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Form 10QSB for CHINAWE COM INC

24-May-2004

Quarterly Report

The following discussion should be read in conjunction with the Consolidated Condensed Financial Statements and Notes thereto appearing elsewhere in this Form 10-QSB. 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 RMB404,409 (US$48,800) during the three- month period ended March 31, 2004. At the end of this period we had a shareholders' deficit of RMB9,140,650 (US$1,102,998) and a working capital deficit of RMB9,125,235 (US$1,101,138). The Independent Auditors Report on the Company's financial statements as of and for the years ended December 31, 2003 and 2002 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, but do 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 needed funds and there are no guarantees that we will not be required 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 our 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.

Three Months Ended March 31, 2004 compared to the Three Months Ended March 31, 2003

Revenues. Subscription and service income for the three months ended March 31, 2004 was RMB67,079 as compared to subscription and service income of RMB130,027 for the three months ended March 31, 2003, a decrease of 48%. As a result of focusing on the new business development in providing services relating to the management of non-performing loans as discussed in "Liquidity and Capital Resources" below, revenue earned from the current business has been decreased significantly. Other income for the three months ended March 31, 2004 was RMB21,267 as compared to other income of RMB10 for the three months ended March 31, 2003, an increase of 2,126%.

Expenses. Administrative and general expenses for the three months ended March 31, 2004 were RMB427,168 as compared to RMB412,752 for the three months ended March 31, 2003, an increase of 3%. As a result of loans advanced to the Company by a director in the third quarter of 2003, the Company has incurred interest expense of RMB64,265 payable to a director in this quarter.

As a consequence of the foregoing, our loss from operations increased from RMB282,725 for the three months ended March 31, 2003 to RMB360,089 for the three months ended March 31, 2004. Our net loss increased from RMB284,675 for the three months ended March 31, 2003 to RMB404,409 for the three months ended March 31, 2004.

Factors That May Affect Future Results

This Report on Form 10-QSB contains various forward-looking statements that are based on management's beliefs, as well as assumptions made by, and information currently available to, management. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Forward-looking statements may include, without limitation, management's expectations regarding: the Company's future financial and operating performance and financial condition; the closing and outcome of the pending transaction described herein; industry conditions; and the Company's liquidity and needs for additional financing.

Such statements are subject to certain risks, uncertainties, assumptions and other factors, many of which are outside the Company's control that could cause actual results to differ materially from such statements. Without limitation these factors include: the risks associated with the implementation of our business strategy, uncertainty concerning the effects of our pending transaction with Citigroup Financial Products Inc. and China Great Wall Asset Management Corporation, risks associated with the non-performing loan industry, risks associated with the Asian and Chinese economies, the effects of vigorous competition in the markets in which we operate and acts of terrorism. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, projected or expected. The Company does not intend to update these forward-looking statements prior to its next required filing with the Securities and Exchange Commission.

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.

Liquidity and Capital Resources

The Company's financial statements for the three months ended March 31, 2004 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 three months ended March 31, 2004, the Company reported a net loss of RMB404,409 (US$48,800) and at March 31, 2004 has a shareholders' deficit and a working capital deficit of RMB9,140,650 (US$1,102,998) and RMB9,125,235 (US$1,101,138), 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 China Great                  Wall Asset Management Corporation ("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 non-performing assets (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)      Subsequent to the period ended March 31, 2004, the Company                  entered into an interim Services Agreement (the "Agreement")                  with Citigroup Financial Products Inc., a subsidiary of                  Citigroup Inc. ("CFP"), to provide loan servicing and other                  services relating to a pool of non-performing loans ("NPL" or                  "NPLs") in Huizhou, Guangdong Province, China to be purchased                  by CFP from Great Wall. The NPLs to be purchased are valued at                  $242 million.

                  The Agreement will be in effect for a period of approximately                  eight months, during which period approval of the requisite                  Chinese governmental agencies will be sought for the                  transaction between CFP and Great Wall. Upon receipt of the                  relevant approvals (the "Closing"), it is the intention of CFP                  and the Company that the Company is to provide substantially                  the same services for a period covering the resolution of the                  NPLs.

                  In addition to receiving servicing fees, including a fixed                  monthly portion and a variable fee based on performance, the                  servicing arrangement for the Huizhou transaction with CFP was                  structured to allow the Company to participate in profit                  sharing without investing in the pool of assets as previously                  contemplated by the Company. This arrangement allows the                  Company to defer any fund raising exercise to a later date                  when the benefits of such exercise can be maximized. As most                  of the servicing fees are payable after the Closing, the full                  effect of the Agreement will only be reflected after the                   Closing which is expected to occur in the second half of this                  year.

                  The Agreement provides the basis for close cooperation between                  the Company and CFP for the investment and resolution of                  non-performing assets in the Chinese market. The Company is                  currently evaluating its involvement in a series of NPLs                  transactions and more transactions are expected in the near                  future.

                  The Company reached agreement with Great Wall for the                  employment of certain members from the existing Great Wall                  team in Guangdong. The Company will continue to add talents to                  complement the existing staff which possesses a good mix of                  industry know-how and local knowledge. Management believes                  that the combination of in-depth knowledge of China and                  professional skills in the servicing industry will give the                  Company a competitive edge in servicing NPLs in China.

                  Management believes that the new strategic direction of the                  Company and the servicing arrangement with CFP will erase                  doubts on the Company's operating as a going-concern. Barring                  unforeseen circumstances, the Company is expected to have a                  turn around in operating results in the second half of this                  year. Management believes that the focus on NPLs in China will                  form the basis of growth for the Company in the years to come.                  The Company is currently evaluating its involvement in a                  series of NPL transactions. The Company will focus on the NPL                  business as its core business and its current e-business is                  expected to diminish in importance with respect to revenue and                  profit.

         (3)      After entering into the Agreement, 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)      Our current cash balances will not be sufficient to meet our                  working capital and capital expenditure requirements for the                  next six months. However, after the Company entered into the                  Agreement as mentioned in section (2) 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. In addition, we may seek to raise funds 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.

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 three months ended March 31, 2004 and March 31, 2003, 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 result 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.

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. In particular, the Company has limited previous experience in the loan servicing business. There is the risk that an established loan servicing company might expand into China and acquire a large market share of the loan servicing business. It is also possible that the services provided by the Company might not be competitive against a stronger and more experienced loan servicing company.

GOVERNMENT APPROVAL

The Agreement is an interim agreement which will be in effect for a period of approximately eight months, during which period approval of the requisite PRC governmental authorities will be sought for the transaction between CFP and Great Wall. There can be no assurance that such approvals will be granted or be granted on a timely basis. Failure to obtain the requisite approvals or to obtain the approvals on a timely basis will have a material adverse affect on our business, financial condition and operating results.

DEPENDENCE ON CFP

CFP is currently the Company's sole client for its loan servicing business. The loss of CFP as a client will have a material adverse affect on our business, financial condition and operating results. The Company's failure to attract and retain additional clients for loan servicing will have a material adverse affect on our business, financial condition and operating results.

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.

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

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 customer 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

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 INTERNET SERVICES AND REPUTATION MAY BE ADVERSELY AFFECTED BY

SOFTWARE DEFECTS

Our internet 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 internet business. We may not discover software defects that affect our services or enhancements until we deploy the software.

                    RISKS RELATING TO DOING BUSINESS IN CHINA

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 internet business. 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.

Any new legislation or regulation adopted by the PRC regarding the loan servicing business in the PRC, or the application or uncertainty relating to the application of existing laws and regulations to the loan servicing business, 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.

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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