteria set forth under FASB’s Accounting Standards Codification (“ASC”) 605-10: Revenue Recognition (“ASC 605-10”) have been met, namely, the fees charged by the Company are fixed or determinable, the advertisers understand the specific nature and terms of the agreed-upon transactions and collectability is reasonably assured.  In accordance with ASC 605-45, Reporting Revenue Gross as Principal Versus Net as an Agent, Betawave reports revenues on a gross basis principally because the Company is the primary obligor to the advertisers.
 
Costs of Revenues and Expenses
 
    Cost of revenue and expenses primarily consist of payments to publishers in the Betawave Network, personnel-related costs, including payroll, recruitment and benefits for executive, technical, corporate and administrative employees, in addition to professional fees, insurance and other general corporate expenses.  We believe the key element to the execution of our strategy is the hiring of personnel in all areas that are vital to our business.  Our investments in personnel include business development, sales and marketing, advertising, service and general corporate marketing and promotions.
 
Accounting for Stock-Based Compensation
 
    Prior to January 1, 2006, we used the intrinsic value method to record stock-based compensation for employees, which requires that deferred stock-based compensation be recorded for the difference between an option’s exercise price and the fair value of the underlying common stock on the grant date of the option.
 
    Effective January 1, 2006, we adopted the fair value recognition provisions of ASC 718, Stock Compensation (“ASC 718”) 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 FASB Statement 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 ASC 718.
 
 
33

 
    Stock-based compensation expense for performance-based options granted to non-employees is determined in accordance with ASC Topic 505-50, Equity Based Payments for Non-Employees ("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 generally accepted accounting principles to recognize the cost for the transaction prior to the measurement date, the fair value of unvested options granted to non-employees is remeasured at the balance sheet date.
 
    We currently use 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 periods.
 
    The following table presents stock-based compensation expense included in the Consolidated Statements of Operations related to employee and non-employee stock options, restricted shares and warrants as follows as of December 31, 2009 and 2008:
 
   
December 31,
2009
   
December 31,
2008
 
Cost of revenue
  $ (1,793 )    $ 84,106  
                 
Sales and marketing
    1,272,185       700,340  
                 
Product development
    84,965       18,501  
                 
General and administrative
    2,932,687       1,920,430  
                 
            Total stock-based compensation
   $ 4,288,044     $ 2,723,377  
 
    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.
 
 
34

 
    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) at December 31, 2009 and 2008:
 
   
December 31,
2009
 
December 31,
2008
Risk free interest rate
 
2.41%
 
2.16%
         
Expected lives
 
6.10 Years
 
5.91 Years
         
Expected volatility
 
71.03%
 
75.84%
         
Dividend yields
 
0%
 
0%
 
    The weighted-average grant date fair value of the options granted during the years ended December 31, 2009 and 2008 were $0.06 and $0.14, respectively.
 
    At December 31, 2009, there was $2,020,730 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  1.99 years.
 
    Basic net loss per share to common stockholders 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 attributable to common shareholders would give effect to the dilutive effect of potential common stock consisting of stock options, warrants 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 for the years ended December 31, 2009 and 2008.
 
    The following outstanding stock options, warrants and preferred stock (on an as-converted into common stock basis) were excluded from the computation of diluted net loss per share attributable to holders of common stock as they had an antidilutive effect as of December 31, 2009 and 2008:
 
   
December 31,
2009
 
December 31,
2008
Shares issuable upon exercise of employee and non-employee stock options
 
523,249
 
4,717,067
Shares issuable upon exercise of warrants
 
-
 
5,744,335
Shares issuable upon conversion of Series A preferred stock
 
7,355,648
 
7,355,648
Total
 
7,878,897
 
17,817,050
 
 
35

 
Property and Equipment
 
    Property and equipment are recorded at cost less accumulated depreciation and amortization.  Major improvements are capitalized, while repair and maintenance costs that do not improve or extend the lives of the respective assets are expensed as incurred. Depreciation and amortization charges are calculated using the straight-line method over the following estimated useful lives:
 
   
Estimated Useful Life
Computer equipment and software
 
3 years
Furniture and fixtures
 
5 years
Leasehold improvements
 
Shorter of estimated useful life or lease term
 
    Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operating expenses.  If factors change we may decide to use shorter or longer estimated useful lives and depreciation and amortization expense may differ materially in the future from that recorded in the current periods.
 
Impairment of Long-Lived Assets
 
    We continually evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance of long-lived assets may not be recoverable.  When factors indicate that long-lived assets should be evaluated for possible impairment, we typically make various assumptions about the future prospects the asset relates to, consider market factors and use an estimate of the related undiscounted future cash flows over the remaining life of the long-lived assets in measuring whether they are recoverable.  If the estimated undiscounted future cash flows exceed the carrying value of the asset, a loss is recorded as the excess of the asset’s carrying value over its fair value.  There have been no such impairments of long-lived assets through December 31, 2009.
 
    Assumptions and estimates about future values are complex and often subjective.  They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.  Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, different assumptions and estimates could materially affect our reported financial results.  More conservative assumptions of the anticipated future benefits could result in impairment charges, which would increase net loss and result in lower asset values on our balance sheet.  Conversely, less conservative assumptions could result in smaller or no impairment charges, lower net loss and higher asset values.
 
Income Taxes
 
    We are subject to income taxes, federal and state, in the United States of America.  We use the asset and liability approach to account for income taxes.  This methodology recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax base of assets and liabilities and operating loss and tax carryforwards.  We then record a valuation allowance to reduce deferred tax assets to an amount that more likely than not will be realized.  In evaluating our ability to recover our deferred income tax assets we consider all available positive and negative evidence, including our operating results, ongoing tax planning and forecasts of future taxable income.  Through December 31, 2009, we have provided a valuation allowance of $21,256,048 against our entire net deferred tax asset, primarily consisting of net operating loss carryforwards.  In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
 
 
36

 
Advertising and Promotion Costs
 
    Expenses related to advertising and promotions of products are charged to expense as incurred.  Advertising and promotional costs totaled $8,883 and $129,414 for the years ended December 31, 2009 and 2008.
 
Adopted Accounting PronouncementsIn 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 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 Consolidated Financial Statements.
 
    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 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 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 Consolidated Financial Statements.
 
 
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    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 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 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 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 Consolidated Financial Statements.
 
    Our policy is to recognize potential accrued interest and penalties related to the liability for uncertain tax benefits, if applicable, in income tax expense. Net operating loss carryforwards since inception remain open to examination by taxing authorities, and will continue to remain open for a period of time post utilization.
 
Off-Balance Sheet Arrangements
 
 
  ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
   
    Not applicable.
 
 
38

 
  ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
    Our audited consolidated financial statements for the fiscal year ended December 31, 2009, along with the report of our independent registered public accounting firm thereon, are included in this Annual Report on Form 10-K beginning on page F-1 and are incorporated herein by reference.
 
  ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
    None.
 
  ITEM 9A.
CONTROLS AND PROCEDURES.
 
Evaluation of Disclosure Controls and Procedures
 
    As of the end of the period covered by this Annual Report on Form 10-K, management performed, with the participation of our President and Interim Chief Executive Officer and Chief Accounting Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.  Our disclosure controls and procedures are designed to reasonably ensure that information required to be disclosed in the report we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management including our President and Interim Chief Executive Officer and our Chief Accounting Officer, to allow timely decisions regarding required disclosures.  Based on the evaluation and the identification of the material weaknesses in our internal control over financial reporting described below, our President and Interim Chief Executive Officer and our Chief Accounting Officer concluded that, as of December 31, 2009, our disclosure controls and procedures were not effective.
 
Management’s Report on Internal Control Over Financial Reporting
 
    Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act.  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”).  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
    Management has conducted, with the participation of our President and Interim Chief Executive Officer and our Chief Accounting Officer, an assessment, including testing of the effectiveness, of our internal control over financial reporting as of December 31, 2009.  Management’s assessment of internal control over financial reporting was conducted using the criteria in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
 
    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.  In connection with our assessment of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of
 
 
39

 
2002, we identified the following material weaknesses in our internal control over financial reporting as of December 31, 2009:
 
1.  
Our control environment did not sufficiently promote effective internal control over financial reporting resulting in recurring material weaknesses which were not remediated during 2009.
 
2.  
Our board of directors has not established adequate financial reporting monitoring activities to mitigate the risk of management override, specifically:
 
·  
a majority of our board of directors is not independent;
 
·  
no financial expert on our audit committee has been designated;
 
·  
there is insufficient oversight of external audit specifically related to fees, scope of activities, and monitoring of results; and
 
·  
there is insufficient oversight of accounting principle implementation.

3.  
Due to an insufficient number of personnel in our accounting group there have been material audit adjustments to the annual financial statements.

4.  
We have not sufficiently restricted access to data or adequately divided, or compensated for, incompatible functions among personnel to reduce the risk that a potential material misstatement of the financial statements would occur without being prevented or detected.  Specifically we have not divided the authorizing of transactions, recording of transactions, reconciling of information, and maintaining custody of assets within the financial closing and reporting, revenue and accounts receivable, purchases and accounts payable, and cash receipts and disbursements processes.
 
    Because of the material weaknesses noted above, management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2009, based on Internal Control – Integrated Framework issued by COSO.
 
Remediation of Material Weaknesses in Internal Control Over Financial Reporting
 
    We are in the process of implementing remediation efforts with respect to our control environment and the material weaknesses noted above as follows:
 
·  
We plan, over the course of the next year, to evaluate the composition of our board of directors and to determine whether to add independent directors or to replace an inside director with an independent director, in both cases, in order to have a majority of our board of directors become independent.  We will determine whether any of its current directors serving on our audit committee is a financial expert and, if not, will ensure that one of the new directors serving on our audit committee is a financial expert.  We will work to ensure the audit committee exercises appropriate oversight of our external auditors specifically relating to fees, scope of activities, and monitoring of results and will also work to ensure that our audit committee exercises appropriate oversight of accounting principle selection and implementation.
 
·  
Management intends to retain external consultants with appropriate SEC and U.S. GAAP expertise to assist in financial statement review, account analysis review, review and filing of SEC reports, and other related advisory services.
 
·  
We intend on undertaking a restricted access review to analyze all financial modules and the list of persons authorized to have edit access to each.  We will remove or add authorized personnel as appropriate to mitigate the risks of management or other override.
 
·  
We plan to re-assign roles and responsibilities in order to improve segregation of duties.

    We believe the foregoing efforts will enable us to improve our internal control over financial reporting. Management is committed to continuing efforts aimed at improving the design adequacy and operational effectiveness of its system of internal controls.  The remediation efforts noted above will be subject to our internal control assessment, testing, and evaluation process.
 
 
40

 
Changes in Internal Control Over Financial Reporting
 
    In connection with our assessment of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, we identified the following material weaknesses in our internal control over financial reporting as of December 31, 2008 which have been remediated by December 31, 2009:

1.  
Our board of directors has not established adequate financial reporting monitoring activities to mitigate the risk of management override, specifically:
 
·  
no formally documented financial analysis is presented to our board of directors, specifically fluctuation, variance, trend analysis or business performance reviews;
 
·  
delegation of authority has not been formally communicated; and
 
·  
an effective whistleblower program has not been established.

2.  
We have not maintained sufficient competent evidence to support the effective operation of our internal controls over financial reporting, specifically related to our board of directors oversight of quarterly and annual SEC filings; and management’s review of SEC filings, journal entries, and account analyses and reconciliations.

    As a result of these material weakness, we completed the implementation of the following measures during the third and fourth quarters ended December 31, 2009 to remediate these material weakness:
 
·  
We now draft quarterly consolidated financial statement variance analyses of actual versus budget with relevant explanations of variances which are distributed to our board of directors;
 
·  
We have formally documented our delegation of authority policy which specifies exactly what requires board of directors approval; other than the specific items that our board of directors must authorize, all other authority is delegated to the Chief Accounting Officer and point to the further delegation from the Chief Accounting Officer to employees;
 
·  
We have developed, documented, and communicated our formal whistleblower program to employees; have posted the policy on our website in the governance section and in the common areas in the office; have provided a 1-800 number for reporting complaints; have retained a third-party vendor to monitor the hotline; and now provide quarterly reports of activity to our board of directors; and
 
·  
We have developed an internal control over financial reporting evidence policy and procedures which contemplates, among other items, a listing of all key internal controls over financial reporting, assignment of responsibility to process owners within the Company, communication of such listing to all applicable personnel, and specific policies and procedures around the nature and retention of evidence of the operation of controls including management review and approval of journal entries and account analyses, and audit committee review of SEC filings.

    As a result of our enhancement of controls, management has concluded that the material weaknesses described above have been remediated as of December 31, 2009.
 
    Other than as described above, there have been no changes in our internal control over financial reporting during the fourth quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 ITEM 9B.
OTHER INFORMATION.
 
    None.
 
 
41

 
PART III
 
  ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
 
 
Set forth below is certain information regarding our directors, executive officers and key personnel.
 
Name
 
Age
 
Position
James Moloshok
 
60
 
Executive Chairman and Director
Tabreez Verjee
 
34
 
President, Interim Chief Executive Officer and Director
Lennox L. Vernon
 
63
 
Chief Accounting Officer
Riaz Valani
 
33
 
Director
John Durham
 
58
 
Director
Michael Jung
 
40
 
Director
Richard Ling
 
48
 
Director
Mark Menell
 
45
 
Director
Matt Freeman    40   Director

    Our directors and officers hold office until the earlier of their death, resignation, or removal or until their successors have been duly elected and qualified.  There are no family relationships among our directors and executive officers.  Our above-listed officers and directors have neither been convicted in any criminal proceeding during the past five years nor parties to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining them from future violations of, or prohibiting activities subject to, federal or state securities laws or a finding of any violation of federal of state securities laws or commodities laws.  Similarly, no bankruptcy petitions have been filed by or against any business or property of any of our directors or officers, nor has bankruptcy petition been filed against a partnership or business association in which these persons were general partners or executive officers.
 
James Moloshok, Executive Chairman and Director
 
    James Moloshok joined us as our Executive Chairman and a director on December 18, 2007.  Prior to joining us, from 2005 to 2007, Mr. Moloshok was President of Digital Initiatives for HBO Network, where Mr. Moloshok was responsible for exploring new opportunities for the company, focusing on innovative content and fast-changing technology.  Prior to that, from 2001 to 2005, Mr. Moloshok served in various positions with Yahoo! Inc., serving most recently as Senior Vice President, Entertainment and Content Relationships, during which he helped build partnerships with movie studios, TV networks and producers.  Prior to that, Mr. Moloshok was a co-founder of Windsor Digital, an entertainment and investment company.  From 1999 to 2000, Mr. Moloshok served as president of Warner Bros.  Online and president and CEO of Entertaindom.com, an original entertainment destination for Time Warner.  From 1989 to 1999, Mr. Moloshok served as Senior Vice President of Marketing at Warner Bros. and previously held the same position at Lorimar Telepictures, a television distribution company, which was formed when Lorimar merged with Telepictures in 1986 where he was also responsible for marketing to consumers, broadcasters and advertisers.
 
Tabreez Verjee, President and Director
 
    Tabreez Verjee has served as Betawave’s President since February 26, 2007 and has served as a director since October 27, 2006.  Mr. Verjee is currently a General Partner at Global Asset Capital, LLC, which directed more than $500 million in committed assets from leading global institutional investors across two venture capital funds and over 40 portfolio companies in the United States and Europe.  Prior to that, Mr. Verjee co-headed IMDI/Sonique and successfully negotiated its sale to Lycos.  Sonique was one of the most popular consumer internet music applications with approximately four million unique users and status as the fifth most downloaded application on the Internet in 1999.  Mr. Verjee also brings media finance expertise to Betawave from his prior role as managing director of Global Entertainment Capital, which was a pioneer in media asset securitizations with $150 million in committed capital.  Mr. Verjee began his career as a strategy consultant at Bain & Company.  Mr. Verjee received his bachelor of science in Engineering with honors at the University of California at Berkeley. He is currently on the board of directors of kiva.org and is a charter member of TiE.
 
 
42

 
Lennox L. Vernon, Chief Accounting Officer & Director of Operations
 
    Lennox Vernon joined Betawave as its Chief Accounting Officer and Director of Operations on October 30, 2006.  Mr. Vernon brings over 25 years of successful financial and operations experience to Betawave.  Prior to joining Betawave and since 2004, Mr. Vernon was Controller of Moderati Inc., a provider of high-impact mobile content to consumers and wireless carriers.  Previously, from 2003 to 2004, Mr. Vernon was the Controller of Optiva Inc. and from 2002 to 2003, he was the Controller of PaymentOne Corporation.  From 2000 through 2002, Mr. Vernon was a financial consultant whereby he managed financial accounting and economic projects, and completed year end reports, annual reports and proxy statements.  Mr. Vernon has also worked for many years at various software companies including Fair Isaac, as Acting CFO, at Macromedia, a developer of software tools for web publishing, multimedia and graphics, as Vice President Controller and at Pixar, a high-tech graphics and animation studio, as Corporate Controller.  Mr. Vernon graduated from San Jose State University with a Bachelor of Science, and is a certified public accountant in the State of California.

Riaz Valani, Director
 
    Riaz Valani joined our board of directors on October 27, 2006.  Mr. Valani is currently a General Partner at Global Asset Capital, LLC, where he has worked since 1997.  He previously served as Chairman of Viventures Partners SA and President of IMDI/Sonique.  Mr. Valani was a Managing Director of Global Entertainment Capital and was with Gruntal & Co. focused on private equity and asset securitizations.  Mr. Valani was one of the two investment bankers that engineered the acclaimed “David Bowie Bonds” which was awarded Euromoney’s Deal of the Year in 1997.  Mr. Valani also privatized Quorum Growth Capital, one of Canada’s leading publicly traded venture capital firms in a successful management led buyout.  Cumulatively he has several billion dollars of transactional expertise across structured finance, real estate, and private equity.  He has overseen portfolios of over fifty venture investments in technology, media, and telecom companies, and real estate investments in over twenty office and hospitality properties.  He currently serves as a director of Maritz Properties, Inc., Avex Funding Corporation and is a Charter Member of TiE.
 
John Durham, Director
 
    John Durham joined our board of directors on November 1, 2007.  Mr. Durham is currently CEO and Managing Partner at Catalyst, which specializes in connecting emerging technology companies, publishers and brand marketers facilitating the integration of paid media, non-paid media and emerging media.  Mr. Durham was previously President of Sales & Marketing for Jumpstart Automotive Media since August 2006 and on the board of directors of Jumpstart Automotive Media since 2004.  From 2004 to 2006, Mr. Durham had served as the Executive Vice President, Business Strategy at Carat Fusion.  Prior to that, he was a founder of Pericles Communication.  Before the launch of Pericles Communication, Mr. Durham had served as Chief Operating Officer of Interep Interactive.  Prior to that, he was with Winstar Interactive/Interep Interactive, which he joined in March 1998 as Vice President of Advertising Sales.  Mr. Durham has been teaching advertising and marketing classes since 1992 and currently teaches advertising in the MBA program at the University of San Francisco.  He also founded and is the president of the Bay Area Interactive Group, an Internet industry networking group.
 
Michael Jung, Director
 
    Michael Jung joined our board of directors on December 3, 2008.  Mr. Jung is a partner at Panorama Capital.  Mr. Jung was part of the founding team at Panorama Capital in late 2005 and became a partner in November 2008.  Panorama is the successor to the venture capital program of JPMorgan Partners, which Mr. Jung joined in 2003.  Prior to working in venture capital, he was vice president of corporate strategy and development at the Exigen Group, an enterprise software and services company where he managed the company’s day-to-day business development activities.  He also served as vice president of strategic corporate development at Ask Jeeves, leading the company’s mergers and acquisitions and strategic partnership efforts.  Early in his career, Mr. Jung advised a variety of high technology companies both as an investment banker with BancBoston Robertson Stephens and as an attorney with Gunderson Dettmer.  He holds a JD and an MBA from the University of Michigan and bachelor’s degree in political economy of industrial societies from the University of California, Berkeley.
 
Richard Ling, Director
   
    Richard Ling joined our board of directors on December 12, 2008.  Mr. Ling founded Rembrandt Venture Partners in 2004.  Prior to co-founding Rembrandt, Mr. Ling was the founding CEO and Chairman of MetaLINCs Inc., an e-mail search and analytics company acquired by Seagate in 2007.  Prior to MetaLINCs Mr. Ling was the co-founder, President and CEO of AlterEgo Networks Inc., a wireless infrastructure company, acquired by Macromedia Inc. in March 2002.  Before AlterEgo, Mr. Ling led the e-Commerce product organization at Inktomi, where he was responsible for overseeing all areas of the group’s engineering and operations, including site and network operations and product development.  Mr. Ling was a co-founder, VP of Products and Engineering, and acting CTO at Impulse Buy Networks Inc., leading the development, operations and product management groups.  Impulse Buy Networks was acquired by Inktomi in 1998.
 
 
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Mark Menell, Director
 
    Mark Menell joined our board of directors on December 12, 2008.  Mr. Menell has been a partner at Rustic Canyon since January 2000.  From August 1990 to January 2000, Mr. Menell was an investment banker at Morgan Stanley & Co.  Incorporated, including as principal and co-head of Morgan Stanley’s Technology Mergers and Acquisitions Group, in Menlo Park, CA.  Mr. Menell is a member of the board of directors of GSI Commerce, Inc. (NASDAQGS:  GSIC).
 

Board of Directors and Corporate Governance
 
    Our board of directors consists of eight members: Matt Freeman, James Moloshok, Tabreez Verjee, Riaz Valani, John Durham, Michael Jung, Richard Ling and Mark Menell.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
    We are not subject to Section 16(a) of the Exchange Act.
 
Board Committees
 
    The board of directors has established a compensation committee, which sets the compensation for officers of the Company, reviews management organization and development, reviews significant employee benefit programs and establishes and administers executive compensation programs.  The compensation committee currently consists of Mr. Jung, Mr. Menell and Mr. Durham.  The board of directors has also established an audit committee, which oversees the Company’s accounting and financial reporting processes and the audit of the Company’s consolidated financial statements.  The audit committee currently consists of Mr. Menell and Mr. Durham.
 
    We have not formally designated a nominating committee.  The board has not established specific, minimum qualifications for recommended nominees or specific qualities or skills for one or more of our directors to possess. The Nominating Committee uses a subjective process for identifying and evaluating nominees for director, based on the information available to, and the subjective judgments of, the members of the board and our then current needs for the board as a whole, although the board does not believe there would be any difference in the manner in which it evaluates nominees based on whether the nominee is recommended by a shareholder.  The board considers the needs for the board as a whole when identifying and evaluating nominees and, among other things, considers diversity in background, age, experience, qualifications, attributes and skills in identifying nominees, although it does not have a formal policy regarding the consideration of diversity. In fiscal 2009, the board did not recommend any new directors for election to the board.
 
    Our board of directors intends to appoint such persons and form such committees as may be required to meet the corporate governance requirements imposed by Sarbanes-Oxley Act of 2002.  Therefore, we intend that a majority of our directors will eventually be independent directors and at least one director will qualify as an “audit committee financial expert” within the meaning of Item 407(d)(5) of Regulation S-B, as promulgated by the SEC.  Additionally, our board of directors is expected to appoint a nominating committee and to adopt a charter relative to such committee.  Until further determination by our board of directors, the full board of directors will undertake the duties of the nominating committee.  We do not currently have an “audit committee financial expert”.
 
Board Leadership Structure and Role in Risk Oversight
   
    We do not have a chairperson of the board or a lead independent director, although Mr. Moloshok holds the office of Executive Chairman. In the absence of a chairperson of the board, the President presides at all board of directors’ and shareholders’ meetings. We believe this is appropriate for our company at this time because (1) of our size, (2) of the size of our board, (3) our President is responsible for our day-to-day operation and implementing our strategy, and (4) discussion of developments in our business and financial condition and results are important parts of the discussion at board meetings and it makes sense for the President to chair those discussions.
 
    Our Board of Directors oversees our risk management. This oversight is administered primarily though the following:
 
·  
the Board’s review and approval of our annual business plan (prepared and presented to the board by the President and other management), including the projected opportunities and challenges facing our business each year;
·  
at least quarterly review of our business developments, business plan implementation and financial results;
·  
our Audit Committee’s oversight of our internal controls over financial reporting and its discussions with management and the independent accountants regarding the quality and adequacy of our internal controls and financial reporting (and related reports to the full board); and
·  
our Compensation Committee’s reviews and recommendations to the board regarding our executive officer compensation and its relationship to our business plans.
 
    These discussions are generally led by our President, who presides at the board meetings.
 
Code of Ethics
 
    We have adopted a Code of Ethics that applies to all of our employees and officers, including our principal executive, financial and accounting officers, and our directors and employees.  We have posted the Code of Ethics on our Internet website at http://betawave.com/about/code-of-conduct.html.  We intend to make all required disclosures concerning any amendments to, or waivers from, our Code of Ethics that, in each case, apply to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions, on our Internet website.
 
Material Changes to Procedures to Nominate Directors
 
    We did not make any material changes to the procedures by which security holders may recommend nominees to our board of directors.
 
Stockholder Communication
 
    Stockholders desiring to send a communication to our board of directors, or to a specific director, may do so by delivering a letter to the Secretary of the Company at 706 Mission Street, 10 th Floor, San Francisco, California 94103.  The mailing envelope must contain a clear notation indicating that the enclosed letter is a “stockholder-board communication” or “stockholder-director communication.” All such letters must identify the author as a stockholder and clearly state whether the intended recipients of the letter are all members of our board of directors or certain specified individual directors.  The Secretary will circulate such letters to the appropriate director or directors of Betawave.
 
 
44

 
  ITEM 11.
EXECUTIVE COMPENSATION.
 
Summary Compensation Table for Fiscal Years 2009 and 2008
 
    The following table summarizes all compensation recorded by us in each of the fiscal years ended December 31, 2009 and 2008 for (i) all individuals serving as our principal executive officer during fiscal year ended December 31, 2009, (ii) our two most highly compensated executive officers other than our principal executive officer, each of whom was serving as one of our executive officers at the end of the fiscal year ended December 31, 2009 and whose total compensation for the fiscal year ended December 31, 2009 exceeded $100,000 and (iii) up to two additional individuals for whom disclosure would have been provided under (ii) above but for the fact that the individual was not serving as one of our executive officers at the end of fiscal year ended December 31, 2009.  Such officers are referred to herein as our “Named Executive Officers.”
 
Summary Compensation Table for Fiscal Years 2009 and 2008
 
Name and Principal Position
Fiscal
Year
 
Salary ($)
   
Bonus ($)
   
Stock
Awards
($)
   
Option
Awards
($)(1)
   
Non-Equity
Incentive Plan
Compensation
($)
   
Change in Pension
Value and Non-qualified Deferred
Compensation
Earnings
($)
   
All Other
Compensation
($)
   
Total
($)
 
Matt Freeman(2)
Former Chief Executive Officer
2009    $ 635,640      $ 75,000      ---       ---      ---      ---      ---      $ 710,640  
  2008    $ 250,131       ---      ---     $ 3,258,678      ---      ---      ---     $ 3,508,809  
James Moloshok(3)
Executive Chairman
2009    $ 217,689       ---      ---       ---      ---      ---    $ 179,500     $ 397,189  
 
2008
  $ 69,200       ---     ---     $ 432,023      ---      ---      ---     $ 501,223  
Tabreez Verjee (4)
President and Interim Chief Executive Officer (Principal Executive Officer)
2009
  $ 174,951     $ 55,500      ---       ---       ---       ---       ---     $ 230,451  
2008
  $ 105,598       ---      ---     $ 2,139,078       ---       ---       ---     $ 2,244,676  
Lennox L. Vernon
Chief Accounting Officer
2009
  $ 155,083       ---       ---     $ 17,265       ---       ---       ---     $ 172,348  
2008
  $ 160,000       ---       ---     $ 72,632       ---       ---       ---     $ 232,632  
 Mark Oltarsh
Chief Revenue Officer
2009   $  75,303        ---        ---      $  160,958        ---        ---        ---      236,288
_________________________
 
(1)  
The amounts shown in this column represent the compensation costs of stock options for financial reporting purposes for fiscal year 2009 and 2008 under ASC 718, rather than an amount paid to or realized by the named executive officer.  The ASC 718 value as of the grant date for options is spread over the number of months of service required for the grant to become non-forfeitable.  Compensation costs shown in column (f) reflect ratable amounts expensed for grants that were made in fiscal years 2009 and 2008.  There can be no assurance that the ASC 718 amounts will ever be realized.
 
(2)  
As of November 30, 2009, Matt Freeman no longer serves as our Chief Executive Officer, but continues to serve as a director.
 
(3)  
Mr. Moloshok was owed $240,000 pursuant to a consulting agreement dated December 18, 2007 and was eligible to earn up to $100,000 in performance bonuses. However, the Company had only paid $179,500 in fiscal year 2009 and $69,200 of this amount in fiscal year 2008.
 
(4)  
Mr. Verjee was owed annual base compensation of $210,000 in 2009 pursuant to an amended and restated employment agreement dated December 3, 2008, however the Company had only paid Mr. Verjee $174,951 in fiscal year 2009. Mr. Verjee received a bonus of $55,500 in 2009 as part of his employment agreement. Mr. Verjee was owed $175,000 pursuant to an employment agreement dated February 26, 2008, however, the Company had only paid Mr. Verjee $105,598 in fiscal year 2008. Since November 30, 2009, Mr. Verjee has served as our Interim Chief Executive Officer in addition to President.
 
 
45

 
Outstanding Equity Awards at Fiscal Year-End for Fiscal Year 2009
 
    The following table sets forth the stock option and stock awards of each of our Named Executive Officers outstanding at the end of fiscal year 2009.
 
Outstanding Equity Awards at Fiscal Year-End for Fiscal Year 2009
   
Option Awards
 
Stock Awards
   
Number of Securities Underlying Unexercised Options
(#)
 
Number of Securities Underlying Unexercised Options
(#)
 
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
 
Option Exercise Price
 
Option Expiration
 
Number of Shares or Units of Stock That Have Not Vested
 
Market Value of Shares or Units of Stock That Have Not Vested
 
Equity Incentive Plan Awards: number of Unearned Shares, Units or Other Rights That Have Not Vested
 
Equity Inventive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
Name
 
Exercisable
 
Unexercisable
 
(#)
 
($)
 
Date
 
(#)
 
($)
 
(#)
 
($)
Matt Freeman
   
2,013,889
   
---
     
---
 
$
0.23
   
11/30/2011
   
---
 
$
---
   
---
   
---
     
2,013,889
   
---
     
---
 
$
0.80
   
11/30/2011
   
---
 
$
---
   
---
   
---
     
12,511,812
   
---
     
---
 
$
0.20
   
11/30/2010
   
---
 
$
---
   
---
   
---
     
---
   
999,441
(1)
   
---
 
$
0.60
   
11/30/2010
   
---
 
$
---
   
---
   
---
     
---
   
999,441
(2)
   
---
 
$
0.80
   
11/30/2010
   
---
 
$
---
   
---
   
---
     
---
   
999,441
(3)
   
---
 
$
1.00
   
11/30/2010
   
---
 
$
---
   
---
   
---
     
---
   
999,441
(4)
   
---
 
$
1.20
   
11/30/2010
   
---
 
$
---
   
---
   
---
     
---
   
999,441
(5)
   
---
 
$
1.40
   
11/30/2010
   
---
 
$
---
   
---
   
---
James Moloshok
   
1,500,000
   
---
     
---
 
$
0.23
   
12/18/2017
   
---
 
$
---
   
---
   
---
     
1,628,735
   
1,628,736
(6)
   
---
 
$
0.20
   
12/2/2018
   
---
 
$
---
   
---
   
---
     
---
   
235,641
(7)
   
---
 
$
0.60
   
12/2/2018
   
---
 
$
---
   
---
   
---
     
---
   
235,641
(8)
   
---
 
$
0.80
   
12/2/2018
   
---
 
$
---
   
---
   
---
     
---
   
235,641
(9)
   
---
 
$
1.00
   
12/2/2018
   
---
 
$
---
   
---
   
---
     
---
   
235,641
(10)
   
---
 
$
1.20
   
12/2/2018
   
---
 
$
---
   
---
   
---
     
---
   
235,641
(11)
   
---
 
$
1.40
   
12/2/2018
   
---
 
$
---
   
---
   
---
Tabreez Verjee
   
2,361,111
   
138,889
(12)
   
---
 
$
0.35
   
2/1/2018
   
---
 
$
---
   
---
   
---
     
6,046,951
   
6,046,952
(13)
   
---
 
$
0.20
   
12/2/2018
   
---
 
$
---
   
---
   
---
     
---
   
999,441
(14)
   
---
 
$
0.60
   
12/2/2018
   
---
 
$
---
   
---
   
---
     
---
   
999,441
(15)
   
---
 
$
0.80
   
12/2/2018
   
---
 
$
---
   
---
   
---
     
---
   
999,441
(16)
   
---
 
$
1.00
   
12/2/2018
   
---
 
$
---
   
---
   
---
     
---
   
999,441
(17)
   
---
 
$
1.20
   
12/2/2018
   
---
 
$
---
   
---
   
---
     
---
   
999,441
(18)
   
---
 
$
1.40
   
12/2/2018
   
---
 
$
---
   
---
   
---
Lennox L. Vernon
   
54,167
   
20,833
(19)
   
---
 
$
0.37
   
10/24/2017
   
---
 
$
---
   
---
   
---
     
179,517
   
359,035
(20)
   
---
 
$
0.20
   
12/2/2018
   
---
 
$
---
   
---
   
---
     
---
   
35,752
(21)
   
---
 
$
0.60
   
12/2/2018
   
---
 
$
---
   
---
   
---
     
---
   
35,752
(22)
   
---
 
$
0.80
   
12/2/2018
   
---
 
$
---
   
---
   
---
     
---
   
35,752
(23)
   
---
 
$
1.00
   
12/2/2018
   
---
 
$
---
   
---
   
---
     
---
   
35,752
(24)
   
---
 
$
1.20
   
12/2/2018
   
---
 
$
---
   
---
   
---
     
---
   
35,752
(25)
   
---
 
$
1.40
   
12/2/2018
   
---
 
$
---
   
---
   
---
     
53,385
   
9,115
(26)
   
---
 
$
0.20
   
9/14/2019
   
---
 
$
---
   
---
   
---
_________________________
 
(1)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
(2)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
(3)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
 
46

 
(4)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
(5)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
(6)  
These stock options vest monthly from January 2009 through June 2012.
 
(7)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
(8)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
(9)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
(10)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
(11)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
(12)  
These stock options vest monthly from February 2008 through February 2011.
 
(13)  
These stock options vest monthly from January 2009 through June 2012.
 
(14)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
(15)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
(16)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
(17)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
 
47

 
(18)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
(19)  
These stock options vest monthly from October 2007 through October 2010.
 
(20)  
These stock options vest monthly from January 2009 through June 2012.
 
(21)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
(22)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
(23)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
(24)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
(25)  
These stock options vest only upon the earlier of a liquidation event or a firmly underwritten public offering of the Company's common stock at a price per share equal to or greater than $0.40 and pursuant to which all of the Company's common stock issuable upon conversion of the Series A Preferred Stock and upon exercise of the Warrants held by the investors party to the Securities Purchase Agreement will be sold.
 
(26)  
These stock options vest monthly from October 2006 through October 2010.
 
Director Compensation for Fiscal Year 2009
 
    The compensation paid by us to the non-employee directors for fiscal year 2009 is set forth in the table below:
 
Director Compensation for Fiscal Year 2009
Name
Fees Earned or Paid in Cash
($)
Stock Awards
($)
Option Awards(1)
($)
Non-Equity Incentive Plan Compensation  ($)
Nonqualified Deferred Compensation Earnings
($)
All Other Compensation
($)
Total
($)
John Durham(2)
$
29,625
$
---
$
23,492
$
---
$
---
$
---
$
53,117
Michael Jung
$
---
$
---
$
---
$
---
$
---
$
---
$
  ---
Richard Ling
$
---
$
---
$
---
$
---
$
---
$
---
$
  ---
Mark Menell
$
---
$
---
$
---
$
---
$
---
$
---
$
  ---
Riaz Valani(3)
$
88,000
$
---
$
179,800
$
---
$
---
$
---
$
267,800
 
(1)  
The amounts shown in this column represent the compensation costs of stock options for financial reporting purposes for fiscal year 2009 and 2008 under ASC 718, rather than an amount paid to or realized by the named executive officer.  The ASC 718 value as of the grant date for options is spread over the number of months of service required for the grant to become non-forfeitable.  Compensation costs shown in column (f) reflect ratable amounts expensed for grants that were made in fiscal years 2009 and 2008.  There can be no assurance that the ASC 718 amounts will ever be realized.
 
(2)  
Represents compensation paid to Catalyst pursuant to a services agreement between the Company and Catalyst Strategy, Inc. (“Catalyst”), a corporation that is an affiliate of Mr. Durham
 
(3)  
Mr. Valani earned fees and was granted stock options pursuant to a consulting agreement entered into with the Company dated February 1, 2008.
 
 
48

 
Employment Agreements with Our Named Executive Officers
 
James Moloshok
 
    On December 10, 2008, we entered into an employment agreement with James Moloshok.  Mr. Moloshok had previously served as a consultant to us since December 18, 2007.  Under the terms of the employment agreement, Mr. Moloshok is required to devote an average of 30 hours per week to his work for us for an indefinite term, subject to termination by either party in accordance with the terms of the employment agreement.  We may terminate Mr. Moloshok at any time without notice, for any reason or no reason at all.
 
    The employment agreement provides that Mr. Moloshok will be paid a base monthly salary of $20,000, less standard payroll deductions and tax withholdings.  Under the employment agreement, Mr. Moloshok will also be eligible to (i) receive incentive compensation of $100,000 per year, contingent upon attainment of performance targets to be agreed to with our board of directors and (ii) participate in an incentive compensation plan to be established by our board of directors under which Mr. Moloshok will be eligible to receive up to 150,000 fully vested shares of restricted stock per year, contingent upon attainment of performance targets to be agreed to with our board of directors.  In the event Mr. Moloshok’s employment is terminated by us other than for cause, death or disability, or if Mr. Moloshok resigns for good reason, the employment agreement provides for a severance payment of $120,000 and an additional six months of vesting on any options, restricted stock or restricted stock units awarded to Mr. Moloshok.  In the event of a “change of control” before Mr. Moloshok’s service terminates, any unvested options, restricted stock, and restricted stock unit awards granted to Mr. Moloshok will immediately become fully vested.
 
Tabreez Verjee
 
    On December 3, 2008, we entered into an amended and restated employment agreement with Tabreez Verjee, which supersedes and replaces his prior employment agreement dated February 26, 2007.  Mr. Verjee’s employment agreement provides that Mr. Verjee will devote 95% of his time to the performance of his duties to us as President for a salary at the monthly rate of $17,500, less standard payroll deductions and tax withholdings.  Mr. Verjee will also be eligible to receive incentive compensation of up to $100,000 per year, contingent upon attainment of performance targets to be mutually agreed upon with the Board. Upon the termination of Mr. Freeman, in addition to serving as our President, Mr. Verjee became our Interim Chief Executive Officer.
 
    The term of Mr. Verjee’s employment as our President is indefinite, subject to termination by either party in accordance with the terms of the amended and restated employment agreement.  We may terminate Mr. Verjee at any time, without notice, for any reason or no reason at all.  Pursuant to the terms of his amended and restated employment agreement, in the event that Mr. Verjee’s employment is terminated by us other than for cause, death or disability, Mr. Verjee is eligible to receive, among other things, severance payments, in the form of a salary continuation, equal to one year’s base salary (subject to reduction to six months if Mr. Verjee finds subsequent employment prior to the expiration of the twelve month period) and any unvested options awarded to Mr. Verjee will fully and immediately vest, which, to the extent unexercised, will expire on the earlier of three years after such termination or the expiration date as set forth in the applicable stock option agreement.  If Mr. Verjee’s employment is terminated by death or disability, Mr. Verjee’s unvested options will become fully vested which, to the extent unexercised, will expire upon the earlier of three years after such termination or the expiration date as set forth in the applicable stock option agreement.  In the event of a “change of control,” 50% of any unvested options granted to Mr. Verjee shall become fully vested immediately prior to the occurrence of the change of control.  In addition, if there is a “change of control” before Mr. Verjee’s service terminates and if Mr. Verjee’s employment is terminated without cause or resigns for good reason within 12 months of the “change of control,” then in addition to the foregoing vesting of any unvested options, any remaining unvested options shall vest immediately prior to the termination of employment.  Mr. Verjee shall have 36 months from such separation of employment to exercise his vested options (provided that no such exercise period shall extend beyond the maximum term specified in the applicable stock option agreement).
 
Lennox L.  Vernon
 
    On December 10, 2008, we entered into an amended and restated employment agreement with Lennox L.  Vernon, which supersedes and replaces his previous employment agreement dated October 30, 2006.  His amended and restated employment agreement provides that Mr. Vernon will serve as our Chief Accounting Officer and Director of Operations at an annual base salary of $160,000, less standard payroll deductions and tax withholdings.  Mr. Vernon is also eligible to receive annual bonus payments of up to 15% of his base salary, contingent upon meeting certain goals determined by the CEO.  Subsequently, Mr. Vernon’s annual base salary was increased to $168,000.
 
    The term of Mr. Vernon’s employment as our Chief Accounting Officer and Director of Operations is indefinite, subject to termination by either party in accordance with the terms of the amended and restated employment agreement.  We may terminate Mr. Vernon at any time upon 30 days’ notice, for any reason or no reason at all.  Pursuant to the terms of his amended and restated employment agreement, in the event that Mr. Vernon’s employment is terminated by us other than for cause, death or disability, Mr. Vernon is eligible to receive, among other things, severance payments in the form of a salary continuation equal to three months’ base salary.  Generally, if Mr. Vernon’s employment is terminated by us for or without cause, by Mr. Vernon with or without good reason, or by death or disability, Mr. Vernon’s unvested options will immediately expire.  If there is a “change of control” before Mr. Vernon’s service terminates, and if Mr. Vernon’s employment is terminated without cause or if Mr. Vernon resigns for good reason within 12 months of the “change of control,” any unvested options granted to Mr. Vernon will immediately become fully vested.  Any unexercised vested options will expire one month after the termination of Mr. Vernon’s employment.
 
Matt Freeman
 
    On December 3, 2008, we entered into an employment agreement with Mr. Freeman which superseded his prior employment agreement dated June 5, 2008.  His employment agreement provided for a salary at the monthly rate of $50,000, less standard payroll deductions and tax withholdings.  Mr. Freeman was eligible to receive incentive compensation of up to $150,000 per year, contingent upon attainment of performance targets to be mutually agreed upon with the Board.
 
    Mr. Freeman’s employment was terminated effective as of November 30, 2009. Mr. Freeman continues to serve as a director on the Company’s board. In connection with Mr. Freeman’s termination, we entered into a Separation Agreement and Mutual Release pursuant to which, among other things: (i) we agreed to pay Mr. Freeman all accrued salary and all accrued and unused vacation benefits earned through November 30, 2009, subject to standard payroll deductions, withholding taxes and other obligations; (ii) we agreed to pay Mr. Freeman his current base salary for six month, equal to $300,000, in monthly installments in the form of a salary continuation; (iii) a one-time lump sum payment of $75,000 payable prior to December 31, 2010; and (iv) the parties agreed to terminate Mr. Freeman’s existing employment agreement and to release each other from any and all claims that they may have against each other.
 
 
49

 
 ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
 
    The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 27, 2010.  The table sets forth the beneficial ownership of each person who, to our knowledge, beneficially owns more than 5% of the outstanding shares of common stock, each of our directors and executive officers, and all of our directors and executive officers as a group.  The address of each director and executive officer is c/o Betawave Corporation, 706 Mission Street, 10 th Floor, San Francisco, California 94103.
 
 
Shares of
Common
Stock
Beneficially
Owned
   
Percentage of Class of
Shares Beneficially
Owned(1)
 
Tabreez Verjee
 
 
37,746,413
(2)
 
 
61.5
%
Riaz Valani
   
28,939,706
(3)
   
55.1
%
James Moloshok
   
6,007,596
(4)
   
17.2
%
Matt Freeman
   
16,539,590
(5)
   
36.1
%
Michael Jung
   
101,739,671
(6)
   
77.7
%
Richard Ling
   
50,869,855
(7)
   
63.5
%
Mark Menell
   
76,304,753
(8)
   
72.3
%
John Durham
   
468,389
(9)
   
1.6
%
Lennox L. Vernon
   
376,972
(10)
   
1.3
%
Executive Officers and Directors as Group (9 persons)
 
 
219,638,987
 
 
 
90.4
%
 
(1)
Beneficial ownership percentages are calculated based on 29,230,284 shares of common stock issued and outstanding as of March 26, 2010.  Beneficial ownership is determined in accordance with Rule 13d-3 of the Exchange Act.  The number of shares beneficially owned by a person includes shares underlying options, warrants or other convertible securities held by that person that are currently exercisable (or convertible) or exercisable (or convertible) within 60 days of March 26, 2010.  The shares issuable pursuant to the exercise of those options, warrants or other convertible securities are deemed outstanding for computing the percentage ownership of the person holding those options, warrants or other convertible securities, but are not deemed outstanding for the purposes of computing the percentage ownership of any other person.  The persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite that person’s name, subject to community property laws, where applicable, unless otherwise noted in the applicable footnote.
 
(2)
Includes (i) 9,302,820 shares underlying stock options exercisable within 60 days of March 26, 2010 held by Mr. Verjee, (ii) 5,553,744 shares of common stock, 9,264,700 shares of common stock issuable upon conversion of Series A preferred stock and 3,705,880 shares of common stock issuable upon exercise of warrants exercisable within 60 days of March 26, 2010 held by Internet Television Distribution LLC, of which Mr. Verjee is a member and over which Mr. Verjee and Mr. Valani have shared voting and investment power; and (iii) 82,032 shares of common stock, 6,666,660 shares of common stock issuable upon conversion of Series A preferred stock and 2,666,664 shares of common stock issuable upon exercise of warrants exercisable within 60 days of March 26, 2010 held by Technology Credit Partners LLC, of which Mr. Verjee is a member and over which Mr. Verjee and Mr. Valani have shared voting and investment power.  Excludes 9,784,375 shares underlying stock options not exercisable within 60 days of March 26, 2010 and held by Mr. Verjee.
 
(3)
Includes (i) 46,805 shares of common stock held by Mr. Valani, (ii) 840,000 shares underlying stock options exercisable within 60 days of March 26, 2010 held by Mr. Valani, (iii) 5,553,744 shares of common stock, 9,264,700 shares of common stock issuable upon conversion of Series A preferred stock and 3,705,880 shares of common stock issuable upon exercise of warrants exercisable within 60 days of March 26, 2010 held by Internet Television Distribution LLC, of which Mr. Valani is a member and over which Mr. Valani and Mr. Verjee have shared voting and investment power; and (iv) 82,032 shares of common stock, 6,666,660 shares of common stock issuable upon conversion of Series A preferred stock and 2,666,664 shares of common stock issuable upon exercise of warrants exercisable within 60 days of March 26, 2010 held by Technology Credit Partners LLC, of which Mr. Valani is a member and over which Mr. Valani and Mr. Verjee have shared voting and investment power.
 
 
50

 
(4)
Includes (i) 274,845 shares of common stock held by Mr. Moloshok, (ii) 3,332,327 shares underlying stock options exercisable within 60 days of March 26, 2010 held by Mr. Moloshok, (iii) 1,617,640 shares of common stock issuable upon conversion of Series A preferred stock held by Mr. Moloshok, and (iv) 647,056 shares issuable upon exercise of warrants exercisable within 60 days of March 26, 2010.  Excludes 2,467,619 shares underlying stock options not exercisable within 60 days of March 26, 2010 and held by Mr. Moloshok.
 
(5)
Includes 16,539,590 shares underlying stock options exercisable within 60 days of March 26, 2010 held by Mr. Freeman.
 
(6)
Includes (i) 50,000,000 shares of common stock issuable upon conversion of Series A preferred stock, (ii) 21,124,400 shares of common stock issuable upon conversion of notes issued in March 2010, and (iii) and 30,615,271 shares of common stock issuable upon exercise of warrants exercisable within 60 days of March 26, 2010, all held by Panorama Capital, L.P.  Mike Jung serves as a Member of Panorama Capital Management, LLC, the general partner of Panorama Capital, L.P.  He shares voting control and dispositive power over the shares but disclaims beneficial ownership, except to the extent of his proportionate pecuniary interest therein.
 
(7)
Includes (i) 25,000,000 shares of common stock issuable upon conversion of Series A preferred stock, (ii) 10,562,220 shares of common stock issuable upon conversion of notes issued in March 2010, and (iii) 15,307,635 shares of common stock issuable upon exercise of warrants exercisable within 60 days of March 26, 2010, all held by Rembrandt Venture Partners Fund Two, L.P. and Rembrandt Venture Partners Fund Two-A, L.P.  Richard Ling serves as a Member of Rembrandt Venture Partners Fund Two, LLC, the general partner of Rembrandt Venture Fund Two, L.P. and Rembrandt Venture Fund Two-A, L.P.  He shares voting control and dispositive power over the shares but disclaims beneficial ownership, except to the extent of his proportionate pecuniary interest therein
 
(8)
Includes (i) 37,500,000 shares of common stock issuable upon conversion of Series A preferred stock, (ii) 15,843,300 shares of common stock issuable upon conversion of notes issued in March 2010, and (iii) 22,961,453 shares of common stock issuable upon exercise of warrants exercisable within 60 days of March 26, 2010 all held by Rustic Canyon Ventures III, L.P.  Mark Menell serves as a Member of Rustic Canyon GP III, LLC, the general partner of Rustic Canyon Ventures III, L.P.  He shares voting control and dispositive power over the shares but disclaims beneficial ownership, except to the extent of his proportionate pecuniary interest therein.
 
(9)
Includes (i) 383,689 shares underlying stock options exercisable within 60 days of March 26, 2010 held by Mr. Durham and (ii) 50,000 shares of common stock issuable upon exercise of a warrant exercisable within 60 days of March 26, 2010 held by Catalyst SF, of which Mr. Durham is a member and over which he has shared voting and investment power. Excludes 158,599 shares underlying stock options not exercisable within 60 days of March 26, 2010 held by Mr. Durham.
 
(10)
Includes 340,282 shares underlying stock options exercisable within 60 days of March 26, 2010 held by Mr. Vernon.  Excludes 477,842 shares underlying stock options not exercisable within 60 days of March 26, 2010 held by Mr. Vernon.
 
 
51

 
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
 
Transactions with Panorama Capital, L.P., Rustic Canyon Ventures III, L.P., Rembrandt Venture Fund Two, L.P. and Rembrandt Venture fund Two-A, L.P.
 
    In connection with the closings under the note and warrant purchase agreement in March 2010, Panorama Capital, L.P. (“Panorama Capital”), which is an affiliate of Mr. Jung, Rustic Canyon Ventures III, L.P. (“Rustic”), which is an affiliate of Mr. Menell, Rembrandt Venture Partners Fund Two, L.P. (“Rembrandt Fund Two”), which is an affiliate of Mr. Ling and Rembrandt Venture Partners Fund Two-A, L.P. (“Rembrandt Fund Two-A,” and together Panorama Capital, Rustic and Rembrandt Fund Two, the "Lead Investors"), which is also an affiliate of Mr. Ling, purchased notes in the aggregate principal amount of $2,376,494 and warrants to purchase 23,884,359 shares of the Company's common stock. The Lead Investors previously purchased Series A preferred stock and warrants from us in December 2008 for an aggregate purchase price of $22,500,000.
 
 
    Effective as of February 1, 2008, we entered into another one-year consulting agreement with Mr. Valani under which Mr. Valani is to provide us with business and corporate development consulting services and devote an average of 20% of his working time to provide such services.  Pursuant to the terms of the consulting agreement, on February 5, 2008, our board of directors granted to Mr. Valani, non-qualified stock options under our 2007 non-qualified stock option plan to purchase 440,000 shares of common stock, with an exercise price of $0.31 per share, which was the closing price per share of our common stock on the OTC Bulletin Board on the date of grant.  Thirty-three percent of the total amount of such options granted to Mr. Valani vested on the date of the grant and the remainder of the options granted to Mr. Valani vest monthly at the rate of 1/24th per month, provided that Mr. Valani continues to provide services to us.  In addition, the consulting agreement provides for us to pay to Mr. Valani a fee consisting of cash compensation of $8,000 per month, the payment of which is deferred until (i) our board of directors elects to pay the cash compensation in its discretion, (ii) the occurrence of a change in control, (iii) two years after the effective date of the consulting agreement or (iv) the date when Mr. Valani ceases to provide services to us and is no longer a member of our board of directors.  In connection with the closings under the securities purchase agreement in December 2008, we terminated the consulting agreement.
 
Transactions with Internet Television Distribution LLC and Technology Credit Partners, Affiliates of Tabreez Verjee and Riaz Valani
 
    In connection with the closings under the securities purchase agreement in December 2008, Internet Television Distribution LLC (“ITD”), which is an affiliate of Mr. Verjee and Mr. Valani, exchanged (i) Subordinated Notes held by ITD in the aggregate principal amount of $1,852,941 into 463,235 shares of Series A preferred stock and related warrants to purchase 3,705,880 shares of our common stock, and (ii) warrants held by ITD to purchase 1,798,973 shares of common stock at an exercise price of $1.75 per share into 1,574,102 shares of common stock.  ITD previously purchased the Subordinated Notes and warrants from us in April and June 2008 for an aggregate purchase price of $1,575,000.
 
    In addition, in connection with the closings under the securities purchase agreement, Technology Credit Partners (“TCP”), which is also an affiliate of Mr. Verjee and Mr. Valani, exchanged (i) Senior Notes held by TCP in the aggregate principal amount of $1,000,000 into 333,333 shares of Series A preferred stock and related warrants to purchase 2,666,664 shares of our common stock, and (ii) warrants held by TCP to purchase 93,750 shares of common stock at an exercise price of $1.75 per share into 82,032 shares of common stock.  TCP purchased the Senior Notes and warrants from various prior holders of such securities during 2008.
 
Transactions with James Moloshok
 
    In connection with the closings under the securities purchase agreement in December 2008, Mr. Moloshok exchanged (i) Subordinated Notes held by Mr. Moloshok in the aggregate principal amount of $323,529 into 80,882 shares of Series A preferred stock and related warrants to purchase 647,056 shares of our common stock, and (ii) warrants held by Mr. Moloshok to purchase 314,108 shares of common stock at an exercise price of $1.75 per share into 274,845 shares of common stock.  Mr. Moloshok previously purchased the Subordinated Notes and warrants from us in April and June 2008 for an aggregate purchase price of $275,000.
 
Transactions with Catalyst Strategy, Inc., an affiliate of John Durham
 
    In connection with a services agreement between the Company and Catalyst Strategy, Inc. (“Catalyst”), a corporation that is an affiliate of Mr. Durham, on February 28, 2008 we issued to Catalyst a warrant to purchase 50,000 shares of our common stock for a period of five years at an exercise price of $1.75 per share.  The exercise price of the warrant has subsequently been adjusted to $0.20 per share, pursuant to its exercise price adjustment provisions.  Both the services agreement and the terms of the warrant grant were approved by our board of directors following disclosure of Mr. Durham’s relationship with Catalyst.
 
 
52

 
 
    Our board of directors uses the definition of “independent director” as set forth in NASDAQ Marketplace Rule 4200(a)(15) in determining whether members of our board of directors are independent.  Our board of directors has affirmatively determined that Mr. Durham, Mr. Mennell, Mr. Jung and Mr. Ling is each an “independent director” as that term is set forth in NASDAQ Marketplace Rule 4200(a)(15).  Our board of directors did not consider any transactions, relationships or arrangements not disclosed pursuant to this Item 13, “Certain Relationships and Related Transactions, and Director Independence” of this Annual Report on Form 10-K in making its subjective determination that each of these directors is an “independent director” as that term is set forth in NASDAQ Marketplace Rule 4200(a)(15).
 
    We do not currently have a separately designated nominating committee.
 
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
  
    Set forth below is a summary of aggregate fees billed by Rowbotham & Company LLP, our independent registered public accounting firm, for services in the fiscal period ended December 31, 2008.  In determining the independence of Rowbotham & Company LLP, the board of directors acting as the audit committee considered whether the provision of non-audit services is compatible with maintaining Rowbotham & Company LLP’s independence.
 
    2009     2008  
 Audit Fees (1)(2)   $ 270,659     $ 179,614  
 Audit-Related Fees     ---       ---  
 Tax Fees     23,105       32,837  
 All Other Fees     ---       ---  
 Total Fees   $ 293,764     $ 212,451  
 
 
(1)
The total audit fees and reimbursement of expenses billed by Rowbotham & Company LLP for fiscal year 2009 were $270,659 for the audits performed during such fiscal year, the reviews of the quarterly financial statements and audit services provided in connection with other statutory or regulatory filings.
 
(2)
The total audit fees and reimbursement of expenses billed by Rowbotham & Company LLP for fiscal year 2008 were $179,614 for the audits performed during such fiscal year, the reviews of the quarterly financial statements and audit services provided in connection with other statutory or regulatory filings.
 
PART IV
 
  ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
 
    The exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index immediately preceding such exhibits, which Exhibit Index is incorporated herein by reference.
 
 
53

 
SIGNATURES
 
    Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
BETAWAVE CORPORATION
     
     
     
 
By:
/s/ Tabreez Verjee
   
Tabreez Verjee
   
President and Interim Chief Executive Officer
     
   
Date: March 31, 2010
 
POWER OF ATTORNEY
 
    Each of the undersigned officers and directors of Betawave Corporation, a Nevada corporation, does hereby make, constitute and appoint Tabreez Verjee the undersigned’s true and lawful attorney-in-fact, with power of substitution, for the undersigned and in the undersigned’s name, place and stead, to sign and file with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K for the year ended December 31, 2009, any and all amendments and exhibits to such Annual Report on Form 10-K and any and all applications, instruments, and other documents to be filed with the Securities and Exchange Commission pertaining to such Annual Report on Form 10-K or any amendments thereto, granting unto said attorneys-in-fact, and either of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted.
 
    Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
 
Title
 
Date
         
 
 
 
 
 
/s/ Tabreez Verjee
 
President and Director
 
March 31, 2010
Tabreez Verjee
 
 (Principal Executive Officer)
 
 
         
 
 
 
 
 
/s/ Lennox L. Vernon
 
Chief Accounting Officer
 
March 31, 2010
Lennox L. Vernon
 
(Principal Financial and Accounting Officer)
 
 
         
 
 
 
 
 
/s/ John Durham
 
Director
 
March 31, 2010
John Durham
 
 
 
 
         
 
 
 
 
 
/s/ Michael Jung
 
Director
 
March 31, 2010
Michael Jung
 
 
 
 
         
 
 
 
 
 
/s/ Richard Ling
 
Director
 
March 31, 2010
Richard Ling
 
 
 
 
         
 
 
 
 
 
 
 
Director
 
 
Mark Menell
 
 
 
 
         
 
 
 
 
 
/s/ James Moloshok
 
Executive Chairman and Director
 
March 31, 2010
James Moloshok
 
 
 
 
         
 
 
 
 
 
/s/ Riaz Valani
 
Director
 
March 31, 2010
Riaz Valani
 
 
 
 
         
         
/s/ Matt Freeman
 
Director
 
March 31, 2010
Matt Freeman
 
 
 
 
 
 
 
 
 
 
S-1
 

 
EXHIBIT INDEX
 
Exhibit No.
 
Description
 
Filed Herewith or Incorporated by Reference
2.1
 
Agreement and Plan of Merger and Reorganization, dated as of October 27, 2006, by and among GoFish Corporation, a Nevada corporation, GF Acquisition Corp., a California corporation, GoFish Technologies, Inc., a California corporation, ITD Acquisition Corp., a Delaware corporation and Internet Television Distribution Inc., a Delaware corporation.
 
Incorporated by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K dated October 27, 2006 filed with the Securities and Exchange Commission on October 31, 2006 (File No. 333-131651).
         
3.1
 
Articles of Incorporation of Betawave Corporation (f/k/a Unibio Inc.) filed with the Delaware Secretary of State on September 21, 2010.
 
Incorporated by reference to Exhibit 3.3 to Registrant’s Registration Current Report on Form 8-K filed with the Securities and Exchange Commission on September 23, 2009 (File No. 333-131651).
         
3.2
 
Bylaws of Betawave Corporation.
 
Incorporated by reference to Exhibit 3.5 to Registrant’s Registration Current Report on Form 8-K filed with the Securities and Exchange Commission on September 23, 2009 (File No. 333-131651).
         
4.1
 
Form of Warrant of GoFish Corporation issued in private offering completed October 27, 2006.
 
Incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated October 27, 2006 filed with the Securities and Exchange Commission on October 31, 2006 (File No. 333-131651).
         
4.2
 
Purchase Agreement dated as of June 7, 2007 by and among GoFish Corporation and the investors identified on the signature pages thereto.
 
Incorporated by referenced to Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated June 7, 2007 filed with the Securities and Exchange Commission on June 8, 2007 (File No. 333-131651).
         
4.3
 
Registration Rights Agreement dated as of June 7, 2007, by and among GoFish Corporation and the investors signatory thereto.
 
Incorporated by referenced to Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated June 7, 2007 filed with the Securities and Exchange Commission on June 8, 2007 (File No. 333-131651).
         
4.4
 
Form of Note issued in June 2007 financing.
 
Incorporated by referenced to Exhibit 4.3 to Registrant’s Current Report on Form 8-K dated June 7, 2007 filed with the Securities and Exchange Commission on June 8, 2007 (File No. 333-131651).
         
4.5
 
Form of Warrant issued in June 2007 financing.
 
Incorporated by referenced to Exhibit 4.4 to Registrant’s Current Report on Form 8-K dated June 7, 2007 filed with the Securities and Exchange Commission on June 8, 2007 (File No. 333-131651).
         
10.1
 
Form of Subscription Agreement, dated as of October 27, 2006, by and between GoFish Corporation and the investors in the private offering completed October 27, 2006.
 
Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K dated October 27, 2006 filed with the Securities and Exchange Commission on October 31, 2006 (File No. 333-131651).
         
10.2
 
Split Off Agreement, dated as of October 27, 2006, by and among GoFish Corporation, Dianxiang Wu, Jianhua Xue, GoFish Technologies, Inc. and GF Leaseco, Inc.
 
Incorporated by reference to Exhibit 10.4 to Registrant’s Current Report on Form 8-K dated October 27, 2006 filed with the Securities and Exchange Commission on October 31, 2006 (File No. 333-131651).
         
 
 
S-2

 
         
10.3
 
Form of Indemnity Agreement by and between GoFish Corporation and Outside Directors of GoFish Corporation.
 
Incorporated by reference to Exhibit 10.6 to Registrant’s Current Report on Form 8-K dated October 27, 2006 filed with the Securities and Exchange Commission on October 31, 2006 (File No. 333-131651).
         
10.4
 
2006 Equity Incentive Plan.
 
Incorporated by reference to Exhibit 10.7 to Registrant’s Current Report on Form 8-K dated October 27, 2006 filed with the Securities and Exchange Commission on October 31, 2006 (File No. 333-131651).
         
10.5
 
Form of Incentive Stock Option Agreement by and between GoFish Corporation and participants under the 2006 Equity Incentive Plan.
 
Incorporated by reference to Exhibit 10.8 to Registrant’s Current Report on Form 8-K dated October 27, 2006 filed with the Securities and Exchange Commission on October 31, 2006 (File No. 333-131651).
         
10.6
 
Form of Non-Qualified Stock Option Agreement by and between GoFish Corporation and participants under the 2006 Equity Incentive Plan.
 
Incorporated by reference to Exhibit 10.9 to Registrant’s Current Report on Form 8-K dated October 27, 2006 filed with the Securities and Exchange Commission on October 31, 2006 (File No. 333-131651).
 
         
10.7
 
GoFish Corporation 2007 Non-Qualified Stock Option Plan (as amended through February 5, 2008)
 
Incorporated by reference to Exhibit 10.29 to Registrant's Annual Report on Form 10-KSB, dated March 31, 2009, filed with the Securities and Exchange Commission on March 31, 2008 (File No. 333-131651).
         
10.8
 
Advertising Representation Agreement, dated as of December 10, 2007, between MiniClip and GoFish Corporation.
 
Incorporated by reference to Exhibit 10.30 to Registrant's Annual Report on Form 10-KSB, dated March 31, 2009, filed with the Securities and Exchange Commission on March 31, 2008 (File No. 333-131651).
         
10.9
 
Stock and Warrant Issuance Agreement, dated as of December 10, 2007, between MiniClip Limited and GoFish Corporation.
 
Incorporated by reference to Exhibit 10.33 to Registrant's Annual Report on Form 10-KSB, dated March 31, 2009, filed with the Securities and Exchange Commission on March 31, 2008 (File No. 333-131651).
 
         
21.1
 
Subsidiaries of GoFish Corporation.
 
Incorporated by reference to Exhibit 21.1 to Registrant’s Amendment No. 2 to Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on August 24, 2007 (File No. 333-142460).
         
24.1
 
Power of Attorney (included on signature page)
 
Filed herewith.
         
31.1
 
Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a).
 
Filed herewith.
         
31.2
 
Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a).
 
Filed herewith.
         
32.1
 
Certification of the Principal Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Filed herewith.
         
32.2
 
Certification of the Principal Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Filed herewith.
 
*
 
Confidential treatment requested for certain portions of this exhibit, which portions are omitted and filed separately with the Securities and Exchange Commission.

 
S-3

 
BETAWAVE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Audited Financial Statements
 
Page
 
Report of Independent Registered Public Accounting Firm
   
F-1
 
Consolidated Balance Sheets as of December 31, 2009 and 2008
   
F-2
 
Consolidated Statements of Operations for the Years Ended December 31, 2009 and 2008
   
F-3
 
Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2009 and 2008
   
F-4
 
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009 and 2008
   
F-5
 
Notes to the Consolidated Financial Statements
   
F-6
 
         

 
 

 
Report of Independent Registered Public Accounting Firm


The Board of Directors and Stockholders of
Betawave Corporation

We have audited the accompanying consolidated balance sheets of Betawave Corporation and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis of designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial positions of the Company as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred net loss since its inception, has experienced liquidity problems, negative cash flows from operations, and a working capital deficit at December 31, 2009, that raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Rowbotham & Company LLP
San Francisco, California
March 31, 2010

 
F-1

 


Betawave Corporation
Consolidated Balance Sheets
As of December 31, 2009 and 2008

   
December 31,
   
December 31,
 
   
2009
   
2008
 
Assets
           
Current assets:
           
Cash and cash equivalents
 
$
681,847
   
$
11,863,121
 
Restricted cash
   
53,750
     
-
 
Trade accounts receivable, net of allowance for doubtful accounts of none at December 31, 2009 and 2008
   
2,462,136
     
3,108,136
 
Prepaid expenses
   
233,566
     
961,829
 
Total current assets
   
3,431,299
     
15,933,086
 
                 
Property and equipment, net
   
57,988
     
236,448
 
Line of credit fees, net of amortization of $44,765 and none at December 31, 2009 and 2008, respectively
   
74,608
     
-
 
Deposits
   
117,179
     
113,029
 
Total assets
 
$
3,681,074
   
$
16,282,563
 
                 
Liabilities and Stockholders’ Equity (Deficit)
               
Current liabilities:
               
Line of credit
 
$
1,150,564
   
$
-
 
Accounts payable
   
2,454,703
     
4,085,886
 
Accrued liabilities
   
691,939
     
1,601,840
 
Deferred revenue
   
91,875
     
109,243
 
Total current liabilities
   
4,389,081
     
5,796,969
 
                 
Commitments and contingencies
   
     
 
                 
Stockholders’ equity (deficit):
               
Preferred Stock: $0.001 par value; 10,000,000 shares authorized; 7,065,293 shares issued and outstanding at December 31, 2009 and 2008 (liquidation value of $28,261,172 at December 31, 2009 and 2008)
   
7,065
     
7,065
 
Common Stock: $0.001 par value; 400,000,000 shares authorized; 29,230,284 and 29,229,284 shares issued and outstanding at December 31, 2009 and 2008, respectively
   
29,231
     
29,230
 
Notes receivable from stockholders
   
-
     
(18,910
)
Additional paid-in capital
   
55,885,690
     
51,563,483
 
Accumulated deficit
   
(56,629,993
)
   
(41,095,274
)
Total stockholders’ equity (deficit)
   
(708,007)
     
10,485,594
 
Total liabilities and stockholders’ equity (deficit)
 
$
3,681,074
   
$
16,282,563
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
F-2

 
 
Betawave Corporation
Consolidated Statements of Operations
For the Years Ended December 31, 2009 and 2008

   
December 31,
   
December 31,
 
   
2009
   
2008
 
Revenues
 
$
7,682,939
   
$
7,701,599
 
                 
Cost of revenues and expenses:
               
Cost of revenue
   
7,284,970
     
6,551,870
 
Sales and marketing
   
8,715,930
     
6,480,550
 
Product development
   
581,057
     
713,964
 
General and administrative
   
6,617,112
     
6,024,801
 
Loss on debt extinguishment
   
-
     
2,736,832
 
Total costs of revenues and expenses
   
23,199,069
     
22,508,017
 
Operating loss
   
(15,516,130
)
   
(14,806,418
)
                 
Other income (expense):
               
Interest income
   
14,910
     
23,238
 
Miscellaneous income
   
72,405
     
278,740
 
Interest expense
   
(105,904
)
   
(2,465,545
)
Total other income (expense)
   
(18,589
)
   
(2,163,567
)
Net loss before provision for income taxes
   
(15,534,719
)
   
(16,969,985
)
Provision for income taxes
   
     
 
Net loss
 
$
(15,534,719
)
 
$
(16,969,985
)
                 
Net loss per share - basic and diluted
 
$
(0.53
)
 
$
(0.66
)
                 
Shares used to compute net loss per share - basic and diluted
   
29,229,500
     
25,707,208
 
 

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

 
F-3

 
 
Betawave Corporation
Consolidated Statements of Stockholders’ Equity (Deficit)
For the Years Ended December 31, 2009 and 2008
 
                                     
               
Notes
                   
               
Receivable
   
Additional
             
   
Preferred Stock
   
Common Stock
   
From
   
Paid-in
   
Accumulated
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Stockholders
   
Capital
   
Deficit
   
Total
 
Balances at January 1, 2008    
      $
     
25,169,739
      $
25,171
      $
(18,910
)
    $
20,727,408
      $
  (24,125,289
)
    $
(3,391,620
)
Issuance of Common Stock in February to publisher for representation rights
   
     
     
300,000
     
300
     
     
101,700
     
     
102,000
 
Beneficial conversion on 2007 warrants
   
     
     
     
     
     
772,500
     
     
772,500
 
Conversion of  6% senior convertible note in June into common stock
   
     
     
25,000
     
25
     
     
39,975
     
     
40,000
 
Issuance of Series A preferred stock for cash, net of issuance costs
   
5,625,000
     
5,625
     
     
     
     
21,016,813
     
     
21,022,438
 
Conversion of 15% unsecured convertible original discount notes in December
   
1,029,406
     
1,029
     
     
     
     
4,116,595
     
     
4,117,624
 
Exchange of  15% unsecured convertible original issue discount notes warrants in December for common stock
   
     
     
3,498,013
     
3,498
     
     
556,401
     
     
559,899
 
Conversion of 6% senior convertible  in December for preferred stock
   
410,887
     
411
     
     
     
     
1,643,138
     
     
1,643,549
 
Purchase of warrants associated with 6% Senior convertible notes in  December
   
     
     
     
     
     
(134,188
)
   
     
(134,188
)
Exchange of 6% senior note warrants in December for common stock
   
     
     
82,032
     
82
     
     
(82
)
   
     
 
Exchange of placement agents warrants in December for common stock
   
     
     
154,500
     
154
     
     
(154
)
   
     
 
Nonemployee stock-based compensation charge
   
     
     
     
     
     
127,623
     
     
127,623
 
Stock-based compensation charge
   
     
     
     
     
     
2,595,754
     
     
2,595,754
 
Net loss
   
     
     
     
     
     
     
(16,969,985
)
   
(16,969,985
)
     Balances at December
         31, 2008
   
7,065,293
     
7,065
     
29,229,284
     
29,230
     
(18,910
)
   
51,563,483
     
(41,095,274
)
   
10,485,594
 
Issuance of warrants to Silicon Valley Bank in March
   
     
     
     
     
     
33,794
     
     
33,794
 
Issuance of Common Stock in October for cash upon exercise of options
   
     
     
1,000
     
1
     
     
369
     
     
370
 
Write-off of notes receivable from stockholders
   
     
     
     
     
18,910
     
     
     
18,910
 
Non-employee stock-based compensation charge
   
     
     
     
     
     
(263
)    
     
(263
)
Stock-based compensation charge
   
     
     
     
     
     
4,288,307
     
     
4,288,307
 
Net loss
   
     
     
     
     
     
     
(15,534,719
)
   
(15,534,719
)
Balances at December 31, 2009
   
7,065,293
   
$
7,065
     
29,230,284
   
$
29,231
   
$
-
   
$
55,885,690
   
$
(56,629,993
)
 
$
(708,007
)
 
 
The accompanying notes are an integral part of these consolidated financial statements.

 
F-4

 

Betawave Corporation
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2009 and 2008

   
December 31,
   
December 31,
 
   
2009
   
2008
 
Cash flows from operating activities:
           
Net loss
 
$
(15,534,719
)
 
$
(16,969,985
Adjustments to reconcile net loss to net cash used in operating activities:
               
Loss on debt extinguishment
   
-
     
2,736,832
 
Loss on disposal of fixed assets
   
4,898
     
1,959
 
Depreciation and amortization of property and equipment
   
201,990
     
260,028
 
Amortization of line of credit fees
   
44,765
     
-
 
Amortization of convertible note fees
   
-
     
474,618
 
Stock-based compensation
   
4,288,044
     
2,723,377
 
Non cash interest expense
   
-
     
1,866,813
 
Non cash cost of revenues
   
-
     
102,000
 
Write-off of notes receivable from stockholders
   
18,910
     
-
 
Changes in operating assets and liabilities:
               
Trade accounts receivable
   
646,000
     
(1,503,927
)
Prepaid expenses
   
728,263
     
(458,037
)
Line of credit fees
   
(85,579
   
-
 
Other assets
   
(4,150
   
4,950
 
Accounts payable
   
(1,631,184
   
2,687,625
 
Accrued liabilities
   
(909,899
)    
887,146
 
Deferred revenue
   
(17,369
   
109,243
 
Net cash used in operating activities
   
(12,250,030
   
(7,077,358
)
                 
Cash flows from investing activities:
               
Funds held as restricted cash
   
(53,750
)
   
(550,000
)
Funds released from restricted cash
   
-
     
550,000
 
Purchase of property and equipment
   
(28,428
)
   
(41,118
)
Net cash used in investing activities
   
(82,178
)
   
(41,118
                 
Cash flows from financing activities:
               
Proceeds from issuance of Series A Preferred Stock, net of issuance cost of $1,477,562
   
-
     
21,022,438
 
Proceeds from exercise of employee stock options
   
370
     
-
 
Proceeds from issuance of due to stockholder
   
-
     
610,000
 
Repayment of due to stockholder
   
-
     
(400,000
Borrowings on line of credit
   
3,235,359
     
-
 
Payments on line of credit
   
(2,084,795
   
-
 
Proceeds from issuance of unsecured convertible original issue discount notes due June 2010 and related warrants, net of fees of $101,300
   
-
     
3,188,700
 
Repayment of convertible promissory notes
   
-
     
(6,414,187
)
Purchase of warrants
   
-
     
(134,188
Net cash provided by financing activities
   
1,150,934
     
17,872,763
 
Net increase (decrease) in cash and cash equivalents
   
(11,181,274
   
10,754,287
 
Cash and cash equivalents at beginning of the year
   
11,863,121
     
1,108,834
 
Cash and cash equivalents at the end of the year
 
$
681,847
   
$
11,863,121
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-5

 
Betawave Corporation
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2009 and 2008
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 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, Company changed its name 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.  These 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 “Risks Factors” in Part II, Item 1A of this Annual Report on Form10-K 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 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 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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
 
Principles of Consolidation - The consolidated financial statements include the financial statements of Betawave Corporation and its wholly-owned subsidiaries.  All significant transactions and balances between the Betawave Corporation and its subsidiaries have been eliminated in consolidation.
 
Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and disclosures.  Accordingly, actual results could differ from those estimates.
     
Fair Value of Financial Instruments -   The carrying amounts of accounts receivable, prepaid expenses, accounts payable, and accrued liabilities, and deferred revenue, approximate fair value due to the short-term maturities of these instruments. Based on the borrowing rates available to the Company for debt with similar terms, the carrying value of the line of credit approximates fair value.
 
 
F-6

Cash and Cash Equivalents - For purposes of reporting cash flows, the Company considers all short-term, interest-bearing deposits with original maturities of three months or less to be cash equivalents.  Cash and cash equivalents include a certificate of deposit account.
 
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 and cash equivalents in commercial banks.  The Company’s cash and cash equivalents at commercial banks usually exceeds the federally insured limits.
 
Accounts Receivable  - The Company generally requires no collateral from its customers.  An allowance for doubtful accounts will be recorded based on a combination of historical experience, aging analysis, and information on specific accounts.  Account balances will be written-off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.  The Company has recorded an allowance against its receivables of none at December 31, 2009 and 2008.
 
Accounts Receivable Concentrations - At December 31, 2009, three customers accounted for 14%, 12% and 12%, respectively, of accounts receivable.  At December 31, 2008, three customers accounted for 26%, 13% and 7%, respectively, of accounts receivable.
 
Revenue Concentrations - The Company’s revenue is generated mainly from advertisers who purchase inventory in the form of graphical, text-based or video ads on the Company’s Network of websites.  These advertisers’ respective agencies facilitate the purchase of inventory on behalf of their advertisers.  For the year ended December 31, 2009, four customers accounted for 17%, 9%, 7% and 6%, respectively, of total revenues.  For the year ended December 31, 2008, four customers accounted for 22%, 9%, 8% and 5%, respectively, of total revenues.
 
Line of Credit Fees - Line of credit fees are being amortized on a straight-line method over the term of the line of credit. Amortization expense was $44,765 for the year ended December 31, 2009.
 
Property and Equipment - Property and equipment are stated at cost less accumulated depreciation and amortization.  Major improvements are capitalized, while repair and maintenance costs that do not improve or extend the lives of the respective assets are expensed as incurred. Depreciation and amortization charges are calculated using the straight-line method over the useful lives of the assets, generally three years.  Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operating expenses.
 
Impairment of Long-Lived Assets - The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance of long-lived assets may not be recoverable.  When factors indicate that long-lived assets should be evaluated for possible impairment, the Company typically makes various assumptions about the future prospects the asset relates to, considers market factors and uses an estimate of the related undiscounted future cash flows over the remaining life of the long-lived assets in measuring whether they are recoverable.  If the estimated undiscounted future cash flows are less than the carrying value of the asset, a loss is recorded as the excess of the asset’s carrying value over its fair value.  There have been no such impairments of long-lived assets through December 31, 2009 and 2008.
  
Income Taxes - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance is recorded for loss carryforwards and other deferred tax assets where it is more likely than not that such loss carryforwards and deferred tax assets will not be realized. Our policy is to recognize potential accrued interest and penalties related to the liability for uncertain tax benefits, if applicable, in income tax expense. Net operating loss carryforwards since inception remain open to examination by taxing authorities, and will continue to remain open for a period of time post utilization.

 
F-7

 
Revenue Recognition - Revenues are recognized from the display of graphical advertisements on the websites of the publishers in the Company Network as “impressions” are delivered up to the amount contracted for by the advertiser.  An “impression” is delivered when an advertisement appears in pages viewed by users.  Arrangements for these services generally have terms of less than one year.  These revenues are recognized as such because the services have been provided, and the other criteria set forth under FASB’s Accounting Standards Codification (“ASC”) 605-10: Revenue Recognition (“ASC 605-10”) have been met, namely, the fees charged by the Company are fixed or determinable, the advertisers understand the specific nature and terms of the agreed-upon transactions and collectability is reasonably assured.  In accordance with ASC 605-45, Reporting Revenue Gross as Principal Versus Net as an Agent, Betawave reports revenues on a gross basis principally because the Company is the primary obligor to the advertisers.
 
Expense Recognition - Expenses are charged to expense as incurred.
 
Advertising and Promotion Costs - Expenses related to advertising and promotions of products are charged to expense as incurred. Advertising and promotional costs totaled $8,883 and $129,414 for the years ended December 31, 2009 and 2008, respectively.
 
Research and Development - Research and development costs are charged to operating expenses as incurred.
 
Stock-Based Compensation - Effective January 1, 2006, the Company adopted the fair value recognition provisions of ASC 718, Stock Compensation (“ASC 718”) using the modified prospective transition method. Under that transition method, compensation cost recognized for the periods ended December 31, 2009 and 2008 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 Statement of Financial Accounting Standards 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 ASC 718.

Stock-based compensation expense for performance-based options granted to non-employees is determined in accordance with ASC Topic 505-50, Equity-based payments to non-employees (“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 generally accepted accounting principles to recognize the cost for the transaction prior to the measurement date, the fair value of unvested options granted to non-employees is remeasured 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 periods.
  
Included in cost of revenues and expenses is $4,288,044 and $2,723,377 of stock-based compensation for the years ended December 31, 2009 and 2008, respectively.  At December 31, 2009, this amount includes $(2,196) of stock-based compensation related to non-employees, $4,288,307 related to employees and $1,933 related to warrants. At December 31, 2008, this amount includes $36,820 of stock-based compensation related to non-employees, $2,595,755 related to employees, $66,000 related to restricted stock, and $24,802  related to the warrants.
 
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 during the years ended December 31, 2009 and 2008.
 
Loss Per Share  - Basic net loss per share to common stockholders 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 attributable to common shareholders would give effect to the dilutive effect of potential common stock consisting of stock options, warrants 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 for the years ended December 31, 2009 and 2008.
 
 
F-8

 
The following outstanding stock options, warrants and preferred stock (on an as-converted into common stock basis) were excluded from the computation of diluted net loss per share attributable to holders of common stock as they had an antidilutive effect as of December 31, 2009 and 2008:
 
   
December 31,
2009
   
December 31,
2008
 
        Shares issuable upon exercise of employee and non-employee stock options
 
 
523,249
     
4,717,067
 
        Shares issuable upon exercise of warrants
   
-
     
5,744,335
 
        Shares issuable upon conversion of Series A preferred stock
   
7,355,648
     
7,355,648
 
       Total
   
7,878,897
     
17,817,050
 
 
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.

Segments - Segments are defined as components of the Company’s business for which separate financial information is available that is evaluated by the Company’s chief operating decision maker (its CEO) in deciding how to allocate resources and assess performance.  The Company has only one overall operating segment.

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 Consolidated Financial Statements. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on our 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 Consolidated Financial Statements.

 
F-9

 
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 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 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 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 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 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 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 Consolidated Financial Statements.
 
 
F-10

 
 
3.
Fair Value
 

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 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.
 
 
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 December 31, 2009:

     
Level 1
   
Level 2
   
Level 3
   
Total
 
 
Cash and cash equivalents
 
$
681,847
   
$
---
   
$
---
   
$
681,847
 
 
Restricted cash
   
53,750
     
---
     
---
     
53,750
 
 
 Total assets
 
$
735,597
   
$
---
   
$
---
   
$
735,597
 

 
F-11

 
Property and Equipment, net
 
Property and equipment, net consisted of the following at December 31, 2009 and 2008:
 
     
December 31,
2009
   
December 31,
2008
 
 
Computer equipment and software
 
$
672,681
   
$
652,877
 
 
Leasehold improvements
   
145,794
     
145,794
 
 
Furniture and fixtures
   
7,737
     
7,737
 
 
Total property and equipment
   
826,212
     
806,408
 
   Less accumulated depreciation and amortization    
(768,224
)    
(569,960
)
 
Property and equipment, net
 
$
57,988
   
$
236,448
 
 
Depreciation and amortization expense totaled $201,990 and $260,028 for the years ended December 31, 2009 and 2008, respectively.
  
5.
Accrued Liabilities
 
Accrued liabilities consisted of the following at December 31, 2009 and 2008:
 
     
December 31,
2009
   
December 31,
2008
 
 
Accrued vendor obligations
 
$
122,879
   
$
687,928
 
 
Accrued compensation
   
482,103
     
777,290
 
 
Accrued city and county taxes
   
34,362
     
41,836
 
 
Accrued interest expenses
   
6,140
     
-
 
 
Other
   
46,455
     
94,786
 
 
Total accrued liabilities
 
$
691,939
   
$
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”) which provided 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 borrowings were secured based upon a percentage of certain eligible billed and unbilled receivables. The Company was eligible to borrow, repay and reborrow under the line of credit facility at any time. The advances under the line of credit facility accrued 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%.
 
On November 25, 2009, the Company and SVB entered into an Amended and Restated Loan and Security Agreement (the “A&R Loan Agreement”) which amends and restates the Loan and Security Agreement. The A&R Loan Agreement amended and restated the Loan and Security Agreement to, among other things: (i) modify the interest rate on the financed receivable to be based on the gross amount (rather than the financed amount) of the financed receivables and other related fees described below, (ii) accelerate the maturity date from March 27, 2011 to January 31, 2010 (the “Maturity Date”), (iii) increase the default rate from 4% to 5% and (v) remove the financial covenants in the Original Loan Agreement. The available revolving credit line remains set at $1.5 million. The Maturity Date was subsequently extended to March 31, 2010.

 
 
F-12

 
The borrowings under the A&R Loan Agreement remain secured and based upon a percentage of certain eligible billed accounts receivables of the Company, and unbilled accounts receivables are no longer included in the borrowing base. Under the A&R Loan Agreement, the Company may borrow, repay and reborrow under the line of credit facility at any time subject to certain terms and conditions, but the advances are subject to a lockbox arrangement and are paid when payment is received on such financed receivable. Advances under the line of credit facility shall continue to accrue interest at a per annum rate equal to the greater of (i) 3.0% above Silicon Valley Bank’s announced prime rate or (ii) 7.0% which interest shall be charged to the Company based on the gross amount of the financed receivables. The A&R Loan Agreement also requires that the Company pay certain additional monthly fees including a collateral handling fee equal to 0.50% of the gross amount of the financed receivables. Under the A&R Loan Agreement, the minimum monthly finance charge (including interest and fees) to be paid by the Company is $5,500. The obligations under the A&R Loan Agreement remain collateralized by substantially all of the Company’s assets. The A&R Loan Agreement retains the affirmative and negative covenants principally relating to liens, indebtedness, investments, distributions to shareholders and the use and disposition of assets. Certain covenants were amended pursuant to the A&R Loan Agreement and the financial covenants set forth in the Original Loan Agreement were removed. In addition, the A&R Loan Agreement contains customary events of default. As of December 31, 2009, there is $1,150,564 outstanding under this revolving credit arrangement. At December 31, 2009, we did not have any additional funds available for borrowing. Interest expense totaled $102,662 for the year ended December 31, 2009.

7.
Convertible Notes
 
In June 2007, the Company entered into a purchase agreement (the “Purchase Agreement”) pursuant to which they sold the June 2007 Notes in the aggregate principal amount of $10,300,000 and the June 2007 warrants to purchase an aggregate of 3,862,500 shares of common stock (the “June 2007 Warrants”)  in a private placement transaction (the “June 2007 Private Placement”). The June 2007 Notes were outstanding until their purchase by the Company on or before December 12, 2008.
 
The June 2007 Notes bore interest at a rate of 6% per annum.  The June 2007 Notes had maturity dates three years from the date of issuance and were convertible into shares of the Company’s common stock at a conversion price of $1.60 per share, subject to full-ratchet anti-dilution protection.
 
The Purchase Agreement governing the June 2007 Notes contains various negative covenants which are no longer applicable to the Company.
 
The June 2007 Warrants issued to the investors in the June 2007 Private Placement were exercisable for a period of five years commencing one year after the date of issuance at an exercise price of $1.75 per share.  Utilizing the Black-Scholes valuation model and the following assumptions: estimated volatility of 85%, a contractual life of six years, a zero dividend rate, 5.12% risk free interest rate, and the fair value of common stock of $1.72 per share at date of grant, the Company determined the allocated fair value of the warrant to be $4,924,202.  The Company has recorded this amount as a debt discount and is amortizing the debt discount over the term of the June 2007 Notes.  The amortization is being recorded as interest expense and totaled $1,559,331 for the year ended December 2008.
 
On November 28, 2007, one of the original holders of the June 2007 Notes sold its right, title and interest in its June 2007 Note to a third party at a $42,500 discount.  The Company paid the original holder $42,500 and treated it as a debt discount and is amortizing the debt discount over the term of the June 2007 Notes.  The amortization is being recorded as interest expense and totaled $15,612 for the year ended December 31, 2008.
 
As part of the June 2007 Private Placement, the Company paid placement agent fees equal to 7% of the gross proceeds raised in the June 2007 Private Placement, $721,000, and associated expenses of $367,909 for a total of $1,088,909.  In addition, as part of the June 2007 Private Placement, the Company issued placement agent warrants to purchase an aggregate of 309,000 shares of the Company’s common stock (the “June 2007 Placement Agent Warrants”).  A portion of the June 2007 Placement Agent Warrants that were exercisable for 193,125 of the Company’s  common stock were exercisable for a period of five years commencing one year after issuance at an exercise price of $1.60 per share.  Utilizing the Black-Scholes option-pricing model and an assumed estimated volatility of 85%, an assumed contractual life of five years, an assumed zero dividend rate, an assumed 5.12% risk free interest rate, and an assumed  fair value of the Company’s common stock of $1.72 per share on the  date of issuance, the Company determined the allocated fair value of this portion of the June 2007 Placement Agent Warrants that are exercisable for 193,125 shares of the Company’s common stock to be $235,722.  The remaining portion of the June 2007 Placement Agent Warrants that are exercisable for 115,875 the Company’s common stock are exercisable for a period of five years commencing one year after issuance at an exercise price of $1.75 per share.  Utilizing the Black-Scholes option-pricing model and an assumed estimated volatility of 85%, an assumed contractual life of five years, an assumed zero dividend rate, an assumed 5.12% risk free interest rate, and an assumed fair value of the Company’s common stock of $1.72 per share on the date of issuance, the Company determined the allocated fair value of this remaining portion of the June 2007 Placement Agent Warrants that were exercisable for 115,875 shares of the Company’s common stock to be $138,569.  The total convertible note fees were $1,564,500.  These fees are being amortized to expense over the term of the June 2007 Notes and amounted to $447,618 for the year ended December 31, 2008.
 
Also embedded in the June 2007 Private Placement, is a nondetachable conversion feature that is in-the-money at the commitment date.  Per EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” a beneficial conversion feature allows the securities to be convertible into common stock at the lower of a conversion rate fixed at the commitment date or a fixed discount to the market price of the common stock at the date of conversion.  The embedded beneficial conversion feature is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital.  That amount is calculated at the commitment date as the difference between conversion price and the fair value of the common stock or other securities into which the security is convertible, multiplied by the number of shares into which the security is convertible (intrinsic value).
 
 
F-13

 
The beneficial conversion feature amounted to $772,500 and is recorded as a debt discount and is amortizing over the term of the June 2007 Notes.  The amortization is being recorded as interest expense and totaled $236,900 for the year ended December 31, 2008.
 
In two separate closings, on April 18, 2008 and June 30, 2008, the Company sold unsecured convertible original issue discount notes due June 8, 2010 in the aggregate principal amount of $4,117,647 (the “2008 Notes”) and detachable warrants (the “2008 Warrants”) to purchase an aggregate of 3,997,723 shares of the Company’s common stock, in a private placement transaction for an aggregate purchase price of $3,500,000.  The 2008 Notes and 2008 Warrants were outstanding until their conversion into stock of the Company on December 12, 2008. The 2008 Notes were discounted 15% from their respective principal amounts, and will bear interest at a rate of 15% per annum beginning one year from the date of issuance, payable on any conversion date or the maturity date of the 2008 Notes in cash or shares of the Company’s common stock, at the investor’s option.  The 2008 Notes had a maturity date on June 8, 2010 and were convertible into shares of our common stock, at a conversion price of $2.06 per share, subject to full-ratchet anti-dilution protection.  The Company has recorded $617,648 as a debt discount on the 2008 Notes and is amortizing the debt discount over the term of the 2008 Notes.  The amortization is being recorded as interest expense and totaled $163,207 for the year ended December 31, 2008.
 
The 2008 warrants were exercisable after 181 days from issuance until April 18, 2013 at an exercise price of $1.75 per share.  Utilizing the Black-Scholes option-pricing model and the following assumptions: estimated volatility of 64.9%, a contractual life of five years, a zero dividend rate, 3.34% risk free interest rate, and the fair value of common stock of $1.75 per share at date of grant, the Company determined the initial allocated fair value of the warrants to be $276,858.  The Company has recorded $276,858 as a debt discount and is amortizing the debt discount over the term of the 2008 Notes.  The amortization is being recorded as interest expense and totaled $70,973 for the year ended December 31, 2008.  As part of the issuance on April 18, 2008 and June 30, 2008, the Company paid legal and due diligence fees of $101,300.  These fees are being amortized to expense over the term of the 2008 Notes and amounted to $27,003 for the year ended December 31, 2008.
 
The 2008 Warrants provided for a contingent cash settlement feature, as such, the initial allocated fair value and subsequent re-measurements were classified as Warrant Liability in the Company’s consolidated financial statements.  See Note 12.
 
Interest expense, including amortization of debt discount, totaled $2,465,545 for the year ended December 31, 2008.  In December 2008, the Company issued 7,065,293 in Series A Convertible Preferred Stock.  Of the total shares issued, 5,625,000 shares were issued for net cash proceeds of $21,022,438 with the remaining shares issued in satisfaction of certain convertible notes and related detachable warrants.  The Company utilized proceeds of $6,548,375 from the issuance of the preferred stock to repay the remaining convertible notes and reacquire related detachable warrants.  At December 31, 2008, all convertible notes have been fully paid.  See Note 13.
 
8.
Commitments and Contingencies
 
The Company leases office space under non-cancelable operating leases with expiration dates through 2015.  The future minimum rental payments under these leases at December 31, 2009 are as follows:
 
   
Future Minimum
 
Year Ending December 31:
 
Lease Payments
 
2010
 
 $
415,294
 
2011
   
320,663
 
2012
   
238,156
 
2013
   
248,514
 
2014
   
254,105
 
2015
   
85,328
 
   
$
1,562,060
 
 
Rent expense totaled $555,556 and $363,122 for the years ended December 31, 2009 and 2008, respectively.
 
 
F-14

 
9.
Stockholders’ Equity
 
On September 14, 2006, the Company increased its authorized capital stock from 75,000,000 shares of common stock, par value $0.001, to 300,000,000 shares of common stock, par value $0.001, and 10,000,000 shares of preferred stock, par value $0.001.  On December 11, 2008, pursuant to the approval of the Company’s Board of Directors and holders of a majority of outstanding shares of the Company’s capital stock, the Company increased its authorized shares of common stock, par value $0.001, to 400,000,000.
 
In December 2008, the Company exchanged certain equity classified warrants issued in conjunction with 6% convertible notes for 236,532 shares of Company common stock and $134,188 in cash.  As the warrants were classified in equity, the net effect of these transactions was a reduction in additional paid-in capital of $134,188.
 
 
During 2008, the Company’s Board of Directors authorized 10,000,000 shares of Series A Convertible Preferred Stock (“preferred stock”) with a par value of $.001 per share.  On two separate closings in December 2008, the Company issued to certain investors 5,625,000 shares of preferred stock along with warrants to purchase 45,000,000 shares of the Company’s common stock in exchange for $22,500,000.
 
The Company issued an additional 1,440,293 shares of preferred stock with warrants to purchase 11,522,344 shares of the Company’s common stock in exchange for certain convertible notes and related detachable warrants.  The preferred stock and warrants were issued as combined units valued at $4 per unit with each unit consisting of 1 share of preferred stock with 1 warrant to purchase 8 shares of common stock for $.20 per share.
 
Utilizing the Black-Scholes option-pricing model and the following assumptions: estimated volatility of 78.12%, a contractual life of five years, a zero dividend rate, 1.93% risk free interest rate, and the fair value of common stock on the grant dates of $.20 on December 3, 2008 and $.16 on December 12, 2008, the Company determined the fair value of the warrants to be $5,568,761.  The Company has determined that the warrants meet the requirements for equity classification contained within EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock .  As such, the fair value of the warrants has been recorded in additional paid-in capital and will not be revalued on each reporting date.
 
The Company incurred $1,477,562 in stock issuance costs related to the transactions.  The stock issuance costs have been recorded as reduction of the net proceeds from the sale.  The Company also issued warrants to a placement agent as partial compensation for services related to the issuance of the preferred stock units.  The warrants are for the purchase of 6,665,343 shares of the Company’s common stock and are exercisable for a period of 5 years at an exercise price of $.20 share.  Utilizing the Black-Scholes option-pricing model and the following assumptions: estimated volatility of 78.12%, a contractual life of five years, a zero dividend rate, 1.93% risk free interest rate, and the fair value of common stock on the grant date of $.16 on December 12, 2008, the Company determined the fair value of the warrants to be $632,391.  The Company has determined that the warrants meet the requirements for equity classification contained within EITF 00-19.  However, the issuance of these warrants had no net impact on the Company’s consolidated financial statements as the direct stock issuance expenses deducted from issuance proceeds included in additional paid-in capital are offset by the fair value of the equity classified warrants issued.
 
Based on the fair market value of the Company’s stock on December 3, 2008, the preferred stock issued on that date contained a conversion feature that was in-the-money.  Per EITF 98-5, a beneficial conversion feature allows the securities to be convertible into common stock at the lower of a conversion rate fixed at the commitment date or a fixed discount to the market price of the common stock at the date of conversion.  The beneficial conversion feature is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital.  That amount is calculated at the commitment date as the difference between conversion price and the fair value of the common stock or other securities into which the security is convertible, multiplied by the number of shares into which the security is convertible (intrinsic value).
 
The beneficial conversion feature amounted to $1,007,250.  Because the Company’s preferred stock is not mandatorily redeemable and may be converted to common stock at any time, this beneficial conversion feature would normally be reflected as a dividend to the preferred stockholders.  However, because the Company has an accumulated deficit, such an adjustment would necessarily reduce additional paid-in capital thus having no impact on the Company’s consolidated financial statements.
 
Each share of preferred stock is convertible into 20 shares of common stock, subject to certain anti-dilution and other adjustments as set forth in the certificate of designation of the preferred stock.  So long as 2,434,657 shares of Series A preferred stock remain outstanding, holders of Series A preferred stock shall be entitled to elect four directors to the Company’s board of directors.  Holders of Series A preferred stock also shall have voting rights and shall be entitled to vote, on an as converted basis as set forth in the certificate of designation, together with the holders of common stock as a single class with respect to any matter upon which holders of common stock have the right to vote.
 
The preferred stock will have a liquidation preference of $4.00 per share and shall be entitled to receive dividends, prior and in preference to any declaration or payment of any dividend on the common stock, at the rate of $0.32 per share per annum, when and if any such dividends are declared by the board of directors of the Company.  Any declared and unpaid dividends are not cumulative.  So long as 2,434,657 shares of Series A preferred stock remain outstanding, the Company will be required to obtain the consent of the holders of at least two-thirds of the outstanding shares of Series A preferred stock prior to taking certain actions.
 
 
F-15

 
10.
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.

In 2006, the Company’s Board of Directors adopted a 2006 Equity Incentive 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 2007 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 Non-Qualified Plan to 16,500,000.  On December 2, 2008 the Board increased the number of shares reserved under the Non-Qualified Plan to 69,141,668.  On January 16, 2009, the Board increased the number of shares reserved under the Non-Qualified 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.

 
F-16

 
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 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 June 4, 2008, the Board also granted initial awards under the 2008 Plan, which were granted to certain non-officer employees and consultants of the Company.  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 2008 Plan will initially be administered by the Board.  The Board froze the 2004 Plan on October 27, 2006 and the 2006 Plan on March 31, 2008.  As of December 31, 2008, there were 297,737 shares under the 2004 Plan and 3,073,229 shares under the 2006 Plan that were unavailable for further issuance.

A summary of stock option transactions is as follows:
 
   
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 December 31, 2008
   
9,664,334
     
80,047,496
   
$
0.41
 
Additional shares reserved
   
13,821,501
        ---         ---  
Options granted
   
(11,715,332
)
   
11,715,332
   
$
0.15
 
Options exercised
   
     
(1,000
      $
0.37
 
Options cancelled
   
16,093,286
     
(16,974,384
)
 
$
0.34
 
Balances at December 31, 2009
   
27,863,789
     
74,787,444
   
$
0.38
 
  
 
F-17

 
    The following table summarizes information concerning outstanding options as of December 31, 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
   
343,561
 
7.70
         
138,561
 
 4.48
     
$
0.07
   
125,000
 
9.69
         
 
     
$
0.08
   
617,000
 
9.61
         
312,000
 
 9.63
     
$
0.16
   
8,563,957
 
9.42
         
444,396
 
9.58
     
$
0.19
   
12,057
 
8.89
         
12,057
 
 8.89
     
$
0.20
   
38,543,567
 
8.92
         
27,024,616
 
 8.92
     
$
0.23
   
4,280,556
 
8.26
         
4,280,556
 
 8.26
     
$
0.24
   
73,666
 
8.42
         
61,667
 
 8.42
     
$
0.25
   
65,000
 
8.58
         
40,833
 
 8.58
     
$
0.27
   
400,000
 
7.83
         
288,889
 
7.83
     
$
0.29
   
100,000
 
8.24
         
100,000
 
8.24
     
$
0.35
   
4,746,250
 
8.08
         
4,430,486
 
8.08
     
$
0.37
   
1,738,872
 
7.79
         
1,525,770
 
7.80
     
$
0.42
   
130,000
 
8.02
         
62,292
 
8.02
     
$
0.60
   
2,541,668
 
8.92
         
 
     
$
0.80
   
4,555,557
 
8.70
         
2,013,889
 
8.43
     
$
1.00
   
2,541,668
 
8.92
         
 
 —
     
$
1.20
   
2,541,668
 
8.92
         
 
 —
     
$
1.40
   
2,541,668
 
8.92
         
 
 —
     
$
3.08
   
40,000
 
6.96
         
29,167
 
 6.96
     
$
3.65
   
64,271
 
6.87
         
64,271
 
 6.87
     
$
3.78
   
15,000
 
7.38
         
9,688
 
 7.38
     
$
3.80
   
59,375
 
7.30
         
42,708
 
 7.30
     
$
5.79
   
147,083
 
7.08
         
114,166
 
 7.08
     
       
74,787,444
 
8.83
 
$
73,255
   
40,996,012
 
 8.66
 
$
29,805
 
 
F-18

 
Included in cost of revenues and expenses is $4,288,044 and $2,723,377 of stock-based compensation for the years ended December 31, 2009 and 2008, respectively.  At December 31, 2009, this amount includes $(2,196) of stock-based compensation related to non-employees, $4,288,307 related to employees and $1,933 related to warrants. At December 31, 2008, this amount includes $36,820 of stock-based compensation related to non-employees, $2,595,755 related to employees, $66,000 related to restricted stock and $24,802 related to the warrants.
  
The following table presents stock-based compensation expense included in the Consolidated Statements of Operations related to employee and non-employee stock options, restricted shares and warrants as follows as of December 31, 2009 and 2008:
 
   
December 31,
   
December 31,
 
   
2009
   
2008
 
Cost of revenue
 
$
(1,793
 
$
84,106
 
Sales and marketing
   
1,272,185
     
700,340
 
Product development
   
84,965
     
18,501
 
General and administrative
   
2,932,687
     
1,920,430
 
Total stock-based compensation
 
$
4,288,044
   
$
2,723,377
 
 
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) at December 31, 2009 and 2008:
 
   
December 31,
   
December 31,
 
   
2009
   
2008
 
Risk-free interest rate
   
2.41
%
   
2.16
%
Expected lives
 
6.10 Years
   
5.91 Years
 
Expected volatility
   
71.03
%
   
75.84
%
Dividend yields
   
0
%
   
0
%
 
The weighted-average grant date fair value of the options granted during the years ended December 31, 2009 and 2008 were $0.06 and $0.14, respectively.
 
 
F-19

 
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 December 31, 2009.  At December 31, 2009, 12,708,340 of these options remain outstanding.
 
At December 31, 2009, there was $2,020,730 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 1.99 years.
 
During 2008, the Company accelerated vesting for certain employees who terminated their employment and modified the terms of other options.  As a result, of these modifications the Company recognized additional compensation expense of $202,865 for the year ended December 31, 2008.
 
The Company did not realize any tax benefits from tax deductions of stock-based payment arrangements during the years ended December 31, 2009 and 2008.
 
Stock-based compensation expense related to stock options granted to non-employees is recognized as earned.  In accordance with ASC Topic 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 $(2,196) and $36,820 for the years ended December 31, 2009 and 2008, respectively.
 
A summary of outstanding Common Stock Warrants included those issued as non-employee compensation as of December 31, 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- Investors in public offering
   
3,133,333
   
$
1.72
 
October 2011
              Common Stock- Series A preferred stock units.  See Note 9.
   
56,522,344
   
$
0.20
 
December 2013
              Common Stock- Non-employee compensation.  See Note 9.
   
6,665,343
   
$
0.20
 
December 2013
              Common Stock- Non-employee compensation
   
50,000
   
$
0.20
 
November 2013
              Common Stock- See note below
   
600,000
   
$
0.20
 
March 2014
                Total
   
67,351,020
           
 
In March 2009, the Company issued warrants to purchase 600,000 shares of the Company’s common stock at an exercise price of $0.20 to Silicon Valley Bank in connection with the Loan and Security Agreement. Utilizing the Black-Scholes option pricing model and an assumed estimated volatility of 75%, an assumed contractual life of two and one-half years, an assumed zero dividend rate an assumed 1.27% risk-free interest rate, and an assumed fair value of the Company stock of $0.20 per share on the date of issuance, the Company determined the allocated fair value of these warrants that are exercisable for 600,000 shares of the Company’s common stock to be $33,794. This amount was recorded as line of credit fees.
 
 
F-20

 
In January 2007, in conjunction with a strategic alliance agreement, the Company issued warrants to purchase 166,667 shares of its common stock at an exercise price of $3 per share to a company. In February 2009, these warrants expired and they were canceled.
 
In December 2007, the Company entered into an exclusive relationship with a publisher to sell the publisher's advertising in the U.S. Included in the agreement, in February 2008, the Company granted the publisher 300,000 shares of restricted stock, which had a value of $66,000. In 2009, the shares were no longer restricted.
 
In February 2008, the Company issued warrants to purchase 470,000 shares of the Company's common stock with an exercise price of $1.75 in exchange for services rendered to the Company, of which 90,000 were later forfeited. Of the remaining 380,000 shares, 80,000 were modified as the exercise price decreased to $0.20. In November 2008, the Company entered into a financial advisor agreement and issued a warrant to purchase 50,000 shares of the Company's common stock with an exercise price of $1.75 per share. The warrant was subsequently modified as the exercise price decreased to $0.20. The warrants had a one-year vesting period and in December 2009 were fully vested. The fair value of the warrants was determined using the Black-Scholes valuation model with the weighted-average assumptions previously discussed. Stock-based compensation expense for the years ended December 31, 2009 and 2008 was $1,933 and $24,802, respectively.
 
 
11.
Income Taxes
   
    The provision for income taxes consists of the following for the years ended December 31, 2009 and 2008:
 
   
December 31,
   
December 31,
 
   
2009
   
2008
 
Currently payable (refundable):
           
Federal
 
$
   
$
 
State
   
     
 
Total current
   
     
 
                 
Deferred:
               
Federal
   
     
 
State
   
     
 
Total deferred
   
     
 
Provision for income taxes
 
$
   
$
 
 
 
F-21

 
    A reconciliation of the provision for income taxes with the expected provision for income taxes computed by applying the federal statutory income tax rate (34%) to the net loss before provision for income taxes for the years ended December 31, 2009 and 2008 is as follows:
   
December 31,
   
December 31,
 
   
2009
   
2008
 
               Provision for income taxes at federal statutory rate
 
$
(5,281,804
)
 
$
(5,769,795
)
               Expenses not deductible
   
97,747
     
150,665
 
               Provision to return reconciliation
   
355,590
     
(234,301
               Change in federal valuation allowance
   
4,828,467
     
5,853,431
 
               Provision for income taxes
 
$
   
$
 
  
    As of December 31, 2009, the Company had approximately $45,591,000 of federal and $45,589,000 state operating loss carryforwards potentially available to offset future taxable income.  These net operating loss carryforwards are expected to expire as follows:
 
Year Ended:
 
Federal
   
State
 
2013
 
    
 
$
21,000
 
2014
   
   
   
357,000
 
2015
   
     
1,804,000
 
2016
   
     
4,918,000
 
2017
   
     
15,014,000
 
2018
   
     
12,912,000
 
2019
    
 
     
10,563,000
 
2023
   
21,000
     
 
2024
   
366,000
     
 
2025
   
1,793,000
     
 
2026
   
4,920,000
     
 
2027
   
15,016,000
     
 
2028
   
12,912,000
     
 
2029
   
10,563,000
     
 
   
$
45,591,000
   
$
45,589,000
 
 
The Tax Reform Act of 1986 (the “Act”) provides for a limitation on the annual use of net operating loss carryforwards following certain ownership changes (as defined in the Act) that could limit the Company’s ability to utilize these carryforwards.  Prior equity financings may significantly limit the Company’s ability to utilize the net operating loss carryforwards.
 
 
F-22

 
The components of the deferred tax assets as of December 31, 2009 and 2008 are as follows:
 
   
December 31,
   
December 31,
 
   
2009
   
2008
 
               Deferred tax assets:
           
              Net operating losses
 
$
18,136,875
   
$
14,342,608
 
              Depreciation and amortization
   
103,259
     
70,424
 
              Stock-based compensation
   
2,915,556
     
1,205,972
 
              Reserves and accruals
   
100,358
     
146,597
 
              Deferred revenue
   
-
     
45,513
 
             Total deferred tax asset
   
21,256,048
     
15,811,114
 
              Valuation allowance
   
(21,256,048
)
   
(15,811,114
)
              Net deferred tax assets
 
$
   
$
 
 
    Based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company has provided a full valuation allowance against its net deferred tax assets.
 
    There are no prior or current year tax returns under audit by taxing authorities, and management is not aware of any impending audits.
 
    Tax years that remain open for examination are 2005, 2006, 2007, 2008 and 2009. 
 
    The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company.  In the event the Company has had a change in ownership, utilization of the carryforwards could be restricted.
 
 
F-23

 
12.
Warrant Liability
 
As discussed in Note 8, in two separate closings, on April 18, 2008 and June 30, 2008, the Company sold the 2008 Notes and the 2008 Warrants.  The 2008 Warrants had a five-year term and were exercisable after 181 days from issuance until April 18, 2013 at an exercise price of $1.75 per share. The 2008 Warrant contained a net cash settlement feature, which was available to the warrant holders at their option, in certain change of control circumstances. As a result, under EITF 00-19, the warrants were required to be classified as a liability at their current fair value estimated using the Black-Scholes option-pricing model. Warrants that are classified as a liability are revalued at each reporting date until the warrants are exercised or expire with changes in the fair value reported as interest expense.  Accordingly, we recorded a reduction in interest expense of $226,008 for the year ended December 31, 2008. The decrease represents the change in fair value of the warrant liability from the date of issuance, April 18, 2008, through December 12, 2008, the date the warrants were exchanged for Company common stock. See Note 8.  The aggregate fair value and the assumptions used for the Black-Scholes option-pricing models as of December 12, 2008 were as follows:
 
   
December 12,
 
   
2008
 
Aggregate fair value
 
$
97,437
 
Expected volatility
   
78.12
%
 Weighted average remaining contractual term(years)
   
4.47
 
Risk-free interest rate
   
1.93
%
Expected dividend yield
   
0
%
Common stock price
 
$
0.16
 
 
13.
Loss on Debt Extinguishment
 
In December 2008, the Company repurchased all of its then outstanding convertible debt and related detachable warrants.  The repurchase occurred with a combination of cash payments totaling $6,548,316 and exchanges of convertible debt and warrants for either new Series A preferred stock and warrants or common stock.  
 
The Company recorded a loss on the extinguishment as follows:
 
               
Fair Value of
             
               
Series A
   
Fair Value
       
               
Preferred
   
of Common
       
   
Net Carrying
   
Cash
   
Stock Units
   
Stock
   
Loss on Debt
 
Description
 
Amount
   
Payment
   
Issued
   
Issued
   
Extinguishment
 
Conversion of 6% convertible  notes into 410,887 preferred  stock units
 
$
1,135,221
   
$
   
(1,643,549
)
 
$
   
$
(508,328
)
Conversion of 15% convertible  notes into 1,029,406 preferred  stock units
   
3,457,321
     
     
(4,117,624
)
   
     
(660,303
)
Exchange of liability  classified warrants for  common stock
   
97,437
     
     
     
(559,682
)
   
(462,245
)
Repurchase of 6%  convertible notes
   
6,124,399
     
(6,414,187
)
   
     
     
(289,788
)
Write-off of unamortized  issuance costs
   
(816,168
)
   
     
     
     
(816,168
)
   
$
9,998,210
   
$
(6,414,187
)
 
(5,761,173
)
 
(559,682
)
 
$
(2,736,832
)
 
 
F-24

 
 
14.
Related Party Transactions
 
    The following is the activity between the Company and stockholders related to non-interest bearing notes receivable as of December 31, 2009 and 2008:
 
   
December 31,
   
December 31,
 
   
2009
   
2008
 
Beginning balance
 
$
18,910
   
$
18,910
 
Write-off of notes receivable
   
(18,910)
     
---
 
Notes receivable from stockholders
 
$
---
   
$
18,910
 
  
    The following is the activity between the Company and a stockholder related to amounts due to this individual as of December 31, 2009 and 2008:
 
   
December 31,
   
December 31,
 
   
2009
   
2008
 
         Beginning balance
 
$
---
   
$
---
 
         Amounts received by the Company
   
---
     
610,000
 
         Amounts repaid by the Company
   
---
     
(400,000
)
         Amounts converted to convertible original issue discount notes
   
---
     
(210,000)
 
           Due to stockholder
 
$
---
   
$
---
 
 
15.
Cash Flow Information
 
    Cash paid during the years ended December 31, 2009 and 2008 is as follows:
 
   
December 31,
   
December 31,
 
   
2009
   
2008
 
Interest
 
$
61,139
   
$
629,843
 
Income taxes
 
$
   
$
 
 
   Supplemental disclosure of non-cash investing and financing activities for the years ended December 31, 2009 and 2008 is as follows:
 
   
December 31,
   
December 31,
 
   
2009
   
2008
 
Issuance of warrants to Silicon Valley Bank
 
$
33,794
   
$
---
 
Conversion of Convertible Promissory Notes into common stock
 
$
---
   
$
40,000
 
Issuance of common stock for warrants
 
$
---
   
$
559,899
 
Issuance of Series A preferred stock units for the extinguishment of debt
 
$
---
   
$
5,761,173
 
Issuance of common stock to a publisher
 
$
---
   
$
102,000
 
Convertible notes issued upon conversion of amounts due to stockholder
 
$
---
   
$
210,000
 
Beneficial conversion feature associated with convertible notes
 
$
---
   
$
772,500
 
Decrease in warrant liability
 
$
---
   
$
115,147
 
Issuance of common stock for warrants
 
$
---
   
$
236
 
Initial recording of warrant liability
 
$
---
   
$
213,175 
 
 
 
 
F-25

 
16.
Quarterly Financial Data (Unaudited)
 
 
   
December 31, 2009
 
  
 
First
   
Second
   
Third
   
Fourth
 
  
 
Quarter
   
Quarter
   
Quarter
   
Quarter
 
Revenues
 
$
1,388,420
   
$
2,282,325
   
$
1,725,499
   
$
2,286,695
 
                                 
Cost of revenues and expenses
   
5,806,599
     
4,907,427
     
6,023,914
     
6,461,128
 
Operating loss
   
(4,418,179
)
   
(2,625,102
)
   
(4,298,415
)
   
(4,171,434
)
                                 
Other income (expense):
                               
Interest income
   
5,400
     
3,153
     
4,323
     
2,034
 
Miscellaneous income
   
---
     
71,874
     
502
     
29
 
Interest expense
   
(888
)
   
(31,715
)
   
(37,879
)
   
(35,422
)
Total other income (expense)
   
4,512
     
43,312
     
(33,054
)
   
(33,359
)
                                 
Net loss before provision for income taxes
   
(4,413,667
)
   
(2,581,790
)
   
(4,331,469
)
   
(4,207,793
)
Provision for income taxes
   
     
     
     
 
Net loss
 
$
(4,413,667
)
 
$
(2,581,790
)
 
$
(4,331,469
)
 
$
(4,207,793
)
                                 
Net loss per share – basic and diluted
 
$
(0.15
)
 
$
(0.09
)
 
$
(0.15
)
 
$
(0.14
)
                                 
Shares used to compute net loss per share – basic and diluted
   
29,224,284
     
29,229,224
     
29,229,284
     
29,230,143
 


 

   
December 31, 2008
 
  
 
First
   
Second
   
Third
   
Fourth
 
  
 
Quarter
   
Quarter
   
Quarter
   
Quarter
 
Revenues
 
$
657,150
   
$
1,282,439
   
$
2,786,139
   
$
2,975,871
 
                                 
Cost of revenues and expenses
   
4,272,216
     
4,200,764
     
5,147,610
     
8,887,427
 
Operating loss
   
(3,615,066
)
   
(2,918,325
)
   
(2,361,471
)
   
(5,911,556
)
                                 
Other income (expense):
                               
Interest income
   
4,525
     
5,659
     
5,662
     
7,392
 
Miscellaneous income
   
100
     
     
     
278,640
 
Interest expense
   
(568,957
)
   
(649,386
)
   
(893,227
)
   
(353,975
)
Total other income (expense)
   
(564,332
)
   
(643,727
)
   
(887,565
)
   
(67,943
)
                                 
Net loss before provision for income taxes
   
(4,179,398
)
   
(3,562,052
)
   
(3,249,036
)
   
(5,979,499
)
Provision for income taxes
   
     
     
     
 
Net loss
 
$
(4,179,398
)
 
$
(3,562,052
)
 
$
(3,249,036
)
 
$
(5,979,499
)
                                 
Net loss per share – basic and diluted
 
$
(0.17
)
 
$
(0.14
)
 
$
(0.13
)
 
$
(0.23
)
                                 
Shares used to compute net loss per share – basic and diluted
   
25,298,310
     
25,483,475
     
25,494,739
     
26,266,004
 

 
 
F-26

 
17.
Subsequent Events
 
    Note and Warrant Purchase Agreement
 
On March 25, 2010, we entered into a Note and Warrant Purchase Agreement (the “March 2010 Purchase Agreement”) by and among the Company, Panorama Capital, L.P. (“Panorama Capital”), Rustic Canyon Ventures III, L.P. (“Rustic”), Rembrandt Venture Partners Fund Two, L.P. (“Rembrandt Fund Two”) and Rembrandt Venture Partners Fund Two-A, L.P. (“Rembrandt Fund Two-A” and, together with Rembrandt Fund Two, Panorama Capital and Rustic, the “Lead Investors”). Pursuant to the Purchase Agreement, we may issue and sell, in one or more closings, up to $2,985,000 in aggregate principal amount of subordinated secured convertible promissory notes (“Notes”) and related warrants (“Warrants”) to purchase up to an aggregate of 30,000,000 shares of the Company’s common stock for an aggregate total consideration of $3,000,000 (the “Total Offering”).

 At the initial closing on March 26, 2010 (the “First Closing”), the Company sold to the Lead Investors (i) Notes in the aggregate principal amount of $2,376,494 and (ii) Warrants to purchase 23,884,359 shares of common stock. The Company received approximately $2.4 million in gross proceeds at the First Closing. At one or more subsequent closings (“Subsequent Closings” and together with the First Closing, collectively, the “Closings” and individually, a “Closing”) to be held prior to May 10, 2010, the Company may sell additional Notes in the aggregate principal amount of $608,506.21 and Warrants to purchase 6,115,641 shares of Common Stock. Only current holders of outstanding shares of the Company’s Series A preferred stock, par value $0.001 per share (“Series A Preferred”), and such additional investors as are acceptable to investors holding then outstanding Notes representing at least 66-2/3% of the then outstanding aggregate principal amount of all Notes issued under the Purchase Agreement may participate in any Subsequent Closings.

 Each Note issuable to an investor under the March 2010 Purchase Agreement has a principal amount equal to 99.5% of the total consideration paid by that investor. Each Note is convertible into shares of a new series of preferred stock, par value $0.001 per share, designated as Series B Preferred Stock (“Series B Preferred”). The initial conversion price for any Note issuable prior to the effectiveness of the Reverse Stock Split (as defined below) is $1.00 per share. The Notes are secured by a first priority security interest in substantially all of the Company’s assets pursuant to a Security Agreement entered into between the Company and the collateral agent for the investors. Pursuant to a Subordination Agreement between Silicon Valley Bank and the collateral agent for the investors, the security interest securing the Notes is subordinate to the lien of Silicon Valley Bank under the Amended and Restated Loan and Security Agreement, by and between the Company and Silicon Valley Bank, dated as of November 25, 2009, as amended. The Notes require the Company to comply with certain negative covenants relating to, among other things, the creation of liens, incurring of indebtedness, use of proceeds to pay senior debt and entering into or engaging in any business other than that carried on at the date of the First Closing. In addition, the Notes contain customary events of default. Upon the occurrence of an uncured event of default, among other things, the Lead Investors may declare that all amounts owing under the Notes are due and payable.
 
Under the terms of the Company’s investor’s rights agreement by and among the Company and the holders of the Series A Preferred, the Company has offered to each holder of Series A Preferred the right to purchase its pro rata share of the Total Offering. If any holder of Series A Preferred does not purchase such holder’s full pro rata share of the Total Offering, (i) the rights to purchase any shortfall shall be immediately offered on a pro rata basis to the then holders of Series A Preferred who are paying their respective pro rata rate of the Total Offering, and (ii) any such non-participating holder shall have his Series A Preferred converted into Common Stock at the then-applicable conversion price (the “Forced Conversion”). Any holder of Series A Preferred who purchases any non-participating holder’s interest in the Total Offering, shall receive, in addition to Notes and Warrants, an amount of Series A Preferred equal to the number of shares of Series A Preferred of the non-participating holder.
 
Each share of Series B Preferred is convertible into 20 shares of common stock, subject to certain anti-dilution and other adjustments as set forth in the certificate of designation of the Series B Preferred stock. Holders of Series B Preferred shall have voting rights and shall be entitled to vote, on an as converted basis as set forth in the certificate of designation, together with the holders of common stock as a single class with respect to any matter upon which holders of common stock have the right to vote. The Series B preferred stock will have a liquidation preference of $1.00 per share and shall be entitled to receive dividends, prior and in preference to any declaration or payment of any dividend on the common stock or the Series A Preferred, at the rate of $0.004 per share per annum, when and if any such dividends are declared by the board of directors of the Company. The Company will be required to obtain the consent of the holders of at least two-thirds of the outstanding shares of Series B preferred stock prior to taking certain actions.
 
 
F-27

 
    Stock Split and Related Matters
 
After the First Closing under the Purchase Agreement, and following the filing of the certificate of designation for the Series B Preferred and the expiration of applicable notice periods required by the rules and regulations of the SEC (including Rule 10b-17 under the Exchange Act) and the rules and regulations of FINRA, the Company shall file with the Secretary of State of the State of Delaware a Certificate of Amendment of the Certificate of Incorporation in order to effect a reverse stock split of the Company’s Common Stock at an exchange ratio of 5 to 1 (the “Common Reverse Stock Split”) and a reverse stock split of the Company’s Preferred Stock at an exchange ratio of 2 to 1 (the “Preferred Reverse Stock Split,” and, together with the Common Reverse Stock Split, collectively, the “Reverse Stock Split”).

Settlement of Dispute with Publisher

On March 25, 2010, the Company settled an outstanding dispute with a former publisher regarding an unpaid minimum guarantee for the fourth quarter of 2009. As a result of the settlement, the Company experienced a $1,759,196 reduction in cost of revenues which was reflected in the consolidated financial statements.
 
 
 
 
 
F-28