Dijji Corp. (DJJI) - Description of business

General

 

Our company was incorporated in Nevada on May 16, 1997 under the name of Kafco Corp. On April 11, 2001, we changed our name to Woodland Hatchery, Inc. On September 29, 2003, we acquired Dwango North America, Inc. (formerly Dwango USA, Inc.), which company was incorporated in Texas on November 20, 2000, by means of an exchange offer. Upon the closing of such exchange offer, Dwango North America, Inc. became a majority-owned subsidiary of our company. It has since become a wholly-owned subsidiary after the final shareholder of Dwango North America, Inc. elected to convert its securities into securities of our company. In that the security holders of Dwango North America, Inc. acquired a majority of the voting securities of our company, Dwango North America, Inc. was deemed to be the accounting acquiror. Unless the context otherwise requires, references herein to our company for periods prior to September 29, 2003 are to Dwango North America, Inc. On February 4, 2004, we acquired Over-the-Air Wireless, Inc. by means of a merger of such company into OTA Acquisition Corp., a wholly owned subsidiary of ours formed for such purpose. On December 12, 2005, we changed the name of Dwango North America Corp. and its subsidiary, Dwango North America, Inc., to Dijji Corp.

 

Our principal executive office is located at, 2211 Elliott Avenue, Suite 601, Seattle, Washington 98121. Our telephone number at such address is (206) 832-0600.

 

We are a mobile media company whose products include ringtones, games, images and messaging services for mobile devices. We currently sell our products in North America through distribution agreements with major wireless operators, such as Cingular. Most of our products are sold to consumers via our branded services with branding from major media companies such as Napster, RollingStone Magazine and ESPN Bassmaster. We call our strategy of delivering mobile content under media brands, the mobile channel strategy. The mobile channel strategy allows for the distribution of branded services, using content such as ringtones, games and images, with brands for a specific lifestyle category.

 

During 2004, we signed agreements and launched branded service applications with RollingStone and ESPN. In the latter part of 2004, we signed agreements with Playboy.com, Napster LLC and Beliefnet. We launched Beliefnet in March 2005, Napster in May 2005 and Playboy in October 2005. In October 2005, we terminated the Beliefnet agreement to focus our efforts on our other brands . In light of the proposed reverse acquisition by New Motion, Inc., we are currently in discussions with Playboy regarding a possible termination of our agreement with Playboy prior to the expiration of the specified term of the agreement. Branded services we provide for a particular brand may vary, but they will be some combination of ringtones, images, games, messaging and other content as cell phone technology capabilities become more advanced.

 

On February 4, 2004, we acquired Over-the-Air Wireless, Inc., a company engaged in the wireless ringtone business. The acquisition was in the form of a merger of Over-the-Air Wireless into OTA Acquisition Corp., a wholly-owned subsidiary of ours that we formed for this transaction. From Over-the-Air Wireless, we acquired key employees, one of which is leading our company today, as well as software which was integral to our development.

 

We have entered into distribution agreements with several United States wireless carriers. In March 2005, we entered into agreements with two Canadian wireless carriers and added a third in October 2005.

 

Since August 2002, we have exclusively licensed from Dwango Co., Ltd., a Japanese mobile entertainment supplier, or Dwango Japan, the Dwango trademark and technologies for use in North America.   On October 24, 2005, we entered into a trademark and technology termination agreement with Dwango North America, Inc., our wholly-owned subsidiary, and Dwango Japan. Under the terms of the termination agreement, Dwango Japan is entitled to use and license its technology in North America as of January 1, 2006. We ceased using the Dwango trademark on December 12, 2005 when we announced our new company name, Dijji Corp.

 

Proposed Acquisition of Dijji by New Motion, Inc.

 

On April 25, 2006, we entered into a non-binding letter of intent with New Motion, Inc., or New Motion, relating to the reverse acquisition of Dijji by New Motion, with Dijji surviving as a publicly-held company. Upon the consummation of the proposed transaction, shareholders of Dijji would hold shares that represent approximately 12.5% of the issued and outstanding shares of the combined company’s common stock on a fully-diluted and as-converted basis. New Motion’s stockholders (including holders of securities convertible into New Motion stock) would hold shares that represent approximately 87.5% of the issued and outstanding shares of the combined company’s common stock on a fully-diluted and as-converted basis.

 

New Motion is a direct-to-consumer mobile content provider that develops, licenses, markets, and sells content such as polyphonic ring tones, MP3 "true tones" and voice tones, wallpapers and graphics, wireless application protocol, or WAP, video and Java based games. New Motion is a Delaware corporation headquartered in Irvine, California with a sales office in Edgecliff, Australia.

 

Under the terms of the letter of intent, we would issue restricted shares of newly designated Dijji convertible preferred stock, or Preferred Shares, to the existing stockholders of New Motion, or Existing Holders. In exchange for the Preferred Shares issued to the Existing Holders, the Existing Holders would transfer to Dijji 100% of the outstanding capital stock of New Motion. Immediately following the closing of the exchange transaction, or the Closing, New Motion would be a 100% wholly-owned subsidiary of Dijji.

 

After the closing of the exchange transaction, each of the Preferred Shares issued to the New Motion Stockholder would be convertible into shares of our common stock, upon the filing of an amendment to the Dijji Certificate of Incorporation to effect a reverse split of the common’s common stock and to authorize such number of shares of Dijji common stock that is sufficient for the conversion of the Preferred Shares into such common stock. After the conversion, our securities held by the Existing Holders of New Motion (including holders of securities convertible into New Motion stock) would represent approximately 87.5% of the issued and outstanding shares of the combined company’s common stock on a fully-diluted and as-converted basis. Securities held by our existing shareholders would represent approximately 12.5% of the issued and outstanding shares of the combined company’s common stock on a fully-diluted and as-converted basis.

 

 

The parties have not entered into a definitive agreement relating to the proposed exchange transaction. The letter of intent does not bind either party to consummate any transaction unless and until such terms are negotiated and set forth in a definitive agreement that is properly approved by the respective boards of directors of each party, and executed by each party. Even if the parties enter into a definitive agreement, the consummation of the transaction would be subject to certain conditions to closing.

There can be no assurances that a definitive agreement will be reached on terms acceptable to both Dijji and New Motion , if at all, and, if reached, that the reverse acquisition will be completed . If the proposed exchange transaction is not consummated, we may be required to proceed with the orderly liquidation and winding up of the company .

Products and Services

 

Branded Services

 

In January 2004, we entered into an agreement with ESPN pursuant to which we have launched a game under the Bassmaster mobile name. Bassmaster is currently available to consumers through Cingular, Nextel, Alltel, Boost and T-Mobile wireless carriers. The first Bassmaster mobile game, Legendary Lunkers, features the Cast ‘n Wait system, which emulates real fishing by surprising the player with a call back when a fish is biting. In January 2006, we extended the agreement with existing terms for Bassmaster for an additional three (3) years to January 2009.

 

In March 2004, we entered into an agreement with Real Networks and RollingStone Magazine (Wenner Media) to provide a branded service for “RollingStone Ringtones,” “RollingStone Sound Clips” and “RollingStone Games.” Since the initial launch, we have added these services to Boost Mobile, T-Mobile and Alltel in the United States and Telus in Canada. These products and services using our library of ringtones are promoted through RollingStone Magazine, the RollingStone website, five-digit numbers, also known as short-codes, and wireless carriers. As per the agreement, we paid a $750,000 advance royalty fee and are committed to quarterly minimum royalty payments of $250,000 beginning September 2004, for the five subsequent quarters thereafter. In addition, we agreed to advertise with RollingStone for a minimum of $125,000 per quarter for the duration of the agreement which expires in May 2006.

 

In September 2004, we entered into an agreement with Beliefnet, Inc., a multi-faith media company and online community, to bring customers mobile media content under the Beliefnet Mobile brand. Under the Beliefnet Mobile brand, we provided premium polyphonic and audio ringtones, alert tones, images, spiritual-themed mobile games, and subscription-based content from a variety of faiths. We agreed to minimum royalty payments of $162,500 over the contract term. Additionally, we agreed to advertise through Beliefnet, a minimum of $150,000 over the one year term of the contract. The first Beliefnet Mobile application, Spiritual Trivia, a religious trivia game was released in the first quarter of 2005. Additional components of the Beliefnet channel launched in April 2005. In October 2005, we terminated the agreement with Beliefnet to focus our efforts on our other brands. We were required to make any payments relating to the advertising commitment to Beliefnet for six months and minimum royalty earned by Beliefnet for the six months after launch.

 

In October 2004, we entered into an agreement with Flow C.M.M. Inc., a European gaming company that focuses on providing “girl power” entertainment for teenage girls, to distribute mobile media content in the North American marketplace under the MiniFizz brand. The agreement duration was three years from the initial launch of the service. In October 2005, we entered into an agreement to terminate the license agreement with Flow C.M.M. Inc . Pursuant to the terms of the October 2005 agreement, we made a one time payment of $80,000 which was expensed in the fourth quarter of 2005 .

 

In November 2004, we entered into an agreement with Napster, LLC to distribute mobile media content under the Napster brand. Our first launch included polyphonic ringtones, audiotones, and images; the images are provided by Napster and prominently feature the Napster Kitty. We are required to pay a brand licensing fee of $360,000 over the term of the contract. Additionally, we agreed to pay up to $200,000 within the term of the contract to sponsor certain events promoting the Napster brand subject to certain conditions. The agreement duration is one year from the launch date which of May 2005. In March 2006, Napster gave notice, per contract terms, that the existing agreement would be terminated as of May 2006. We are currently in the process of negotiating an extension to the contract which may provide for terms different than the original contract. We may not be successful in negotiating an extension.

 

In November, 2004, we entered into an agreement with Playboy.com, Inc. to distribute mobile media content under the Playboy brand. Our first launch was in October 2005 and included polyphonic ringtones, audiotones, and images; the images are provided by Playboy and the first launch features non-nude images of women along with other lifestyle images. In December 2005, we launched our credit card website, www.playboymobile.com , which allows Cingular and Sprint subscribers, 18 years or older, to download images of women and other lifestyle images as well as ringtones and audiotones. The term of the agreement is three years. In light of the proposed reverse acquisition by New Motion, Inc., we are currently in discussions with Playboy regarding a possible termination of our agreement with Playboy prior to the expiration of the specified term of the agreement. We have delivered a revolving irrevocable stand-by letter of credit in the amount of $125,000 in favor of Playboy which Playboy has the right to draw upon if we fail to make any payment when due under the agreement. We paid minimum royalties of $250,000 during the first year of the contract and have agreed to pay minimum royalties of $250,000 during the second year of the contract, of which $100,000 has been paid, and $350,000 during the third year of the contract. Additionally, we have agreed to spend a minimum of $100,000 each contract year to market and promote the content to be distributed by us and Rogers and Fido, who host the Playboy content, pursuant to the agreement.

 

In July 2005, we entered into an agreement with USAToday to provide a mobile sweepstakes to be promoted within the Life and Sports section of USAToday. In September 2005, we launched the application in which the participant text messaged via premium SMS the answer to a trivia question and, by doing so, was entered to win a weekly prize and grand prize. The sweepstakes ended in November 2005. The contract duration is for a one-year term allowing for additional projects or sweepstakes to be entered into.

 

Ringtones

 

We hire professional musicians who create unique, high quality ringtones. Our catalog consists of approximately 3,000 polyphonic ringtones and have licensed over 3,000 master tones and custom audiotones, with ongoing production and licensing of new ringtones every month. Our polyphonic and audio ringtone catalog covers every major musical genre from Hip Hop to Rock/Pop, Country to Classical, and R&B to World Music. We also offer sound clips featuring voice greetings, sound effects, and song clips from popular artists. We currently hold non-exclusive licenses from Sony, EMI, Warner/Chappel Hill, ASCAP, Harry Fox, BMI, Universal and BMG as well as several independent labels for the distribution of ringtones. We have licenses with Warner, Universal and several independent labels for the distribution of master tones as well.

 

Distribution of ringtones occurs through our proprietary delivery platform which allows users to browse, search, sample and download from our extensive content catalog. The catalog is easily accessible, sorted by title, artist and category (genre). Ringtone downloads are initiated either through our branded web portals or through a mobile handset using a WAP browser, downloadable BREW ringtone client or SMS, or Short Message Service.

 

Games

 

The games we have distributed fall into one of several categories: stand-alone games, turn-based network games, massively multiplayer games, browser-based network games, and SMS or MMS games. Stand-alone games are one-player games. Turn-based network games are games where the player competes against other players on the network and the game involves taking turns by the players. Massively multiplayer games are games where the player may compete with thousands of other players with an ongoing play experience and evolving story line. Browser-based network games are multiplayer games where the players each play simultaneously, and game play is performed through the use of the phone’s browser, rather than an application running on the phone itself. SMS or MMS, or Multimedia Messaging Service, games are played by sending short messages in response to prompts from the game. SMS is available on digital GSM networks and allows text messages of up to 160 characters to be sent and received via the network operator's message center to or from capable mobile phones or from the Internet. MMS allows users to send messages comprising a combination of text, sounds, images and video to MMS capable handsets.

 

The following is a brief description of the games currently being distributed by us that we have developed internally:

 

Bassmaster Legendary Lunkers is a bass fishing simulation game where players can either fish in real-time or more completely simulate the fishing experience by employing the “Cast ‘n Wait” system where, after the player casts his line, the application shuts itself down and will call the player back to continue play when a “bite” is received. The networked version of the game also features actual weather pulled from the National Weather Service, with accompanying art, and global high score tracking where players can simulate actual Bassmaster tournaments by posting their highest weight totals during the tournament period.

 

RollingStone 20 Questions is a trivia game featuring questions geared towards fans of music and pop culture. Over 600 questions are available for download every month.

 

AquaX is a stand-alone game where players race through the water doing barrel rolls and double flips on a personal watercraft. Players earn points for speed, difficulty of tricks or a combination of both in eighteen challenges set in six different locations.

 

Playboy Poker enables the user to play true Vegas style video poker games such as “Five Card Draw” or “Jacks or better”. The premise for all these games are the same, the user gets dealt an initial 5 cards, choose which ones they want to hold, and then draw back up to five cards. Then based on the game type and the hands they make, they are paid off according to the pay table for the given game.

Images

 

We now offer images for download. Images can be downloaded to mobile phones to be used as wallpapers, screensavers, calling identifier icons, and picture messages, which can be sent to friends along with text. We have an extensive content library, augmented through relationships with image providers such as Corbis and can offer the perfect images for any of our diverse brand partners. We currently have a large offering of Playboy branded images available on-deck through Rogers and Fido (non-nude) in Canada, off-deck through Cingular and Sprint (non-nude) and via a credit card website at PlayboyMobile.com (nude). We support a large and growing number of phone types and support a large percentage of the different screen sizes.

 

Distribution

 

In 2002, we entered into an agreement with AT&T Wireless (now known as Cingular mMode) which provides the terms and conditions under which our applications may be made available to AT&T Wireless subscribers.

 

In 2002, we executed an agreement to become a certified BREW developer with Qualcomm. This agreement enables us to create and publish content on the BREW platform. BREW is the platform being used by Verizon, USCellular and Alltel for its data applications, including entertainment offerings. In October of 2002, we executed a BREW application license agreement with Verizon. The agreement gives us access to post for distribution BREW software applications to the online BREW catalog maintained by Qualcomm. These combined agreements give us a channel to publish content on Verizon, Alltel, Western Wireless, Metro PCS, Midwest Wireless and USCellular. Alltel has released RollingStone Ringtones, Napster and Bassmaster. In early 2006, we launched Napster on Western Wireless, Metro PCS, Midwest Wireless and USCellular.

 

During the second and third quarter of 2004, we launched our RollingStone Ringtone service and several of our games: Bassmaster Legendary Lunkers, Rays of Aten and AquaX with Nextel Operations.

 

In June 2004, we launched our RollingStone Ringtone service with Cingular Wireless LLC and in November 2004, we launched our RollingStone Ringtone service with Boost Mobile. In May 2005, we launched our Napster service with Cingular.

 

In addition to these agreements, we have entered into a carrier agreement with Amp’d Mobile and T-Mobile USA, Inc. and launched services. In total, we have agreements to provide services on twelve (12) United States wireless carriers. In March 2005, we entered into an agreement with Wmode which allows us to provide services to two Canadian carriers, Microcell/Fido and Rogers and in October 2005, we entered into an agreement with Telus, another Canadian carrier, to provide services.

 

Our carrier agreements provide the specification and requirements under which our applications may be made available to the subscribers of such respective wireless carriers. These agreements set forth the compensation methodology and processes to be utilized in connection with the release of games. The wireless carriers are not required to make available to their subscribers any minimum number of games.

 

Our content is initially being sold for a download fee. Under this model, a download fee is charged for each download of an application or bundle of applications. Some applications use a subscription model, where the customer is charged a recurring fee on a monthly basis for use of the service.

 

The fees for downloading content are collected by the carriers and then forwarded to us in what is known as a billing-on-behalf-of system, which is the current system employed by us. A billing-on-behalf-of system allows the fees for our applications to appear on a customer’s regular monthly cell phone bill. When games are sold through a carrier, the carrier is entitled to retain a fee. The development and implementation of billing-on-behalf-of systems enables wireless carriers to collect revenues for subsequent remittance to content providers. This model is critical to attract users who are comfortable paying for content as part of their regular wireless phone bill but who may be hesitant paying for content in an over-the-air credit card transaction.

 

As part of the Playboy content offering, we are now billing via credit card for internet based transactions.

 

Markets

 

We believe that in the United States, a number of changes in the wireless market are driving the evolution to the next generation. These changes include the development of new handsets with higher resolution color screens, longer battery life and the ability to download and execute applications on the handset, the upgrade of wireless networks, the ability of wireless carriers to bill on behalf of application developers such as our company, and the development by companies such as our company of new wireless applications. The United States wireless market is growing rapidly with data and content services driving revenue growth.

 

Our target market is youth, which is typically defined as consumers between the ages of 14 and 24 years old, and sometimes includes consumers through their late 20’s. Wireless carriers, particularly in North America, are increasingly focusing on this segment, as it is the most rapidly adopting segment with respect to the wireless content and new account sales in the marketplace.

 

Marketing and Sales

 

Our success in marketing and selling our applications will rely on product innovation, placement in the upper tiers of the handset menus, so the applications are easier to find, and distribution to increase the number of carriers offering our products. In addition to marketing our products to wireless carriers, we have engaged the end-user consumers with offers and promotions. Marketing of the applications to consumers is performed through a combination of direct marketing through traditional, online, and wireless distribution channels, including marketing by the wireless carriers of wireless content to their subscribers and through public relations efforts.

 

We have committed to a minimum of $100,000 per year over the 3 year life of the contract with Playboy and spent more than $750,000 for RollingStone since June 2004. We have promoted our brands, such as RollingStone, in print ads in RollingStone Magazine, web advertising on RollingStone.com, sweepstakes and events such as Voodoo Festival sponsored by RollingStone and Southern Comfort.

 

Competition

 

The market for wireless content is highly competitive. We expect that the competition will increase as the market grows. We believe that our primary competitors in our two main product categories are as follows: Games: EA (Jamdat), THQ, Mobliss and Glu. Media/Music: Infospace, Verisign (Jamster), 9 squared, Buongiorno, Blue Frog and Moderati. Many of these competitors have released significantly more content to date than us. Many of our competitors have substantially greater financial resources than us, which may allow them to identify emerging trends more quickly and develop technology at a faster pace. We believe that the principal competitive factors are exclusive brand relationships, ability to provide a complete mobile channel solution (games and media), quality of the content, including its freshness and innovative differentiation, relationships with wireless carriers, the ability to have the content placed in the upper tiers of the handset menus, and the number of carriers who offer the content.

 

Dependence on Significant Customers

 

We currently rely on several key customers to generate revenue. In 2005 and 2004, 86% and 95% of revenue, respectively, was generated by four key customers: Cingular, AT&T, Boost and Nextel.

 

Government Regulation

 

We are not currently subject to direct federal, state, or local government regulation, other than regulations applicable to businesses generally. The telecommunications industry is subject to regulation by federal and state agencies, including the Federal Communications Commission, and various state public utility and service commissions. While such regulation does not necessarily affect us directly, the effects of these regulations on the wireless carriers that provide ours applications to their subscribers may, in turn, adversely affect our business, by, for example, increasing our costs or reducing our ability to continue selling our products.

 

Intellectual Property

 

We regard our patents, copyrights, service marks, trademarks, trade secrets, proprietary technology and similar intellectual property, as critical to our success, and we rely on trademark and copyright law, trade secret protection and confidentiality and license agreements with our employees, customers, independent contractors, partners and others to protect our intellectual property rights. There can be no assurance that the steps we have taken to protect our proprietary rights will be adequate to prevent third parties from infringing or misappropriating our proprietary rights.

 

Intellectual Property and Proprietary Rights

 

We require our employees, developers and licensees to enter into agreements requiring them to keep confidential all trade secrets and other confidential information. Our employees enter into agreements which recognize that all inventions, trade secrets, works of authorship, developments and other processes made by them in the course of their work for us are our property. These agreements establish that we have the exclusive right to those works and transfer any residual ownership in those works to us. There can be no assurance that the steps we have taken to protect our proprietary rights will be adequate to prevent third parties from infringing or misappropriating our proprietary rights.

 

Patent Protection

 

We currently have on file U.S. Patent Application serial # 10/744865 - A method and apparatus for a one click upgrade for mobile applications. We perform periodic reviews of our ongoing technology developments and intend to pursue additional patents as appropriate. We may not be able to successfully defend or claim any legal rights in the invention for which an application has been made but for which the Patent and Trademark Office has not issued a patent.

 

Trademarks

 

We have a license to the Dijji® trademark. In addition, we have applied for two other trademarks relating to our company and our services. Those two trademarks are: JAMZ! and JAMZMOBILE. We may not be able to successfully defend or claim any legal rights in those trademarks for which applications have been made but for which the Patent and Trademark Office has not issued a registered certificate.

 

Properties

 

We currently maintain our executive office at 2211 Elliott Avenue Suite 601, Seattle, Washington 98121 and our lease expires in February 2007. The lease on our previous executive office at 200 West Mercer Street, Suite 501, Seattle, Washington 98119 expired in April 2005. On March 18, 2005, we announced the closing of the game studio located at 150 Spear Street Suite 1175 San Francisco, California 94104. The reason for the closure and relocation were to improve our development efficiencies. Our lease in San Francisco expired in December 2005. In addition, we have office space at 5847 San Felipe Street, Houston, Texas that was the location of our executive offices until January 2004. Our lease for such space expires in September 2006. We have sublet our Houston offices.

 

Employees

 

As of December 31, 2005, we had a total of 33 employees, all but one of whom work full-time out of our Seattle, Washington office. We have one remote employee who is located in Colorado. As of April 26, we have a total of 19 employees. None of our employees are represented by unions and we are not aware of any activities seeking such organization. We consider our relations with our employees to be good.

 

 

RISK FACTORS

 

In evaluating our business, you should carefully consider the risks and uncertainties described below, as well as the discussion of risks and other information contained in this Annual Report and in our other public filings. If any of the following risks actually occur, our business, financial condition or operating results could be materially adversely affected.

Important Factors That May Affect Our Operating Results, Our Business and Our Stock Price

Described below and elsewhere in this report are risks and uncertainties that we currently deem to be material and that we believe are specific to our Company and our industry. In addition to these risks, our business may be subject to risks currently unknown to us. If any of these or other risks actually occur, our business, financial condition or operating results could be materially adversely affected.   Prospective and existing investors are strongly urged to carefully consider the various cautionary statements and risks set forth in this annual report and our other public filings .

Risks Relating to Our Business

If we fail to complete, or delay in completing, the reverse acquisition by New Motion we may be required to proceed with the orderly liquidation and winding up of the Company.

 

On April 25, 2006, we entered into a non-binding letter of intent with New Motion, Inc., or New Motion, relating to the reverse acquisition of Dijji by New Motion, with Dijji surviving as a publicly-held company. Upon the consummation of the proposed transaction, shareholders of Dijji would hold shares that represent approximately 12.5% of the issued and outstanding shares of the combined company’s common stock on a fully-diluted and as-converted basis. New Motion’s stockholders (including holders of securities convertible or exercisable into New Motion stock) would hold shares that represent approximately 87.5% of the issued and outstanding shares of the combined company’s common stock on a filly-diluted and as-converted basis.

The parties have not entered into a definitive agreement relating to the proposed exchange transaction. The letter of intent entered into between the parties does not bind either party to consummate any transaction unless and until such terms are negotiated and set forth in a definitive agreement that is properly approved by the respective boards of directors of each party, and executed by each party. Even if the parties enter into a definitive agreement, the consummation of the transaction would be subject to certain significant conditions to closing. In addition, we will remain liable for significant transaction costs, including legal, accounting, financial advisory and other costs relating to the acquisition.

We cannot give any assurance that we, or the combined company if the proposed reverse acquisition by New Motion is completed, will be able to generate meaningful revenues in the future. We have a history of losses and we expect to continue to incur losses for at least the next twelve months. We have historically relied on distributing, servicing, developing and marketing our products as a strategy to generate revenue and expand our operations . If we fail to complete the reverse acquisition by New Motion, without additional third party financing, we will not have the cash resources available to, among other things:

·  
enter into distribution arrangements with major wireless carriers,  
·  
enter into and maintain branded service agreements,
·  
develop products that keep up with that of our competitors, and
·  
achieve a prominent position on application download menus.


If we are unable to complete the reverse acquisition by New Motion, and therefore do not have resources available to distribute, service, develop or market our products, we will not be able to generate enough revenue to maintain our business operations for any sustained period of time, and may be required to proceed with the orderly liquidation and winding up of the Company. Even if we complete the reverse acquisition by New Motion, there can be no assurance that the combined company will be able to generate revenue and expand its operations.

The disruption caused by and uncertainty over the proposed reverse acquisition by New Motion could materially and adversely affect our results of operations .

In connection with the proposed reverse acquisition by New Motion, the attention of our management and our employees may be diverted from day-to-day operations and the customer sales process may be disrupted by customer and salesperson uncertainty over when or if the acquisition will be consummated. In addition, our customers may seek to modify or terminate existing agreements, which may require us to make substantial payments to such customers in connection with such modification or termination, or prospective customers may delay entering into new agreements or purchasing our products and services as a result of the announcement of the proposed acquisition and our ability to retain existing employees may be difficult as a result of uncertainties associated with the proposed acquisition and the continued operations of the Company. As a result, our business and results of operations could be materially and adversely impacted by the current negotiations relating to a possible reverse acquisition by New Motion.

We will have to significantly curtail or cease operations if we are unable consummate the reverse acquisition by New Motion or to secure additional financing.

At December 31, 2004, we had working capital of $667,000 and a capital deficit of $16,226,000. In January and February 2005, we raised gross proceeds of $15,700,000 from private placements of our convertible preferred stock and warrants. At December 31, 2005, we had working capital of $2,656,000, a capital deficit of $15,373,000, and cash and short-term investments of $4,334,000. We believe we will require substantial additional financing to fund the cost of continued operating activities, to finance the growth of our business, to provide cash for the payment of prepaid and ongoing royalties and to buy advertising required pursuant to our agreements. We believe that our current cash resources are sufficient to fund operations through June 30, 2006. We may not be able to obtain the needed funds on terms acceptable to us or at all. If we are unable to secure financing when needed, we may have to significantly curtail or cease operations. Further, if additional funds are raised by issuing equity securities, the anti-dilution provisions from previous financings may be triggered and significant dilution to our current shareholders may occur and new investors may get rights that are preferential to current shareholders.

 

We have incurred debt, which could adversely affect our financial health and our ability to obtain financing in the future and react to changes in our business.

 

As of December 31, 2005, the Company’s principal debt and preferred stock obligations totaled approximately $26.9 million ($24.6 million face value). None of this amount is secured by any of our assets. Our debt could have important consequences to our stockholders. Because of our substantial debt:

 
·  
Our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate purposes, or other purposes may be impaired in the future;

 
·  
A substantial portion of our cash flow from operations may be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available to us for other purposes;

 
·  
We may be exposed to increased interest rates because certain of our borrowings are at variable rates of interest; and

 
·  
Our flexibility to adjust to changing market conditions and ability to withstand competitive pressures could be limited, and we may be more vulnerable to a downturn in general economic conditions or our business or be unable to carry out capital spending that is necessary or important to our growth strategy and productivity improvement programs.


·  
We may be forced to renegotiate and extend our debt terms or, in the event we are unsuccessful, dissolve the business or file for bankruptcy protection.

 

 

We have only recently commenced generating revenues and may not be prepared for the demands of growth.

Our revenues for 2005 and 2004 are as follows: $3,499,000 for 2005 and $1,645,000 for 2004. The growth process places significant demands on our management and operational infrastructure. Continued growth, if any, may adversely affect our ability to maintain high quality standards, have appropriate operational, financial and management controls and achieve continued positive relationships with wireless carriers, branded service partners and customers. To achieve these ends, significant expenditures and allocation of personnel resources may be required. As of December 31, 2005, we had a total of 33 employees, down from 59 employees as of December 31, 2004.

 

The termination of our license with Dwango Japan could affect our business by creating additional competition .

In August 2002, we began exclusively licensing from Dwango Co., Ltd., a Japanese mobile entertainment supplier, or Dwango Japan, the Dwango trademark and technologies for use in North America. In October 2005, we entered into a trademark and technology termination agreement with Dwango North America, Inc., our wholly-owned subsidiary, and Dwango Japan.

We are required to cease using Dwango Japan's technology and the "Dwango" name trademark in May 2006. In addition, under the terms of the Termination Agreement, Dwango Japan is entitled to use and license its technology in North America as of January 1, 2006, which could potentially create additional competition for us .

If we fail to protect our intellectual property rights, we may lose any competitive edge that we have and our sales and profitability may be adversely affected.

Our business depends to a significant degree on licensed and internally developed content and technology. To protect our proprietary products we rely on a combination of patent, copyright, trademark and trade secret laws, as well as contractual provisions relating to confidentiality and related matters. If our proprietary rights in such content or technology, or any other of our proprietary rights, are divulged to the public, or our competitors obtain access to our confidential information, we may lose any competitive edge that we have. We cannot assure you that our means of protecting our proprietary rights will be adequate or that competitors will not independently develop similar or superior technology.

If third parties claim that our products violate their intellectual property rights, we may be forced to take costly actions or pay significant damage awards that could adversely affect our business.

Third parties may make claims against us alleging infringement of patents, copyrights, trademarks, trade secrets or other proprietary rights. If we were to find that our products violated or potentially violated third-party proprietary rights, we might be required to obtain licenses that are costly or contain terms unfavorable to us, or expend substantial resources to reengineer those products so that they would not violate third party rights. Any reengineering effort may not be successful, and we cannot be certain that any such licenses would be available on commercially reasonable terms. Any third-party infringement claims against us could result in costly litigation and be time consuming to defend, divert management’s attention and resources, cause product and service delays, require us to enter into royalty and licensing agreements or result in significant damage awards.

If we publish content without appropriately licensed rights to do so, we could be subject to infringement lawsuits which could subject us to liability and prevent use of content.

We publish content obtained from third parties. We attempt to ensure that all content we publish has appropriate licensed rights prior to using that content in our applications. If the content obtained from third parties is not appropriately licensed , we could be subject to lawsuits and resulting financial judgments and the prevention of our use of the content in our applications. We have had instances where we were required to cease using content due to licensing restrictions, but have not been subject to a lawsuit.

 

The loss of certain key employees could cause us to be unable to implement our business plan.

Our success depends in large part upon the experience, abilities and continued services and contributions of a small number of employees. The loss of the services of one or more of our key employees could cause us to be unable to implement our business plan. The loss of one or more of our key management employees could have a material adverse effect on our business, financial condition or results of operations. In particular, on August 15, 2005, Rick J. Hennessey resigned as our Chief Executive Officer and as a Director. In addition, in December 2005, J. Paul Quinn resigned as our Chief Financial Officer. We replaced these individuals with internal candidates and, if deemed appropriate, individuals from outside our organization. While our internal candidates understand our business model, they must learn a new position and take on additional or new responsibilities, which could take time and result in the disruption to our on-going operations. To integrate into our company, new key management must spend a significant amount of time learning our business model and management systems, in addition to performing their regular duties. Accordingly, until new senior personnel become familiar with our business model and systems, their integration may result in some disruption to our on-going operations. Additionally, we may need to hire additional personnel in general or to replace internal candidates who have been promoted and as a result, we may experience increased compensation costs that are not offset by either improved productivity or increased revenue.

If we are unable to retain qualified management and other personnel, our ability to implement our business plan may be adversely affected.

As of December 31, 2005, we had 33 full-time employees. Most of our present management has limited experience in managing a business such as ours . In December 2005, we reduced our headcount for a second time by approximately 30% in an effort to reduce operating expenses. This followed a head count reduction of approximately 25% in September 2005. We believe that this has had a negative impact on the personnel retained and on our ability to attract additional personnel.

Contemplated changes in the accounting treatment for stock options will make it expensive to maintain our current practice with respect to the granting stock options.

The granting of stock options is used by us as a significant compensation tool. Effective December 15, 2005, the Financial Accounting Standards Board has changed the accounting treatment of stock options which will require the recording of an expense upon each grant of a stock option . Given our current compensation practices, this will result in a significant increase in compensation charges. If we change our compensation practices and reduce or eliminate stock option grants, we may find it more difficult to attract, retain and motivate employees, which could adversely affect our operations.

Risks Relating to Our Common Stock

A significant number of shares of our common stock are eligible for sale pursuant to an effective registration statemen t which could have an adverse effect on the market price for our common stock and could adversely affect our ability to raise capital when needed.

There are 9,574,850 shares of our common stock issued and outstanding as of April 6, 2006 and 38,576,427 additional shares potentially issuable under outstanding convertible preferred stock and notes, warrants and options as of that date. Pursuant to an effective registration , selling shareholders may sell up to 40,594,782 shares of our common stoc k. In the event of significant sales of common stock, the market price for our common stock could decrease significantly and our ability to raise capital could be adversely affected.

The conversion of our notes or preferred stock to common stock will result in a significant charge to our earnings, which may negatively impact our share price and our ability to raise capital.

If the holders of our notes or preferred stock convert into common stock, we will incur a significant charge to our earnings in the form of a write-off of deferred financing costs and deferred acquisition costs. This would result in decreased earnings for our Company, which could have a negative impact on our share price and our ability to raise capital.

Robert E. Huntley, the founder and a former officer and director of our Company, beneficially owns approximately 25% of the issued and outstanding shares of our common stock as of December 31, 2005 and accordingly has significant influence over the outcome of all matters submitted to the shareholders for approval, which influence may be exercised to the detriment of other shareholders.

As of April 6, 2006 , Robert E. Huntley, the founder and a former officer and director of our Company, owned 2,051,553 shares of our common stock and held warrants to purchase an additional 421,841 shares of our common stock. These holdings represent beneficial ownership of approximately 25% of our shares of common stock. Accordingly, Mr. Huntley has significant influence over the outcome of all matters submitted to the shareholders for approval, including the election of directors and the sale or liquidation of the Company or the Company’s ability to satisfy certain conditions to closing the proposed reverse acquisition by New Motion.    

Certain of our shareholders beneficially own a significant number of shares of our common stock and accordingly may have significant influence over our Company and upon the price of our common stock, which may be to the detriment of other shareholders.

As of April 6, 2006 , three entities beneficially own significant positions in our common stock as follows: (a) Alexandra Global Master Fund Ltd. , or Alexandra, holds 475,110 shares of our common stock and holds notes, preferred stock and warrants convertible into or exercisable for an aggregate of 12,114,463 additional shares of our common stock; (b) RH Capital Associates, or RH Capital, owns preferred stock and warrants convertible into or exercisable for an aggregate of 5,962,553 shares of our common stock; and (c) Trafelet & Company, LLC, or Trafelet, is the investment manager for four separate funds that own preferred stock and warrants convertible into or exercisable for an aggregate of 8,357,141 shares of our common stock. All of these shares have been registered for resale in currently effective registration statemen ts. As there is currently a very limited amount of shares in the public float, and the number of shares registered or to be registered on behalf of these beneficial owners is significant, the market price of our common stock could be adversely affected in the event of sales of these shares. The notes, preferred stock and warrants described in this paragraph provide that the number of shares of common stock that may be acquired at any one time by each of Alexandra, RH Capital or the funds managed by Trafelet shall not exceed a number that, when added to the total number of shares of common stock beneficially owned by it, would result in beneficial ownership by it of more than 9.9% of our common stock. But for that provision, on a fully diluted basis, Alexandra, RH Capital and Trafelet could be deemed to beneficially own, on a fully diluted basis, 29%, 14% and 19%, respectively, of our common stock, as of April 6, 2006. Alexandra has the right to nominate two directors to our board of directors and has exercised its right with respect to one director. Each of Alexandra, RH Capital and Trafelet may have significant influence over our Company, including with respect to the Company’s ability to satisfy certain conditions to closing the proposed reverse acquisition by New Motion.

 

The possible issuance of additional shares of our capital stock may dilute the percentage ownership of our current shareholders.

As of April 6, 2006 there are 9,574,850 shares of our common stock outstanding and 38,576,427 shares of common stock issuable upon exercise or conversion of outstanding options, warrants, convertible preferred stock and convertible notes. There are 100,000,000 shares of our common stock and 10,000,000 shares of our preferred stock authorized for issuance. All of our authorized shares in excess of those currently outstanding may be issued without any action or approval by our shareholders and could significantly dilute the percentage ownership of our current shareholders.  

Because the public market for shares of our common stock is limited, you may be unable to resell your shares of common stock.

There is currently only a limited public market for our common stock on the Over-the-Counter Bulletin Board, and you may be unable to resell your shares of common stock. The development of an active public trading market depends upon the existence of willing buyers and sellers that are able to sell their shares and market makers that are willing to make a market in the shares. Under these circumstances, the market bid and ask prices for the shares may be significantly influenced by the decisions of the market makers to buy or sell the shares for their own account, which may be critical for the establishment and maintenance of a liquid public market in our common stock. Market makers are not required to maintain a continuous two-sided market and are free to withdraw firm quotations at any time. We cannot give you any assurance that an active public trading market for the shares will develop or be sustained.

 

The price of our common stock is volatile, which may cause investment losses for our shareholders.

The market for our common stock is highly volatile. The trading price of our common stock is subject to wide fluctuations in response to, among other things, quarterly variations in operating and financial results, announcements of technological innovations or new products by us or our competitors, changes in our revenues and revenue growth rate and general market conditions. In addition, statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to our market or relating to our Company could result in an immediate and adverse effect on the market price of our common stock. The highly volatile nature of our stock price may cause investment losses for our shareholders.

Our common stock is considered to be a “penny stock,” which may make it more difficult for investors to sell their shares.

Our common stock is considered to be a “penny stock.” The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.” Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on NASDAQ, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). On April 25, 2006, our closing stock price, as listed on the Over-the-Counter Bulletin Board was $0.03 per share. Prior to a transaction in a penny stock, a broker-dealer is required to:

·  
deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market;


·  
provide the customer with current bid and offer quotations for the penny stock;


·  
explain the compensation of the broker-dealer and its salesperson in the transaction;


·  
provide monthly account statements showing the market value of each penny stock held in the customer’s account; and


·  
make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.


These requirements may have the effect of reducing the level of trading activity in the secondary market for our stock and investors may find it more difficult to sell their shares.

Risks Relating to Our Industry

The market for wireless applications is a developing market that requires further development to support meaningful revenues for our Company, without which we will not be able to achieve profitability.

The market for wireless applications is an emerging market that is relatively new. Further development of this market is necessary to support meaningful levels of revenues for our Company. The success of the applications we offer will depend upon, among other things, a high level of market acceptance of the current generation of advanced wireless handsets. We cannot give you any assurance that the market will develop as we anticipate. In addition, in view of the battery drain caused by the use of certain advanced wireless applications, the success of these applications may also depend upon the development of new technology and/or cost effective products or accessories that extend the battery life of current wireless devices, for which there can be no assurance.

 

We will incur operating expenses based largely on anticipated revenue trends that are difficult to predict. We anticipate incurring substantial losses until such time, if ever, that substantial revenues are generated. Our success will depend on the market for our products developing sufficiently to support profitable operations, and our ability to commercialize our products and services in order to generate sufficient revenue from sales of these products and services to offset the expenses associated with developing, marketing and supporting them.

Wireless carriers have significant control over the contract terms, including pricing of applications and revenue share percentages, which could adversely affect market acceptance of applications and revenues of content providers.

Agreements with wireless carriers require content providers to obtain approval from these carriers for the pricing of the applications that they propose to offer to their subscribers. Such approvals may not be granted or the carriers may decide to set a price, higher or lower, than what content providers proposed. Content providers ability to change prices may also be restricted. Market acceptance of applications or the level of revenues that content providers can generate could be adversely affected by not obtaining pricing of applications sought by content providers.

Agreements with wireless carriers provide for a revenue share percentage that dictates the percentage of the retail price remitted by consumers to the wireless carriers which is provided to the content providers. This revenue share percentage can be changed by the wireless carrier, in some cases, during the term of the contract. Content providers ability to control that revenue share percentage is very limited. Revenues that content providers can generate could be adversely affected by reductions in their revenue share percentage.

Wireless carrier agreements are typically about one year in length and content providers cannot assure that wireless carriers will continue to rely on their content and renew their contracts.

Wireless carriers have developed their own brand of applications.

Our ability to generate revenue is directly affected by our position on the carrier download menus. Carriers have developed their own content and, as such, are occupying the most lucrative positions on the download menus or eliminating all third party applications altogether. Our success in the marketplace will be based, in part, on our ability to identify alternate means of marketing our applications.

If we do not develop wireless content and respond to changes in technology on a timely basis, we will be unable to grow our business and may never achieve profitability.

Our ability to design, develop, test and support, or obtain from third parties, new or enhanced content for wireless network technology on a timely basis to meet the changing needs of wireless phone users and respond to technological developments and evolving industry standards is critical to our future growth and our ability to achieve profitability. We cannot give you any assurance that we will be able to identify emerging technologies which will gain widespread acceptance. If we invest substantial resources in acquiring, developing or implementing wireless content that does not become widely accepted or which is delayed in introduction, we may be unable to recoup our investment. We cannot give you any assurance that others will not develop technologies that achieve a greater market acceptance than ours, that render our services obsolete or that otherwise adversely affect our competitive position.

The life cycle of our products may be short, which could limit the level of revenues achieved from the sale of new products.

The market for wireless content is an emerging market that is changing rapidly. The emergence of new wireless products and technologies, changes in consumer preferences and other factors may limit the life cycle of our technologies and any future products and services that we develop. This may limit the amount of revenue we are able to achieve from the products we develop. If we incur significant costs to develop a product and are unable to sell such product other than for a short period of time, our results of operations may be adversely affected. Our future performance will depend on our ability to identify emerging technological trends in the wireless content market, identify changing consumer needs, desires or tastes, develop and maintain competitive technology, including new product and service offerings, improve the performance, features and reliability of our products and services, particularly in response to technological changes and competitive offerings, and bring technology to the market quickly at cost-effective prices.

The complexities and incompatibilities among advanced mobile phones and wireless technologies, as well as the continuous introduction of new models, require us to utilize substantial funds for development of a multitude of applications, each with short life cycles.

To achieve significant revenue levels, we must develop applications suitable for numerous phone models and technologies. To keep pace with rapid innovation and the continuous introduction of new, and often incompatible, mobile phone models requires us to expend significant funds for development activities. We expect these circumstances to continue and our ability to achieve profitability will depend not only on our development success, but also the ability to generate sufficient revenues from applications before their generally short life cycle is over.

In the event that there is a significant shift in the source of downloading applications away from the wireless carriers to other sources, we may have to incur significant expense to alter our sales and marketing approach, which approach may not be successful.

Our applications are primarily sold through the wireless carriers with whom we have contractual relationships. There are currently available, however, a small number of cell phone models which have operating systems that allow users to browse the Internet and, in some cases, download applications from sources other than the wireless carrier’s branded service. In the event that the situation evolves such that a substantial portion of application downloads occur away from the wireless carriers, we would have to incur significant expenses to market to the alternative sources. There can also be significant expenses in changing our billing model. No assurance can be given that marketing efforts involving alternative sales channels would be successful.

Increases or changes in government regulation may have an adverse effect on our operations.

We anticipate regulation of the industry in which we participate to increase. Our business operations may be adversely affected in the event that new laws and regulations are adopted that have a restrictive effect on our operations. Areas affected may include privacy, taxation, suitability of content, copyright and distribution. The adoption of new rules and regulations would result in increased legal and other expenses to address the new rules and may potentially circumvent our operations.

We rely on the wireless communications infrastructure, over which we have no control.

Our business operations depend upon the maintenance and growth of the wireless communications infrastructure. Accordingly, our future success will depend upon the deployment and maintenance of reliable next-generation digital networks with the requisite speed, capacity and security for providing reliable wireless communication services. Further, wireless communication may be adversely affected by viruses, worms and other break-ins and disruptions. Wireless services could also be disrupted by outages and infrastructure and equipment failures.