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Form 10KSB for CHINAWE COM INC

14-Apr-2004

Annual Report

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-KSB. The following discussion contains forward-looking statements. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this document.

Overview - Results of Operations

Our financial statements have been prepared assuming that we will continue in business as a going-concern. Presently, we generate no significant income and have incurred net losses since inception. Our prospects must be considered in light of the significant risks, costs and difficulties often encountered by enterprises in their early stages of development, in particular companies in the Internet sector and, more specifically, targeting and operating in the Greater China and Asian markets. As discussed in our financial statements and in this section, we have suffered a net loss of RMB1,851,771 (US $223,463) during the year ended December 31, 2003. At the end of this period we had a stockholders' deficit of RMB9,821,751 (US $1,185,243) and a working capital deficit of RMB9,824,761 (US $1,185,606). The Independent's Auditors Report on the Company's financial statements as of and for the years ended December 31, 2003 and 2001 included a "going concern" explanatory paragraph which means that the Auditors expressed substantial doubt about the Company's ability to continue as a going concern. Management's plans with respect to these matters are described in this section and in our financial statements, and this material does not include any adjustments that might result from the outcome of this uncertainty. There is no guarantee that we will be able to raise the funds and there are no guarantees that we will not require to raise further capital for operations and expansion in the near future.

Our operations have not been, and in the near term are not expected to be, materially affected by inflation or changing prices. We will encounter competition from a variety of firms selling Internet services in its market area. Many of these firms have long-standing customer relationships and are well-staffed and well financed. The Company believes that competition in the Internet industry is based on competitive pricing, although the ability, reputation and support of a marketing network is also significant. The Company does not believe that any recently enacted or presently pending proposed legislation will have a material adverse effect on its results of operations.

Year ending December 31, 2003 compared to the year ending December 31, 2002.

Revenues. Subscription and service income for the year ending December 31, 2003 was RMB421,970 as compared to subscription and service income of RMB582,827 for the year ending December 31, 2002, a decrease of 28%. Other income for the year ending December 31, 2003 was RMB56 as compared to other income of RMB78 for the year ending December 31, 2002, a decrease of 28%.

Expenses. Administrative and general expenses for the year ending December 31, 2003 were RMB2,094,821 as compared to administrative and general expenses of RMB2,200,242 for the year ending December 31, 2002, a decrease of 5%. Loan interest for the year ending December 31, 2003 was RMB178,976, as compared to loan interest of RMB9,364 for the year ending December 31, 2002, an increase of 1,811%, mainly due to the interest payable for a loan from a director in 2003.

As a consequence of the foregoing, our loss from operations increased from RMB1,617,415 for the year ending December 31, 2002 to RMB1,672,851 for the year ending December 31, 2003. Our net loss increased from RMB1,626,701 for the year ending December 31, 2002 to RMB1,851,771 for the year ending December 31, 2003.

Year ending December 31, 2002 compared to the year ending December 31, 2001.

Revenues. Subscription and service income for the year ending December 31, 2002 was RMB582,827 as compared to subscription and service income of RMB2,320,146 for the year ending December 31, 2001, a decrease of 75%. Other income for the year ending December 31, 2002 was RMB78 as compared to other income of RMB13,759 for the year ending December 31, 2001, a decrease of 99%.

Expenses. Administrative and general expenses for the year ending December 31, 2002 were RMB2,200,242 as compared to administrative and general expenses of RMB7,351,710 for the year ending December 31, 2001, a decrease of 70%.

As a consequence of the foregoing, our loss from operations decreased from RMB5,031,564 for the year ending December 31, 2001 to RMB1,617,415 for the year ending December 31, 2002. Our net loss decreased from RMB5,017,805 for the year ending December 31, 2001 to RMB1,626,701 for the year ending December 31, 2002.

Factors That May Affect Future Results

Management's Discussion and Analysis and other parts of this Report contain information based on management's beliefs and forward-looking statements that involve a number of risks, uncertainties, and assumptions. There can be no assurance that actual results will not differ materially from the forward-looking statements as a result of various factors, including but not limited to the following:

The markets for many of our product offerings are characterized by rapidly changing technology, evolving industry standards, and frequent new product introductions. Our operating results will depend to a significant extent on our ability to design, develop, or otherwise obtain and introduce new products, services, systems, and solutions and to reduce the costs of these offerings. The success of these and other new offerings is dependent on many factors, including proper identification of customer needs, cost, timely completion and introduction, differentiation from offerings of our competitors, and market acceptance. The ability to successfully introduce new products and services could have an impact on future results of operations.

Fluctuations in Quarterly Results

We have incurred operating losses since inception, and cannot be certain that we will achieve profitability on a quarterly or annual basis in the future. We believe that future operating results will be subject to quarterly fluctuations due to a variety of factors, including, but not limited to:

o Continued growth of business and of the Internet in China;

o Our ability to attract and retain customers and maintain customer satisfaction;

o Technical difficulties or system outages;

o Government regulation;

o Fulfilling contractual obligations under the agreements with China Great Wall Asset Management Corporation and others

o Pricing policies of competitors;

o Ability to attract and retain qualified personnel with Chinese language and Internet industry expertise, in particular technical, sales and marketing personnel;

o The amount and timing of operating costs and capital expenditures relating to expansion of our business and infrastructure;

o The ability to upgrade, develop and maintain our systems and infrastructure; and

o Failure to increase sales.

In addition to the factors set forth above, the Company's operating results will be impacted by the extent to which the Company incurs non-cash charges associated with stock-based arrangements with employees and non-employees.

Liquidity and Capital Resources

On March 15, 2001, Neo Modern Entertainment Corp. ("Neo Modern") completed a merger with Chinawe, a privately-held company incorporated in the State of Delaware, pursuant to an Agreement and Plan of Merger dated October 17, 2000 (the "Merger Agreement"). In conjunction with the terms of the Merger Agreement, Neo Modern changed its name to Chinawe.com Inc. and each outstanding share of Chinawe common stock was converted into 2,876.4565 shares of Neo Modern common stock. All share and per share amounts reflect the conversion.

The Company's financial statements for the year ended December 31, 2003 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. For the year ended December 31, 2003, the Company reported a net loss of RMB1,851,771 (US $223,463) and at December 31, 2003 has a stockholders' deficit and a working capital deficit of

RMB9,821,751 (US $1,185,243) and RMB9,824,761 (US $1,185,606), respectively. The Company has also experienced difficulty and uncertainty in meeting its liquidity needs. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans to address these concerns include:

(1) In June 2001, the Company signed an agreement with Great Wall, a PRC government-controlled financial company. Under the agreement, which has a five-year term with options to renew, the Company is to help Great Wall dispose of the Assets using both the Company's business and e-business networks. The Company, among other things, has the exclusive right to promote the Assets currently held by Great Wall through the Company's complete electronic business intelligence system. In the event that the promotion efforts result in a successful sale of the Assets, the Company is to receive approximately 1.2% to 2% of the gross sales price of the Assets. Against this background, the Company has decided to enter into the business of servicing non-performing loans, including but not limited to, asset auctions and asset securitizations.

(2) The Company is currently negotiating with a financial services company to act as a service provider for such financial services company and provide services relating to the management of a pool of NLPs in the PRC. Management believes that engaging in this business will bring a new source of revenue to the Company in the foreseeable future which is expected to allow the Company to erase doubts as to its operating as a going concern.

The Company is also currently evaluating its involvement in a series of NPL transactions and the Company will focus on the NPL business as its core business. Management believes that the new role as a service provider will provide the Company with a higher profit potential and high growth potential in an industry that currently has relatively few competitors.

(3) Upon entering into a servicing agreement as mentioned in Section (2) above, the Company expects to issue an aggregate of five to ten million shares of Common Stock to various finders as compensation for their efforts and contributions in connection with the deal.

(4) During the year, Charter One, a company controlled by a director, advanced the Loan for working capital of the Company. On December 15, 2003, Charter One and the Company entered into a Memorandum of Understanding whereby Charter One agreed to convert the Loan into 3,800,000 shares of Common Stock of the Company.

Our current cash balances will not be sufficient to meet our working capital and capital expenditure requirements for the next six months. However, if the Company enters into a servicing agreement with the financial services company, as described above, within the coming months, the Company expects to receive fees on a regular basis, which in management's opinion should be sufficient to meet the Company's working capital and capital expenditure requirements going forward. We currently are engaged in discussions with a number of companies regarding strategic acquisitions or investments. Although these discussions are ongoing, no definitive agreements have been signed and there can be no assurance that any of these discussions will result in actual acquisitions. In addition, we may seek to raise funds for any possible acquisitions or investments by offering debt or equity to the public. There is no guarantee that we will be able to raise the funds. Thereafter, we may need to raise additional funds in order to meet funding requirements of a more rapid expansion plan, potential acquisitions, development of new or enhanced products or services, in response to competitive pressures or to acquire technologies or complimentary products or businesses.

Quantitative And Qualitative Disclosures About Market Risk

We are not exposed to a material level of market risks due to changes in interest rates. We do not have outstanding debt instruments and we do not maintain a portfolio of interest-sensitive debt instruments.

We expect to derive a significant portion of revenues in the form of Renminbi and, therefore, may be exposed to significant foreign currency risks in the future. During the fiscal years ended December 31, 2003 and December 31, 2002, we did not engage in hedging activities to mitigate the impact of changes in foreign exchange rates. We may in the future use foreign currency forward exchange contracts as a vehicle for hedging purposes.

Critical Accounting Policies And Estimates

Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and assumptions. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.

We recognize subscription and service income from members over the period of subscription and to the extent of services rendered in accordance with the terms of subscription and service agreements.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required which would results in an additional general and administrative expense in the period such determination was made.

We do not have any of the following:

o Certain trading activities that include non-exchange traded contracts accounted for at fair value.

o Relationships and transactions with persons or entities that derive benefits from any non-independent relationships other than related party transactions discussed herein.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to the Company.

                                  RISK FACTORS

Risks Relating To Our Business

IT IS DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS BECAUSE WE HAVE A LIMITED

OPERATING HISTORY

If we do not successfully address these risks and uncertainties, our business, operating results and financial condition will be materially adversely affected.

WE HAVE A HISTORY OF LOSSES, WE EXPECT TO LOSE MONEY IN THE FUTURE AND WE MAY

NOT ACHIEVE OR SUSTAIN PROFITABILITY

WE REQUIRE ADDITIONAL FUNDS TO IMPLEMENT OUR CURRENT PLANS AND FINANCE FUTURE

GROWTH

Our business model assumes that we will have substantial additional funds to implement the full range of products and services we plan to offer.

We will seek to obtain additional funds through sales of equity and/or debt, or other external financing in order to fund our current operations and to achieve our business plan. We cannot assure that any additional capital resources will be available to us, or, if available, will be on terms that will be acceptable to us. Any additional equity financing will dilute the equity interests of existing security holders. If adequate funds are not available or are not available on acceptable terms, our ability to execute our business plan and our business could be materially and adversely affected.

OUR MANAGEMENT HAS LIMITED EXPERIENCE OPERATING A PUBLIC COMPANY

WE MAY FACE RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS, INVESTMENTS, STRATEGIC

PARTNERSHIPS OR OTHER VENTURES, INCLUDING WHETHER SUCH TRANSACTIONS CAN BE

LOCATED, COMPLETED AND THE OTHER PARTY INTEGRATED WITH OUR BUSINESS ON FAVORABLE

TERMS

As part of our long-term growth strategy, we may seek to acquire or make investments in complementary businesses, technologies, services or products or enter into strategic relationships with parties who can provide access to those assets, if appropriate opportunities arise. From time to time, we may enter into discussions and negotiations with companies regarding our acquiring, investing in, or partnering with their businesses, products, services or technologies. We may not identify suitable acquisition, investment or strategic partnership candidates, or if we do identify suitable candidates, we may not complete those transactions on commercially acceptable terms or at all. Acquisitions often involve a number of special risks, including the following:

o we may experience difficulty integrating acquired operations, products, services and personnel;

o we may be unable to retain acquired subscribers;

o the acquisition may disrupt our ongoing business;

o we may not be able to successfully incorporate acquired technology and rights into our service offerings and maintain uniform standards, controls, procedures, and policies;

o we may not be able to retain the key personnel of the acquired company;

o the businesses we acquire may fail to achieve the revenues and earnings we anticipated; and

o we may ultimately be liable for contingent and other liabilities, not previously disclosed to us, of the companies that we acquire.

We may not successfully overcome problems encountered in connection with potential future acquisitions. In addition, an acquisition could materially adversely affect our operating results by:

o diluting security holders' ownership interest;

o causing us to incur additional debt; and

o forcing us to amortize expenses related to goodwill and other intangible assets.

Any of these factors could have a material adverse effect on our business. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. Furthermore, we may incur indebtedness or issue equity securities to pay for any future acquisitions.

IF WE FAIL TO EFFECTIVELY MANAGE OUR GROWTH, OUR BUSINESS WILL SUFFER

If the Internet and the business-to-business e-marketplace becomes as widely used in China as we expect and as estimates suggest and our business grows correspondingly, this rapid growth will place a significant strain on our managerial, operational, financial and information systems resources. To accommodate any significant increase in our size and manage our growth, we must implement and improve these systems and attract, train, manage and retain qualified employees. These demands will require us to add new management personnel and develop new expertise. If we fail to successfully manage our growth, our ability to maintain and increase our subscriber base will be impaired and our business will suffer.

It is impossible to predict how entry into the World Trade Organization will affect China's economy or the manner in which it conducts business domestically and internationally.

NETWORKS ARE SUBJECT TO SECURITY RISKS AND INAPPROPRIATE USE BY INTERNET USERS

THAT COULD INTERRUPT OUR SERVICES

The future success of our business will depend on the security of the networks of third parties over which we have no control. Despite implementation of security measures, we remain vulnerable to computer viruses, sabotage, break-ins and similar disruptive problems caused by subscribers or other Internet users.

OUR SERVICES AND REPUTATION MAY BE ADVERSELY AFFECTED BY SOFTWARE DEFECTS

Our services depend on complex software developed by third parties. Software often contains defects, particularly when first introduced or when new versions are released. These defects could cause service interruptions that damage our reputation, increase our service costs, cause us to lose revenue, delay market acceptance or divert our development resources, any of which could materially adversely affect our business, operating results and financial condition. We may not discover software defects that affect our services or enhancements until we deploy the software.

                    RISKS RELATING TO DOING BUSINESS IN CHINA

Our future success substantially depends on continued growth in the use of computer and the Internet in China. Although we believe that computer and Internet usage in China will continue to grow as it has in the past, we cannot be certain that this growth will continue or that it will continue in its present form. The growth of computer usage and the Internet in China is constrained by the cost of computers and other Internet access devices to Chinese people relative to their annual income and current technology infrastructure and no assurance can be given that computers or other Internet access devices will be offered at prices within the budget of the average Chinese consumer or that the technological infrastructure will be enhanced. If Internet usage declines in China or evolves away from our business, our growth will slow or stop and our financial results will suffer.

INCREASED GOVERNMENT REGULATION MAY INCREASE OUR COST OF DOING BUSINESS OR CAUSE

US TO CHANGE THE WAY WE CONDUCT OUR BUSINESS

Any new legislation or regulation adopted by the PRC regarding the Internet, or the application or uncertainty relating to the application of existing laws and regulations to the Internet, could materially adversely affect our business, operating results and financial condition. Legislation could impair the growth of the Internet and decrease the acceptance of the Internet as a communications and commercial medium. This could decrease the demand for our services, increase our cost of doing business or otherwise have a material adverse affect on our business, financial condition and operating results. Further, the growth and development of the Internet messaging market may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies conducting business online. These laws may impose additional burdens on our business. For example, because we rely on the collection and use of personal data from our users for targeting advertisements, any laws or regulations that restrict our ability to collect or use such information may harm us. Hong Kong has enacted laws or adopted regulations that prevent Internet companies or Web portals from selling any information collected from users.

REGULATION OF THE INTERNET AND INFORMATION INDUSTRY IN THE PRC MAY ADVERSELY

AFFECT OUR BUSINESS

The PRC has enacted regulations governing the provision of ISP services, Internet access and the distribution of news and other information. The Chinese government regulates access to the Internet by imposing strict licensing requirements and requiring ISPs in China to use the international inbound and outbound Internet backbones. Our vendors of these services have obtained all licenses required to offer Internet access services in the parts of the PRC where we conduct business, but there can be no assurance that such licenses will be retained.

We also note that the Chinese legal system is a civil law system in which decided legal cases have little precedential value. As a result, in many cases it is difficult to determine the type of content that may result in liability. We cannot predict the effect of further developments in the Chinese legal system, particularly with regard to the Internet, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. Periodically, the Ministry of Public Security has stopped the distribution of information over the Internet which it believes to be socially destabilizing. The Ministry of Public Security has the authority to cause any local ISP to block any Web site maintained outside of China at its sole discretion. Web sites that are blocked in China include many major news-related Web sites such as www.cnn.com, www.latimes.com, www.nytimes.com and www.appledaily.com.hk. These laws will affect the Chinese language Web portal which we propose to develop in the future.

The Chinese government has also expressed its intention to closely control possible new areas of business presented by the Internet, such as Internet telephony. We cannot provide assurance that we will be able to obtain any necessary license required in the future or that future changes in Chinese government policies affecting the provision of ISP services, information services, including the provision of online services, will not impose additional regulatory requirements on us or our strategic partners, intensify competition in the Chinese information industry or otherwise have a material adverse effect on our business, financial condition and results of operations.

THERE ARE ECONOMIC RISKS ASSOCIATED WITH DOING BUSINESS IN CHINA

The PRC economy has experienced significant growth in the past decade, but such growth has been uneven across geographic and economic sectors and has recently been slowing. There can be no assurance that such growth will not continue to decrease or that any slow down will not have a negative effect on our business. The PRC economy is also experiencing deflation which may continue in the future. The current economic situation may adversely affect our profitability over time as expenditures for advertisements may decrease due to the results of slowing domestic demand and deflation. In October, 1998, the Guangdong International Trust and Investment Corporation, an investment holding company of Guangzhou Province, was declared insolvent and shut down by the PRC government. Subsequently many other similarly situated PRC provincial investment holding companies have defaulted on their loans and experienced financial difficulties. As a result, our clients and suppliers may have limited access to credit that may adversely affect our business. In addition, the international financial markets in which the securities of the PRC government, agencies and private entities are traded also have experienced significant price fluctuations upon speculation that the PRC government may devalue the Renminbi which could increase our costs relative to our PRC revenues.

RESTRICTIONS ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO UTILIZE OUR REVENUES

EFFECTIVELY

We expect to derive a significant portion of revenues in the form of Renminbi. Although Chinese governmental policies were introduced in 1996 to allow greater convertibility of the Renminbi, significant restrictions still remain. We can provide no assurance that the Chinese regulatory authorities will not impose greater restrictions on the convertibility of the Renminbi. Any future restrictions on currency exchanges may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside the PRC.

A CHANGE IN CURRENCY EXCHANGE RATES COULD INCREASE OUR COSTS RELATIVE TO OUR

REVENUES

We expect to generate a portion of our revenues and to incur expenses and liabilities in Chinese Renminbi and U.S. dollars. As a result, we are subject to the effects of exchange rate fluctuations with respect to any of these currencies. We have not entered into agreements or purchase instruments to hedge our exchange rate risks although we may do so in the future.

                           RISKS RELATING TO OUR STOCK

Our common stock is listed on the electronic bulletin board of the over-the-counter market. Once delisted, we cannot predict when, if ever, our class of common stock would be re-listed for trading on the electronic bulletin board or any other market or exchange as the approval to re-list the common stock is subject to review by the NASD.

BECAUSE OUR COMMON STOCK PRICE IS BELOW $5.00, WE ARE SUBJECT TO ADDITIONAL

RULES AND REGULATIONS.

The SEC has adopted regulations which generally define a "penny stock" to be any equity security that has a market price (as defined) of less than $5.00 per share, subject to certain exceptions. Our common stock presently is a "penny stock". Because our stock is a "penny stock", it is subject to rules that impose additional sales practice requirements on broker/dealers who sell our securities to persons other than established customers and accredited investors. There can be no assurance that the common stock will trade for $5.00 or more per share, or if so, when.

Although we desire to list the common stock on the Nasdaq SmallCap Market and intend to apply for a listing on the SmallCap market at such time as we meet the listing criteria, there can be no assurance that we will ever qualify.

Absent Nasdaq SmallCap Market or other Nasdaq or stock exchange listing, trading, if any, in common stock will, as it presently is, continue in the "Electronic Bulletin Board" administered by the National Association of Securities Dealers, Inc. As a result, you may find it difficult to dispose of or to obtain accurate quotations as to the market value of the common stock.

WE HAVE NO INTENTION TO PAY DIVIDENDS

We have never paid any cash dividends on our common stock. We currently intend to retain all future earnings, if any, for use in our business and do not expect to pay any dividends in the foreseeable future.

Recently Issued Accounting Pronouncements

There are no new accounting pronouncements for which adoption is expected to have a material effect on the Company's financial statements.

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