KINGOLD JEWELRY, INC. - Annual Report: 2008 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

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ACTIVEWORLDS CORP.

(Exact name of registrant as specified in its charter)

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40 Wall Street, 58^th Floor, New York, NY 10005

(Address of Principal Executive Office) (Zip Code)

(212) 509-1700

(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

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INDEX

i

PART I

Item 1.

Business.

Introduction

We are a Delaware corporation organized on September 5, 1995.  Beginning in 1999, through our wholly-owned subsidiary Activeworlds, Inc., we operated the business of providing Internet software products and services that enabled the delivery of three-dimensional content over the Internet.  We operated this business until July 10, 2002 when we entered into an agreement to sell the subsidiary to our former management.  The sale closed on September 11, 2002, at which time we became inactive.  Since September 2002, we have not conducted any operations and have been searching to acquire an operating business.  Our only expenses have related to seeking a reverse merger candidate, our auditing and legal fees, and other public company expenses.  

Our Plan

Our business plan is to seek, investigate, and, if warranted, acquire an interest in a business opportunity.  Our acquisition of a business opportunity may be made by merger, exchange of stock, or otherwise.  We have no target under consideration, we have very limited sources of capital, and we probably will only be able to take advantage of one business opportunity. At the present time we have not identified any business opportunity that we plan to pursue, nor have we reached any preliminary or definitive agreements or understandings with any person concerning an acquisition or merger.

During 2008, we were not involved in advanced discussions with any parties relating to a reverse acquisition.

We have had no operating activity since completing the sale of our subsidiary on September 9, 2002.  Our management intends to merge with or acquire an operating business to create operating revenue.

Our search for a business opportunity will not be limited to any particular geographical area or industry, including both U.S. and international companies.  Our management has unrestricted discretion in seeking and participating in a business opportunity, subject to the availability of such opportunities, economic conditions and factors.  Our management believes that companies who desire a public market to enhance liquidity for current stockholders or plan to acquire additional assets through issuance of securities rather than for cash will be potential merger or acquisition candidates.

In the event we merge or acquire a business opportunity, the successor company will be subject to our reporting obligations with the Securities and Exchange Commission.  Under the SEC’s shell merger rules, we must file a Form 8-K within four business days of the closing of the transaction. The Form 8-K will also require us to provide the same kind of information on the successor company as would be included in the registration statement on Form 10 including the successor’s business operations, its management and principal stockholders and audited financial statements. Accordingly, we will incur additional expense to conduct due diligence and present the required information for the business opportunity in any report.  Also, the SEC may elect to conduct a full review of the successor company and may issue substantive comments on the sufficiency of disclosure related to the company to be acquired.

Investigation and Selection of Business Opportunities

We anticipate that business opportunities will come to our attention from various sources, including our sole officer/director, our stockholders, professional advisors such as attorneys and accountants, securities broker-dealers, investment banking firms, venture capitalists, members of the financial community and others who may present unsolicited proposals.  Management expects that prior personal and business relationships may lead to contacts for business opportunities; however, we have not entered into any direct or indirect negotiations at the time of this filing with any person, corporation or other entity regarding any possible business reorganization involving Activeworlds Corp.

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A decision to participate in a specific business opportunity may be made upon our management’s analysis of the quality of the other company’s management and personnel, the anticipated acceptability of the business opportunity’s new products or marketing concept, the merit of its technological changes, the perceived benefit that it will derive from becoming a publicly held entity, and numerous other factors which are difficult, if not impossible, to analyze through the application of any objective criteria.  In many instances, we anticipate that the historical operations of a specific business opportunity may not necessarily be indicative of the potential for the future because of the possible need to shift marketing approaches substantially, expand significantly, change product emphasis, change or substantially augment management, or make other changes.  We will be dependent upon the owners of a business opportunity to identify any such problems which may exist and to implement, or be primarily responsible for the implementation of, required changes.

In our analysis of a business opportunity we anticipate that we will consider, among other things, the following factors:

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Potential for growth and profitability, indicated by new technology, anticipated market expansion, or new products;

·

Our perception of how any particular business opportunity will be received by the investment community and by our stockholders;

·

Whether, following the business combination, the financial condition of the business opportunity would be, or would have a significant prospect in the foreseeable future of becoming sufficient to enable our securities to qualify for listing on a exchange or on a national automated securities quotation system, such as the stock market.

·

Capital requirements and anticipated availability of required funds, to be provided by us or from operations, through the sale of additional securities, through joint ventures or similar arrangements, or from other sources;

·

The extent to which the business opportunity can be advanced;

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Competitive position as compared to other companies of similar size and experience within the industry segment as well as within the industry as a whole;

·

Strength and diversity of existing management, or management prospect that are scheduled for recruitment;

·

The cost of our participation as compared to the perceived tangible and intangible values and potential; and

·

The accessibility of required management expertise, personnel, raw materials, services, professional assistance, and other required items.

No one of the factors described above will be controlling in the selection of a business opportunity.  Management will attempt to analyze all factors appropriate to each opportunity and make a determination based upon reasonable investigative measures and available data.  Potentially available business opportunities may occur in many different industries and at various stages of development. Thus, the task of comparative investigation and analysis of such business opportunities will be extremely difficult and complex.  Potential investors must recognize that, because of our limited capital available for investigation, we may not discover or adequately evaluate adverse facts about the opportunity to be acquired.

Form of Acquisition

We cannot predict the manner in which we may participate in a business opportunity. Specific business opportunities will be reviewed as well as our needs and desires and those of the promoters of the opportunity.  The legal structure or method deemed by management to be suitable will be selected based upon management’s review

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and our relative negotiating strength.  We may agree to merge, consolidate or reorganize with another corporation or form of business organization.

Regardless of the legal structure, we likely will acquire another corporation or entity through the issuance of Common Stock or other securities.  Although the terms of any such transaction cannot be predicted, it is possible that the acquisition will occur simultaneously with a sale of shares representing a controlling interest by our current principal stockholder.  In addition, our present management and stockholders most likely will not have control of a majority of our voting shares following a merger or reorganization transaction.  As part of such a transaction, our existing director will probably resign and new directors may be appointed without any vote by our stockholders.

This method may also include, but is not limited to, leases, purchase and sale agreements, licenses, joint ventures and other contractual arrangements. We may act directly or indirectly through an interest in a partnership, corporation or other forms of organization.

Competition

In our effort to locate an attractive opportunity, we expect to encounter competition from business development companies, venture capital partnerships and corporations, venture capital affiliates of large industrial and financial companies, small investment companies, and wealthy individuals.  Many of these persons or entities have significantly greater experience, resources and managerial capabilities than we do and will be in a better position than we are to obtain access to attractive business opportunities.  We also will experience competition from other public “blank check” companies, many of which may have more funds available for the investigation and selection of a business opportunity. In addition, we expect competition will be especially tough due to the recent downturn in the economy making it less attractive for private companies to “go public.”

Item 1A.

Risk Factors.

Not Applicable for smaller reporting companies.

Item 1B.

Unresolved Staff Comments.

None.

Item 2.

Properties.

We do not currently own or lease any property.  Until we make an acquisition, we will not have any need for our own office.  Pending that event, our principal stockholder provides us with an office and administrative services

Item 3.

Legal Proceedings.

None.

Item 4.

Submission of Matters to a Vote of Security Holders.

None.

3

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The following table sets forth, for the periods indicated, the range of quarterly high and low sales prices for our Common Stock which trades on the Over-the-Counter Bulletin Board under the symbol “AWLD.OB.”

Holders

As of March 30, 2009, there were 77 holders of record of our Common Stock holding 6,250,010 shares of Common Stock.

Dividend Policy

We have never paid cash dividends on our Common Stock.  Payment of dividends is within the discretion of board of directors and will depend upon our earnings, capital requirements and operating and our future financial condition.

Sales of Unregistered Securities for the year ended December 31, 2008.  

During the fiscal year ended December 31, 2008, we issued the following unregistered securities:

Purchases of Equity Securities.

During the year ended December 31, 2008, we did not purchase any of our equity securities, nor did any person or entity purchase any equity securities on our behalf.

Item 6.

Selected Financial Data.

Not Applicable.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operation.

The following Management’s Discussion and Analysis or Plan of Operation contains forward-looking statements.  Forward-looking statements reflect management’s current expectations and are inherently uncertain.  Our actual results may differ significantly from management’s expectations.

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The following discussion and analysis should be read in conjunction with our audited 2007 and 2008 financial statements which are included herein.  This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future.  Such discussions represent only the best present assessment of our management.

Overview

We are a Delaware corporation organized on September 5, 1995.  We have been inactive since September 11, 2002.  Since that date, we have been seeking and evaluating business opportunities. We have not had revenue from operations since July 10, 2002.  

Our primary expenses relate to our reporting obligations under the Securities Exchange Act of 1934 and expenses related to the acquisition of another business opportunity.  We will incur expenses due to the legal and accounting services required to prepare periodic reports and the costs of filing these reports with the Securities and Exchange Commission.  

Our plan of operations does not call for any product research or development, nor do we plan to purchase any equipment.

We currently have no employees.  Our management expects to confer with consultants, attorneys and accountants as necessary.

Critical Accounting Estimates

Because we are inactive, we do not make the same judgments or estimates that are made by operating companies.  See Note 2 to our Consolidated Financial Statements for a discussion of our significant accounting policies.

Results of Operations

We had no revenue for the fiscal years ended December 31, 2008 and 2007.  The loss from operations in fiscal 2008 was $ 214,262 primarily consisting of a non-cash expense of $188,186 which was the fair value expense relating to the issuance of 1,550,000 warrants for consulting services rendered to us. In 2007, we incurred a loss from operations of $326,477 primarily consisting of $293,379 of a non-cash charge relating to the modification of 1,050,000 warrants held by our principal shareholder, which were exercised in 2007.  Our net loss for the year ended December 31, 2008 was $214,262 as compared to $326,477 for the year ended December 31, 2007.  

Liquidity and Capital Resources

At December 31, 2008, we had total assets of $206,817 including $206,817 of cash and liabilities of $8,500.

Forward-Looking Statements

This Report contains forward-looking statements that address, among other things, the adequacy of our working capital, In addition to these statements, trend analyses and other information including words such as “seek,” “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend” and other similar expressions are forward looking statements. These statements are based on our beliefs as well as assumptions we made using information currently available to us. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties, and assumptions. Actual future results may differ significantly from the results discussed in the forward-looking statements. For more information regarding some of the ongoing risks and uncertainties of our business, see our other filings with the Securities and Exchange Commission.  We anticipate that some or all of the results may not occur because of factors which we discuss in the “Risk Factors” section which follows.  

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Risk Factors

Risks Relating to Our Business

Because of our limited resources and the significant competition for business combination opportunities, we may not be able to consummate an attractive business combination.

We have been a shell corporation since September 2002 and have not been able to consummate an acquisition.  Identifying, executing and realizing attractive returns on business combinations is highly competitive and involves a high degree of uncertainty.  We expect to encounter intense competition for potential target businesses from other entities having a business objective similar to ours, including venture capital funds, leveraged buyout funds, operating businesses, and other entities and individuals, both foreign and domestic.  Many of these competitors are well established and have extensive experience in identifying and consummating business combinations.  Many of these competitors possess greater financial, technical, human and other resources than we do.  Furthermore, over the past several years, a number of other “blank check” companies have been formed.  There are also many other shell corporations seeking to acquire operating businesses.  Additional investment funds and blank check companies with investment objectives similar to ours may be formed in the future by other unrelated parties, and these funds and companies may have substantially more capital and may have access to obtain additional financing on more attractive terms.

Risk Factors Relating to Our Common Stock

Since we expect to incur expenses in excess of revenues for the near future, we may not become profitable and your investment may be lost

We expect to incur losses for the foreseeable future.  We have not had revenues since entering into the agreement to sell our subsidiary on July 10, 2002, and may never be profitable, or, if we become profitable, we may be unable to sustain profitability. As a result, your investment in our securities may be lost.

We may issue preferred stock without the approval of our stockholders with features, which could make it more difficult for a third party to acquire us and could depress our Common Stock price.

In the future, our board of directors may issue one or more series of preferred stock that has more than one vote per share without a vote of our stockholders. This can prevent a third party from acquiring us even when it is in our stockholders’ best interests and reduce the price of our Common Stock.

Because our Common Stock will not be listed on a stock exchange, investors may be unable to resell them.

Our Common Stock trades on the Over-the-Counter Bulletin Board.  The Bulletin Board is not liquid and trading is limited.  This may hinder an investor’s ability to sell Common Stock.  Accordingly, investors must be able to bear the financial risk of losing their entire investment.

Since our Common Stock is subject to the penny stock rules, investors may experience substantial difficulty in selling their securities.

The SEC has established penny stock rules, which restrict the ability of brokers to solicit the sale of certain securities of companies whose assets, revenue, and/or stock prices fall below minimal thresholds.  Since we are subject to these rules, our Common Stock is deemed a “penny stock.” The penny stock rules limit the ability of a broker to solicit purchasers, which reduces liquidity.  They also generally require a broker to deliver a standardized risk disclosure document prior to a transaction in a penny stock.  The broker must also provide the customer with bid and offer quotations for the penny stock, the compensation of the broker and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account.  These additional requirements may hinder investor’s ability to sell their Common Stock.

The price of our Common Stock has been and may continue to be highly volatile, and investors may not be able to sell their Common Stock at or above market prices.

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The market price for our Common Stock has been highly volatile at times.  As long as the future market for our Common Stock is limited, investors who purchase our Common Stock may only be able to sell them at a loss.  

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable

Item 8.

Financial Statements and Supplementary Data.

See pages F- 1 to F- 13.

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

We have had no change in, or disagreements with, our independent registered public accounting firm during our last two fiscal years.  

Item 9A.

Controls and Procedures.

Not Applicable.

Item 9A(T)

Controls and Procedures.

Disclosure Controls.

We carried out an evaluation required by Rule 13a-15(b) of the Securities Exchange Act of 1934 under the supervision and with the participation of our chief executive officer and chief financial officer of the effectiveness of the design and operation of our “disclosure controls and procedures” as of the end of the period covered by this Report.

Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in an issuer’s reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) information is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

The evaluation of our disclosure controls and procedures included a review of our objectives and processes and effect on the information generated for use in this Report. This type of evaluation will be done quarterly so that the conclusions concerning the effectiveness of these controls can be reported in our periodic reports filed with the SEC. We intend to maintain these controls as processes that may be appropriately modified as circumstances warrant.

Based on their evaluation, our chief executive officer and chief financial officer has concluded that our disclosure controls and procedures are effective in timely alerting him to material information relating to Activeworlds Corp. required to be included in our periodic reports filed with the SEC as of the end of the period covered by this Report. There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Management necessarily applied its judgment in assessing the benefits of controls relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and may not be detected.

Internal Controls.

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Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).  Under the supervision and with the participation of our management, consisting of one person who serves as our Principal Executive Officer and Principal Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2008 based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our evaluation under that criteria, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.  We were not required to have, nor have we engaged our independent registered public accounting firm to perform, an audit on our internal control over financial reporting pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the fourth quarter of fiscal 2008 that have materially affected, or are reasonably likely to material affect, our internal control over financial reporting.

Item 9B.

Other Information.

None.

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PART III

Item 10.

Directors, Executive Officers and Corporate Governance.

We have only one officer and director.

Mr. Goodman has been our sole officer and director since July 2007.  Mr. Goodman is a partner in the New York City law firm of Cyruli Shanks & Zizmor LLP and concentrates on the representation of Internet and new media clients handling a wide range of corporate and financing transactions including venture capital, angel round investing and mergers and acquisitions. He was formerly a faculty member of the Queens College Computer Science Department and is the author of five books on computer programming. Mr. Goodman became a director of Maxus Technology Corporation in December 2006..  He has also been on the board of directors of SecureLogic Corp. since 1999 and serves on the Audit Committee.  He was a director of Broadcaster, Inc. from May 2007 through March 2008. Mr. Goodman received his law degree from the City University of New York and also holds a Bachelors and Masters Degree in Computer Science.

Audit Committee

We do not have an audit committee.

Audit Committee Financial Expert

Not applicable.

Limitation of Our Director’s Liability

Our certificate of incorporation eliminates the liability of our directors for monetary damages to the fullest extent possible.  However, our sole director (and future directors) remains liable for:  

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any breach of the director's duty of loyalty to us or our stockholders,

·

acts or omission not in good faith or that involve intentional misconduct or a knowing violation of law,

·

payments of dividends or approval of stock repurchases or redemptions that are prohibited by Delaware law, or

·

any transaction from which the director derives an improper personal benefit.

These provisions do not affect any liability any director may have under federal and state securities laws.

Code of Ethics

Since we have no employees, and only one officer and director, we have not adopted a code of ethics

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Item 11.

Executive Compensation.

We currently have no employees, and Mr. Paul Goodman our President, is our only executive officer.  Mr. Goodman receives no compensation, except in 2008 he received 250,000 five-year warrants exercisable at $0.16 per share.

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(1)

Represents the dollar amounts of warrants issued to Mr. Goodman recognized in the Company’s year-end 2008 financial statements for reporting purposes in accordance with SFAS 123(R). Amounts shown cover awards granted in 2008 and in prior years. The amounts represent the compensation costs of awards that are paid in rights to purchase shares of the Company’s common stock. The amounts do not reflect the actual amounts that may be realized.

Outstanding Awards at Fiscal Year End

Listed below is information with respect to unexercised options, restricted stock that has not vested, and equity incentive plans for each named executive officer outstanding as of December 31, 2008:

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(1)

Represents warrants.

10

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table provides information as of March 31, 2009 concerning the beneficial ownership of our Common Stock by each director, each person known by us to be the beneficial owner of at least 5% of any class of our Common Stock, and all executive officers and directors as a group.

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(1)

Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all securities beneficially owned by them. Beneficial ownership exists when a person has either the power to vote or sell our Common Stock.  A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days whether upon the exercise of options, warrants or otherwise.  

(2)

Includes 857,894 shares of Common Stock held by Baytree Capital Associates LLC of which Mr. Gardner is the managing member.  Also includes 750,000 warrants issued to a limited liability company, of which Mr. Gardner is a manager.

(3)

Consists of options exercisable at $0.25 until May 5, 2009.

(4)

Includes 16,352 shares of Common Stock owned by Mr. Noll’s wife, as to which he disclaims beneficial ownership

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

In October 2008, we issued an affiliate of Mr. Gardner, our principal shareholder, 750,000 warrants exercisable at $0.16 per share.

Item 14.

Principal Accounting Fees and Services.

Audit Fees

The fees billed for professional services rendered by our independent registered public accounting firm for the audit of our annual financial statements and review of our financial statements included in our Forms 10-K and 10-Q for the fiscal year ended December 31, 2008 were  $14,950 as compared to $14,750 for the fiscal year ended December 31, 2007.

Audit-Related Fees

We did not incur any audit related fees during the fiscal years ended December 31, 2008 or 2007.

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Tax Fees

Our principal independent registered public accounting firm did not perform any tax related services for us during the fiscal years ended December 31, 2008 or 2007.  

All Other Fees

Our independent registered public accounting firm did not perform any other services for us during the fiscal years ended December 31, 2008 or 2007.  We have not adopted audit committee pre-approval policies and procedures.

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PART IV

Item 15.

Exhibits, Financial Statement Schedules.

(a)

Documents filed as part of the report.

(1)

All Financial Statements

Consolidated Balance Sheets at December 31, 2008 and 2007

Consolidated Statements of Operations for the year ended December 31, 2008 and 2007

Consolidated Statement of Changes in Stockholders’ Equity for Years Ended December 31, 2008 and 2007

Consolidated Statement of Cash Flows for Years Ended December 31, 2008 and 2007

(2)

Financial Statements Schedule

(3)

Exhibits

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(1)

Contained in Form SB-2 filed on August 13, 1999

(2)

Contained in Form SB-2/A filed on April 12, 2000

(3)

Contained in Schedule 13-d/A filed on September 11, 2002

(4)

Contained in Form 10-QSB filed on August 13, 2004

(5)

Contained in Form SB-2/A filed on March 16, 2000

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 31, 2009

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

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ACTIVEWORLDS CORP.

TABLE OF CONTENTS

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders

Activeworlds Corp.

We have audited the accompanying consolidated balance sheet of Activeworlds Corp., as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Activeworlds Corp. at December 31, 2008 and 2007, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/  PKF, P.C.

Boston, Massachusetts

March 30, 2009

F-2

ACTIVEWORLDS CORP.

CONSOLIDATED BALANCE SHEET

See notes to consolidated financial statements

F-3

ACTIVEWORLDS CORP.

CONSOLIDATED STATEMENT OF OPERATIONS

See notes to consolidated financial statements

F-4

ACTIVEWORLDS CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2008 AND 2007

See notes to consolidated financial statements

F-5

ACTIVEWORLDS CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

See notes to consolidated financial statements

F-6

ACTIVEWORLDS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Organization and basis of presentation

Activeworlds Corp. (the “Company”) became inactive in July 2002 when it entered into an agreement to sell all of the issued and outstanding stock of its operating subsidiary, Activeworlds, Inc. The agreement closed in September 2002 and the Company’s former management purchased Activeworlds, Inc. in exchange for their selling 2,595,445 shares or approximately 30% of the Company’s common stock to the Company.

In 2004, the Company formed a wholly-owned subsidiary, AWLD, Inc., a Delaware corporation. AWLD, Inc. then formed a wholly-owned subsidiary AWLD, Ltd., an Israeli company in anticipation of an acquisition which was not consummated by the Company.  Both AWLD, Inc. and AWLD, Ltd. were dissolved during 2007.

All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements are presented as those of Activeworlds Corp.

The Company is actively seeking to merge, invest in or acquire other companies to generate revenues and profits.

Note 2 – Summary of significant accounting policies

A.

Nature of operations

The Company provided computer software products and on-line services that permitted users to enter, move about and interact with others in computer-generated, three-dimensional virtual environment using the Internet prior to the subsidiary, Activeworlds, Inc. being sold. As discussed in note 1, the Company is actively seeking to merge, invest in or acquire other companies to generate revenues and profits.

B.

Accounting estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

C.

Financial instruments

The estimated fair value of the Company’s financial instruments, which include cash and accrued liabilities, approximates carrying value.

D.

Investments

Management determines the appropriate classification of securities at the time of acquisition. If management has the intent and the Company has the ability at the time of acquisition to hold securities until maturity, they are classified as investments held to maturity and carried at amortized historical cost. Securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and carried at fair value.

Realized gains and losses on dispositions are based on the net proceeds and the adjusted book value of the securities sold, using the specific identification method. Unrealized gains and losses on investment securities available for sale are based on the difference between book value and fair value of each security. Unrealized gains and losses are reported in accumulated other comprehensive income (loss), whereas realized gains and losses are included in other income.

F-7

ACTIVEWORLDS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 2 – Summary of significant accounting policies (continued)

E.

Net (loss) per share of common stock

Net (loss) per share of common stock is computed by dividing net (loss) by the weighted-average number of common shares outstanding for the year.

F.

Income taxes

The Company reports income for tax purposes on the cash basis. Deferred taxes result from temporary differences and the net operating loss carry­forward. An allowance for the full amount of the gross deferred tax asset has been established due to the uncertainty of utilizing the deferred tax asset in the future.

G.

Stock Plans

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) – Share-Based Payment (“SFAS No. 123(R)”). This statement requires compensation expense to be measured based on the estimated fair value of share-based awards and recognize in income (loss) on a straight-line basis over the requisite service period which is generally the vesting period. As prescribed in FAS No. 148 Accounting for Stock Based Compensation – Transition and Disclosure, the Company elected to use the “prospective method.” The prospective method requires expense to be recognized for all grant awards granted, modified or settled beginning in the year of adoption. Historically, the Company applied the intrinsic method as provided in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations and accordingly, no compensation cost had been recognized for stock options in prior years. As a result of adopting the fair value method for stock compensation, all future awards will be expensed over the stock options’ vesting period. Pro forma information as if fair value method had been used in prior years is not presented, as pro forma compensation amounts are immaterial. The adoption did not have a financial effect in 2008 or 2007.

H.

Capitalization

In 2004 the Board of Directors approved an increase in its authorized capital to 50,000,000 additional shares of common stock with a par value of $.001.

Note 3 – Investments

In 2001 the Company agreed to accept 9,800,000 shares of common stock of its largest contract customer in full and final payment on the work completed to date on the contract. The fair market value at the date the common stock was transferred was $130,777 based on trading on the Australian Stock Exchange (“ASE”). Trading of the common stock of Green X Global Limited (Green X), formerly known as 3D Global Limited, was suspended pending the acquisition of Red X Property Pty. Ltd. (“Red X”). In anticipation of the acquisition Green X consolidated its share capital through a reverse stock split wherein the Company received one share for every 20 shares held. After the reverse split the Company holds 490,000 shares of Green X. The acquisition of Red X was completed during 2005, however, trading remains suspended.

On November 17, 2006, pursuant to Section 436A of the Corporations Act, an Administrator was appointed due to financial difficulties of Green X.  The Administrator is currently managing the business, property and affairs of Green X and interacting with creditors of Green X at this time.  Due to the current facts and circumstances, management decided to establish a reserve for the remaining carrying value of $85,839 in the investment in Green X Global Limited as of December 31, 2006, effectively offsetting the value of the investment. This impairment is considered to be other than temporary, therefore a loss for the full value of the investment, $130,777, was recognized in the net loss and the previous unrealized losses were reclassified as of December 31, 2006. The impairment continues to be other than temporary and the investment remains fully reserved at December 31, 2008.

F-8

ACTIVEWORLDS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 4 – Stock options and warrants

Stock options

In 1999, the Company established a qualified Stock Incentive Plan for its employees. From time to time, the Company issues non qualified stock options to independent contractors and others. In 2004, the Company adopted the 2004 Stock Option Plan authorizing 1,000,000 shares of common stock to be available under the Plan and approved the granting of 500,000 options to its sole director for services rendered to the Company. 50% of the options granted vest immediately. The remaining 250,000 vest only if an acquisition occurs in which control of the Company changes as a result of the acquisition. During 2007, the sole director resigned and a new sole director was appointed. In connection with his resignation, the former sole director forfeited all his outstanding options. The options included the 500,000 options granted above under the 2004 Stock Option Plan and 146,667 granted prior to the 2004 Plan. The options were exercisable at $.25 and $6.09, respectively.

The table below sets forth information as to options in 2008 and 2007:

The shares under options at December 31, 2008 were in the following exercise price ranges:

Warrants

In August 2007, the sole member of the Corporation’s Board of Directors reduced the exercise price of the 750,000 common stock warrants issued under a previous consulting contract, from $2.00 per share to $0.25 per share. The modification in fair value as a result of the decrease in exercise price was determined using the Black Scholes Model with the following assumptions:

F-9

ACTIVEWORLDS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 4 – Stock options and warrants (continued)

In August 2007, the sole member of the Corporation’s Board of Directors reduced the exercise price of the 300,000 common stock warrants issued under a separate contract, from $1.1875 per share to $0.25 per share. The modification in fair value as a result of the decrease in exercise price was determined using the Black Scholes Model with the following assumptions:

The total modification in fair value of the warrants described above was $293,379 and has been recognized as additional consulting services.

In September 2007, the principal stockholder cashlessly exercised the 1,050,000 warrants at their reduced exercise price and an additional 300,000 warrants at $0.06 per share. The stockholder received a total of 857,894 common shares through the exercise of warrants.

In October 2008, the Company issued 1,550,000 five-year common stock warrants for consulting services exercisable at $0.16 per share. Of the warrants, 250,000 were issued to the Company’s sole officer and director and 750,000 were issued to an affiliate of its principal shareholder. The remaining 550,000 common stock warrants were issued to individuals for services rendered. All of the warrants are fully vested, except 300,000 will only vest subject to the Company completing a reverse merger transaction with one unnamed company. The fair value of the 1,550,000 warrants in the amount of $188,186 was expensed at issuance of the warrants and is not affected by changes in the fair value of the Company’s stock subsequent to the measurement date. The consulting costs of the unvested warrants will be re-measured when and if vesting occurs.

F-10

ACTIVEWORLDS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 4 – Stock options and warrants (continued)

Warrants outstanding as of December 31, 2008 are as follows:

*

Warrants cancelled in connection with May 2000 public offering

Note 5 – Income taxes

The net operating loss carryforward at December 31, 2008 attributable to Activeworlds Corp. on the income tax reporting basis is approximately $4,162,000. An allowance has been established for the full amount of the gross deferred tax asset due to the uncertainty of utilizing the deferred taxes in the future.

The tax effect of each type of temporary difference and carryforward is reflected in the following table as of December 31, 2008:

The effective combined Federal and State tax rate used in the calculation of the deferred tax asset was 40%.

The operating loss carryforward is available to reduce Federal and State taxable income and income taxes, respectively, in future years, if any. The realizability of deferred taxes is not assured as it depends upon future taxable income. However, there can be no assurance that the Company will ever realize any future cash flows or benefits from these losses.

F-11

ACTIVEWORLDS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 6 – Net loss per share of common stock

The number of shares on which the basic net loss per share of common stock has been calculated is as follows:

Diluted net loss per share of common stock has not been presented for 2008 and 2007 since the effect of including the stock options and warrants outstanding (note 4) would be antidilutive.

Note 7 – Related party transactions

The Company entered into consulting agreements in 2008 with a company controlled by its principal stockholder. See note 4.

F-12