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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004.
or
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NUMBER 000-19709
NUWAY MEDICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 66-0159115
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2603 MAIN STREET, SUITE 1150
IRVINE, CALIFORNIA 92614
(Address, including zip code, of principal executive offices)
(949) 235-8062
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, $0.0067 PAR VALUE.
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes __ No _x_
The number of shares of the Registrant's Common Stock outstanding as of
June 30, 2004 was 46,322,736 shares and as of March 23, 2005 was 51,822,736
shares.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
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NUWAY MEDICAL, INC.
FORM 10-QSB
INDEX
PAGE
----
PART I
ITEM 1 Financial Statements 3
ITEM 2 Management's Discussion and Analysis 13
ITEM 3 Controls and Procedures 23
PART II
ITEM 1 Legal Proceedings 25
ITEM 2 Changes in Securities 26
ITEM 3 Defaults Upon Senior Securities 28
ITEM 4 Submission of Matters to a Vote of Security Holders 28
ITEM 5 Other Information 28
ITEM 6 Exhibits and Reports on Form 8-K 28
SIGNATURES 29
EXHIBIT INDEX 30
EXHIBIT 31.1 31
EXHIBIT 31.2 32
EXHIBIT 32 33
See accompanying notes to unaudited consolidated financial statements.
-2-
PART I
ITEM 1. FINANCIAL STATEMENTS
NUWAY MEDICAL, INC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2004 AND DECEMBER 31, 2003
ASSETS
June 30, December 31,
2004 2003
(unaudited) (unaudited)
------------ ------------
CURRENT ASSETS
Cash and Cash Equivalents $ 182 $ 671
------------ ------------
Total Current Assets 182 671
------------ ------------
PROPERTY AND EQUIPMENT, NET -- --
------------ ------------
OTHER ASSETS
Marketing Database -- --
Med Wireless License -- --
------------ ------------
Total Other Assets -- --
------------ ------------
TOTAL ASSETS $ 182 $ 671
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 1,722,483 $ 1,256,475
Notes Payable 1,572,100 1,605,000
Discount on Note, Net -- (62,131)
Debentures Payable, Net 26,151 125,000
------------ ------------
Total Current Liabilities 3,320,734 2,924,344
------------ ------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS
SHAREHOLDERS' EQUITY
Convertible Preferred Series A, $.00067 Par Value, 25,000,000
Shares Authorized, 559,322 Shares Issued and
Outstanding at June 30, 2004 and December 31, 2003 375 375
Common Stock, $.00067 Par Value, 100,000,000 Shares
Authorized, 46,322,736 and 36,386,486 Shares Issued
At June 30, 2004 and December 31, 2003, respectively 30,633 23,976
Additional Paid-In Capital 23,398,361 23,002,818
Accumulated Deficit (26,622,917) (25,823,838)
Treasury Stock, at cost, 44,900 Shares Held as of June 30, 2004 and December 31, 2003 (127,004) (127,004)
------------ ------------
Total Shareholders' Equity (3,320,552) (2,923,673)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 182 $ 671
============ ============
See accompanying notes to unaudited consolidated financial statements.
-3-
NUWAY MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Three Months Six Months
Ended June 30, Ended June 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue
Total Sales -- -- -- --
------------ ------------ ------------ ------------
Costs and Expenses
Selling, General and Administrative 282,610 864,496 621,205 1,953,133
Depreciation and Amortization -- -- -- --
------------ ------------ ------------ ------------
Total Costs and Expenses 282,610 864,496 621,205 1,953,133
------------ ------------ ------------ ------------
Operating (Loss) (282,610) (864,496) (621,205) (1,953,133)
------------ ------------ ------------ ------------
Other (Expenses) Income
Interest (Expense) Income (47,318) -- (152,474) (74,955)
Other Income -- -- 4,600 --
------------ ------------ ------------ ------------
Net Other (Expenses) (47,318) -- (147,874) (74,955)
------------ ------------ ------------ ------------
(Loss) Income Before Income Taxes (329,928) (904,369) (799,079) (2,028,088)
Income Taxes (Provision) Benefit -- -- -- --
------------ ------------ ------------ ------------
Net (Loss) Income from Continuing Operations (329,928) (904,369) (799,079) (2,028,088)
------------ ------------ ------------ ------------
Discontinued Operations (Note 2) -- (213,888) -- (4,091,861)
------------ ------------ ------------ ------------
Net (Loss) $ (329,928) $ (1,118,257) $ (799,079) $ (6,119,949)
============ ============ ============ ============
Loss Per Common Share - Basic and Diluted
Loss per share from Continuing Operations (.01) $ (.03) (.02) $ (.08)
============ ============ ============ ============
Loss per share from Discontinued Operations (.00) $ (.01) (.00) $ (.16)
============ ============ ============ ============
Net Loss per Share, rounding (.01) $ (.04) (.02) $ (.24)
============ ============ ============ ============
Weighted Average Common Share
Equivalents Outstanding 45,716,486 30,775,820 45,716,486 25,982,882
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
-4-
NUWAY MEDICAL, INC AND SUBSIDIARY
STATEMENTS OF STOCKHOLDERS' DEFICIT (UNAUDITED)
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 2004
Preferred Stock Common Stock
------------------ --------------------------
Number Par Number Par Additional Retained
of Value of Value Paid-In Earnings Treasury
Shares $.00067 Shares $.00067 Capital (Deficit) Stock
------- ------- ----------- ----------- ----------- ------------ ---------
BALANCE DECEMBER 31, 2003 559,322 375 36,386,486 $ 23,976 $23,002,818 $(25,823,838) $(127,004)
STOCK ISSUED FOR SERVICES 9,180,000 6,151 360,898
CONVERSION OF DEBENTURES 600,000 402 29,598
SALE OF COMMON STOCK 156,250 104 5,047
NET LOSS (799,079)
------- ------- ----------- ----------- ----------- ------------ ---------
BALANCE JUNE 30, 2004 559,322 $ 375 46,322,736 $ 30,633 $23,398,361 $(26,622,917) $(127,004)
======= ======= =========== =========== =========== ============ =========
See accompanying notes to unaudited consolidated financial statements.
-5-
NUWAY MEDICAL, INC AND SUBSIDIARY
STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIOD ENDING
JUNE 30, 2004 AND 2003
Six Month Period Ending
June 30,
------------------------------
2004 2003
(unaudited) (unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (799,079) $(6,119,949)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Issuance of Stock for Services 360,898 1,731,504
Cancellation of prior year warrant compensation
Write Down of Idle Furniture, Fixtures and Office Equipments -- 4,276
Loss on disposal of Discontinued Operations -- 4,117,750
Amortization of Discount on Note 62,131 8,348
Increase (Decrease) in Accounts Payable and Accrued Expenses 393,461 (209,450)
----------- -----------
Net Cash Used In Operating Activities 17,411 (467,521)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES
No Cash Used In or Provided by Investing Activities -- --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Funds from Loan -- 350,000
Payments to reduce Note Payable (22,900) --
Proceeds from Sale of Common Stock 5,000 --
Proceeds from Sale of Preferred Stock -- 279,663
----------- -----------
Net Cash Provided By Financing Activities (17,900) 629,663
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (489) 162,142
CASH AND CASH EQUIVALENTS - BEGINNING 671 521
----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 182 $ 162,663
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION
Cash Paid During the Period for:
Interest $ -- $ --
=========== ===========
Income Taxes $ -- $ --
=========== ===========
Conversion of Debentures and Accrued Interest to Capital $ 98,849 $ --
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
-6-
NUWAY MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ACCOUNTING POLICIES-BASIS OF PRESENTATION
In the opinion of management, the accompanying balance sheets and
related interim statements of operations, cash flows, and stockholders' equity
include all adjustments, consisting only of normal recurring items, necessary
for their fair presentation in conformity with accounting principles generally
accepted in the United States of America (U.S. GAAP). Preparing financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, and expenses. Actual results
and outcomes may differ from management's estimates and assumptions. Estimates
are used when accounting for stock-based transactions, uncollectible accounts
receivable, asset depreciation and amortization, and taxes, among others.
Interim results are not necessarily indicative of results for a full
year. The information included in this Form 10-QSB should be read in conjunction
with Management's Discussion and Analysis and financial statements and notes
thereto included in the NuWay Medical, Inc. Annual Report on Form 10-KSB for the
year ended December 31, 2003.
Certain reclassifications have been made to prior period amounts to
conform with the current period presentation. The results of operations for the
three-month period ended June 30, 2003 gives effect to the Company's
discontinued operations.
NOTE 2. BUSINESS AND ORGANIZATION
OUTLOOK
As of June 30, 2004, and as of February 28, 2005, the Company had no
continuing business operations. Any perceived value in the Company is both
speculative and intangible in nature. The Company is operating as a public shell
and its business operations consist of management seeking merger and acquisition
candidates with ongoing operations.
These consolidated financial statements have been prepared assuming the
Company will continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. During
2003, 2004 and as of February 28, 2005, the Company had limited liquid and
capital resources while seeking acquisition opportunities.
Cash and cash equivalents totaled $182 at June 30, 2004. The Company
had no revenues in the six-month period ended June 30, 2004 and was forced to
consume cash on hand to fund operations. The Company's cash position is
insufficient to meet its expenses. The Company will be required to raise
additional capital to sustain basic operations through the remainder of 2004 and
until a merger candidate with operations of its own is located and a transaction
is consummated. While the Company is actively seeking investments through
private investors and other parties, there is no assurance that the Company will
be able to raise additional capital for the entire period required.
-7-
NUWAY MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company's consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. As of June 30, 2004, the Company had limited liquid and capital
resources and management is incurring personal losses, while seeking acquisition
opportunities.
Ultimately, the Company's ability to continue as a going concern is
dependent upon its ability to attract new sources of capital, establish an
acquisition or reverse merger candidate with continuing operations, attain a
reasonable threshold of operating efficiencies and achieve profitable
operations.
For the six-month period ended June 30, 2004, the Company raised
$71,959. During the remainder of 2004, the Company raised an additional
$149,074, for a total of $221,033. These funds were raised through straight debt
financing, convertible debt financing, and equity financing, as described below.
NOTE 3. 2004 STOCK COMPENSATION PLAN SHARE ISSUANCE
During the six-month period ended June 30, 2004, the Company issued
9,180,000 shares of its common stock to approximately 14 individuals, comprised
of consultants, directors and employees. Of this amount, 5,980,000 shares were
issued from the Company's 2004 Equity Plan and the Company recorded a selling,
general and administrative expense in the amount of $333,000 for such issuances.
During the six-month period ended June 30, 2003, the Company issued 2,330,000
shares of its common stock to approximately 9 individuals, comprised of
consultants and advisory board members. All of these shares were issued from the
Company's 2003 stock compensation plan, and the Company recorded a selling,
general and administrative expense in the amount of $243,000 for such issuances.
Of the $333,000 recorded in the six-month period ended June 30, 2004, $135,000
related to consulting services, $80,000 related to Board of Directors expense,
and $118,000 related to salary expense. Of the $243,000 recorded for the
six-month period ended June 30, 2004, $88,000 related to consulting services,
$30,000 related to advisory board expense, none related to salary expense, and
$125,000 related to legal expense.
NOTE 4. DUE TO PRESIDENT - UNREIMBURSED BUSINESS EXPENSES
The Company's President, Dennis Calvert, loaned money to the Company by
paying from his personal funds certain of the Company's expenses. A significant
portion of these personal funds was obtained by Mr. Calvert by refinancing his
primary residence and cashing out equity thereon. For the six-month period ended
June 30, 2004, Mr. Calvert loaned to the Company $104,906. From October, 2003 to
February 28, 2005, Mr. Calvert loaned the Company a total of $143,141. As of
June 30, 2004, and February 28, 2005, the Company repaid $105 and $41,371 of
this amount, respectively. On March 7, 2005, the Company and Mr. Calvert agreed
such that the $101,770 still outstanding and owed by the Company to Mr. Calvert
will be repaid under the terms of a promissory note bearing interest of 10% per
annum, requiring monthly payments and maturing on January 15, 2006.
-8-
NUWAY MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of February 28, 2005, the Company had accrued an expense related to
the unpaid accrued compensation due its president, Mr. Calvert, in the amount of
$232,900.
NOTE 5. SALES OF UNREGISTERED SECURITIES
On January 31, 2004, the Company issued 30,000,000 shares of its common
stock to the PMG Shareholders pursuant to its obligations in the PMG Stock
Purchase Agreement. The Stock Purchase Agreement was rescinded on October 14,
2004, effective as of January 31, 2004, and those shares were cancelled and
returned to treasury.
In February 2004, the Company received gross and net proceeds of $5,000
from an individual investor in connection with the sale of 156,250 shares of the
Company's common stock. The issuance of the shares described above was made in
reliance on the exemption from registration set forth in Section 4(2) of the
Securities Act of 1933, as amended.
On February 17, 2004, the Company issued 600,000 shares of its common
stock to former convertible debenture holders to partially satisfy its
obligations on a settlement agreement. The shares issued reduced the Company's
settlement obligations by approximately $17,000.
On February 23, 2004, the Company issued a warrant that expires in five
years to Sachi International, Inc. to purchase up to 3,000,000 shares of common
stock at $0.04 a share. The Warrant vests based on the amount of investment
proceeds brought to the Company by the Holder, with 100% vesting if the Holder
brings $500,000 in investment capital. In the event less than $500,000 is
invested, the warrant vests in a pro-rata amount. The closing of any such
investment shall be in the sole and absolute discretion of the Company. Sachi
International, Inc. has not met the conditions for the warrant to vest.
On March 11, 2004, the Company issued 3,200,000 shares of its common
stock to in exchange for services rendered to the Company. Of these shares,
3,000,000 were issued to members of the Company's board of directors, and
200,000 were issued to legal counsel, in the total amount of $128,000.
-9-
NUWAY MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. SUBSEQUENT EVENTS
SALES OF UNREGISTERED SECURITIES
On September 3, 2004, the Company received gross and net proceeds of
$25,000 from two individual investors in connection with the sale of 5,000,000
shares of the Company's common stock.
On October 4, 2004, the Company received gross and net proceeds of
$50,000 from an outside investor and issued its convertible promissory note due
and payable one year from the date of issuance. The note bears interest at a
rate of 10% per annum, payable on the maturity date. The note can be converted,
in whole or in part, into shares of the Company's Series A Preferred stock, on
the basis of $.005 per share, at any time prior to maturity by either the
Company or the lender. Each share of Series A Preferred Stock may be converted
by the holder into one share of the Company's common stock. If the noteholder
converts the note into Series A Preferred Stock, on or after the note's original
maturity date the noteholder may require the Company to buy back the shares of
Series A Preferred Stock for 110% of the principal amount of the promissory note
(the "Buy Back Provision"). If the Company is unable to do so, the Company's
president, Dennis Calvert, has agreed to buy back the shares on the same terms.
If shares of Series A Preferred Stock are converted into common stock, the
holder has the right to include (piggyback) the shares of common stock in a
registration of securities filed by the Company (other than on Form S-4 or Form
S-8).
The Company's payment obligations under the note may be accelerated
upon the following events: (i) the sale of the Company's assets outside the
ordinary course of business; (ii) a breach of the representations and warranties
contained within the agreement evidencing the loan; (iii) the failure to timely
pay the note; (iv) the Company's default in any other loan obligation greater
than $100,000; (v) the Company's dissolution, liquidation, merger,
consolidation, bankruptcy, or future insolvency; and (vi) the commencement of
any suit that threatens to have a material adverse effect on the Company,
including the entry of a final judgment or settlement in excess of $100,000.
On November 4, 2004, the Company received gross and net proceeds of
$10,000 from an outside investor and issued a convertible promissory note on
substantially the same terms as the previously described note.
On December 16, 2004, the Company issued 500,000 shares of its common
stock to its remaining former convertible debenture holder to partially satisfy
its obligations on a settlement agreement. The shares issued reduced the
Company's settlement obligations by approximately $8,700.
On January 6, 2005, the Company received gross and net proceeds of
$25,000 from an outside investor and issued a convertible promissory note on
substantially the same terms as the previously described note.
-10-
NUWAY MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On January 7, 2005, the Company received gross and net proceeds of
$75,000 from two outside investors and issued convertible promissory notes on
substantially the same terms as the previously described notes, except the notes
do not include Buy Back Provisions, and allow conversion into a total of
18,000,000 shares of common stock (at $0.0042 per common share, rather than
$0.005 per Series A Preferred share).
On February 10, 2005, the Company amended its obligations to Dr. James
Seay (the "noteholder") under its promissory note dated November 20, 2003 in the
principal amount of $50,000 and which matured on February 18, 2004. On the
maturity date of the note the Company was obligated to pay the noteholder
$65,000. The Company has paid the noteholder $30,000 and the balance of $35,000
remains outstanding. The amendment to the note entered into on February 10,
2005, (i) extends the maturity date of the note to February 3, 2006, (ii)
provides for interest to accrue at a rate of 10% per annum (15% upon default),
and (iii) allows for the conversion of the note into 7,000,000 shares of the
Company's common stock, or $.005 per share.
In February, 2005, the Company received gross and net proceeds of
$16,000 from three outside investors and issued convertible promissory notes on
substantially the same terms as the previously described notes, except the note
does not include Buy Back Provisions, and allow conversion into a total of
2,261,701 shares of common stock (at $0.007 per common share, rather than $0.005
per Series A Preferred share).
On February 24, 2005, the Company received gross proceeds of $40,000
and net proceeds of $36,000 from two outside investors and issued convertible
promissory notes on substantially the same terms as the previously described
notes, except the notes do not include Buy Back Provisions, and allow conversion
into a total of 4,000,000 shares of common stock (at $0.01 per common share,
rather than $0.005 per Series A Preferred share).
All of these offerings and sales were made in reliance on the exemption
from registration contained in Section 4(2) of the Securities Exchange Act
and/or Regulation D promulgated thereunder as not involving a public offering of
securities.
-11-
NUWAY MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
LITIGATION
In May 2004, the Company was sued by Flight Options, Inc., a jet plane
leasing company, in the Superior Court of Orange County California. The lawsuit
alleges that the Company owes Flight Options approximately $418,300, pursuant to
a five-year lease assigned to the Company by the Company's former president Todd
Sanders, from his corporation, Devenshire Management Corporation ("Devenshire").
Management of the Company believes that the assignment of the lease was not
properly authorized or approved by the Company, and that by Mr. Sander's failure
to identify the lease in a December 2002 settlement agreement with the Company,
he breached the terms of that settlement agreement and, pursuant to the
settlement agreement, must indemnify the Company for any losses owed to Flight
Options. The Company has cross-complained against Mr. Sanders for indemnity, and
has added the affirmative claim of breach of fiduciary duty. The Company has
settled with plaintiff Flight Options pursuant to a stipulation that allows the
Company to either pay to Flight Options $100,000 on or before August 5, 2005, or
allow Flight Options to file a judgment against the Company for $163,310. The
Company's claims against Devenshire and Mr. Sanders will be litigated through
binding arbitration prior to the date in which it must pay $100,000 to Flight
Options. While the Company believes that it has meritorious positions in this
litigation against Devenshire and Mr. Sanders, given the inherent nature of
litigation, it is not possible to predict the outcome of this litigation or the
impact it would have on the Company.
On December 4, 2004 the Company was sued by the law firm of Enenstein
Russell and Saltz, LLP to collect fees that had been billed to the Company in
the amount of $15,233, which had been disputed by the Company. The Company is
defending its rights in the lawsuit. The case is in its beginning stage, and a
trial date has not been set. While the Company believes that it has meritorious
positions in this litigation, given the inherent nature of litigation, it is not
possible to predict the outcome of this litigation or the impact it would have
on the Company.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
This Quarterly Report on Form 10-QSB of NuWay Medical, Inc. (the
"Company") contains forward-looking statements. These forward-looking statements
include predictions regarding, among other things, our:
o general and administrative expenses;
o liquidity and sufficiency of existing cash;
o sale or other disposition of our technology; and
o The outcome of pending or threatened litigation.
You can identify these and other forward-looking statements by the use
of words such as "may," "will," "expects," "anticipates," "believes,"
"estimates," "continues," or the negative of such terms, or other comparable
terminology. Forward-looking statements also include the assumptions underlying
or relating to any of the foregoing statements.
Such statements, which include statements concerning future revenue
sources and concentrations, selling, general and administrative expenses,
research and development expenses, capital resources, additional financings and
additional losses, are subject to risks and uncertainties, including, but not
limited to, those discussed elsewhere in this Form 10-QSB, that could actual
results to differ materially from those projected.
Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including those
set forth below under the heading "Risk Factors" in our Annual Report on Form
10-KSB for the year ended December 31, 2003. All forward-looking statements
included in this document are based on information available to us on the date
hereof. We assume no obligation to update any forward-looking statements.
Unless otherwise expressly stated herein, all statements, including
forward-looking statements, set forth in this Form 10-QSB are as of June 30,
2004, and we undertake no duty to update this information.
PLAN OF OPERATIONS
OVERVIEW
The Company had no continuing business operations as of June 30, 2004
and as of February 28, 2005. Over the course of several years, the Company has
attempted to enter various businesses through the acquisitions of entities
operating ongoing businesses or technology that needed to be developed and
marketed. However, as a result of various factors, but primarily due to its lack
of adequate capital and the inability to secure financing successfully, these
acquisitions could not be properly exploited and integrated to produce
profitable operations by the Company. Management of the Company has elected to
dispose or discontinue through sales or other means, these acquisitions,
including the Company's attempt to develop and market the 15-year licensing
rights acquired from Med Wireless, Inc. (Med Wireless) in July 2002. The Med
Wireless technology consists of software that is compliant with HIPAA, to
electronically organize, store and retrieve medical records and medical images.
During 2003, management of the Company deemed it necessary to discontinue the
Company's attempt to develop and market the Med Wireless and Player Record
Library System ("PRLS") technologies.
-13-
Based on the rapid increase in the number of well-capitalized companies
offering competing technologies, as well as the fact that the Company has been
unable to continue funding any technology enhancements or development related to
the Med Wireless technology, management came to believe that the technology had
lost the ability to be a viable competing technology in its sector and that it
was not in the Company's best interest to continue to pursue the Med Wireless
technology. Moreover, management is doubtful if the Med Wireless technology will
be considered of any significant value to a prospective buyer or licensee of the
technology. The Company is attempting to sell this technology, but expects to
realize only nominal net proceeds, if any, for the technology.
In addition, the Company has abandoned its efforts to market a variety
of products and services to the sports industry with an emphasis on health and
technology related products, primarily PRLS. The Company is attempting to sell
its interest in its majority-owned subsidiary, NuWay Sports, LLC ("NuWay
Sports"), which was established to market the PRLS technology, but expects to
realize only nominal net proceeds, if any, for its interest.
The Company operated as a public shell during all of 2004 and
operations primarily consisted of the Company's president seeking funding,
maintaining the corporate entity, complying with the requirements of the
Securities Exchange Commission (the "SEC") and seeking merger and acquisition
candidates or new business opportunities. The Company will need working capital
resources to maintain the Company's status and to fund other anticipated costs
and expenses during the year ending December 31, 2004 and beyond. The Company's
ability to continue as a going concern is dependent on the Company's ability to
raise capital to, at a minimum, meet its corporate maintenance requirements. If
the Company is able to acquire an ongoing business and/or technology that must
be exploited, it would need additional capital until and unless that prospective
operation is able to generate positive working capital sufficient to fund the
Company's cash flow requirements from operations.
As a result of the dramatic change in direction of the Company's scope
and focus, the abandonment of its technologies and the discontinuance of its
remaining operating businesses, comparisons of year-to-year and
quarter-to-quarter results of operations are not meaningful. Thus the activity
in the three- and six-month periods ended June 30, 2004 is not comparable to the
three- and six-month periods ended June 30, 2003.
RESULTS OF OPERATIONS
The Company had no revenues from continuing operations during the
three- and six-month periods ended June 30, 2004, compared to $5,500 in revenue
during the three- and six-month periods ended June 30, 2003. This decrease in
revenue is attributable to the fact that NuWay Sports marketed the Med Wireless
and PRLS technologies and generated $5,500 of revenue in the three-month period
ended June 30, 2003, whereas the technologies were abandoned prior to the
commencement of the six-month period ended June 30, 2004. NuWay Sports is now
held for sale; consequently the results of operations related to this subsidiary
have been reclassified in our consolidated statement of operations as a loss
from discontinued operations.
-14-
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses were $283,000 and $651,000
for the three- and six-month periods ended June 30, 2004, respectively, compared
to $824,000 and $1,953,000 for the three- and six-month periods ended June 30,
2003, respectively. This decrease is primarily attributable to the fact that the
Company discontinued operations in 2003 and therefore incurred lower operating
expenses in 2004. The largest components of these expenses were:
a. Salaries and Payroll-Related Expenses: These expenses were
$52,000 and $230,000 for the three- and six-month periods ended June
30, 2004, compared to $79,000 and $133,000 for the three- and six-month
periods ended June 30, 2003, a decrease of $27,000 and an increase of
$97,000, respectively. The $97,000 increase for the six-month period
(and the decrease in the three-month period) is almost entirely
attributable to an expense recorded by the Company for the issuance of
3,000,000 shares of the Company's common stock to an officer of the
Company in lieu of cash compensation in the amount of $118,000, and
relates to the efforts by management to obtain additional financing,
comply with SEC reporting requirements, and find a viable merger
candidate.
b. Consulting Expenses: These expenses were $12,000 and
$15,000 for the three- and six-month periods ended June 30, 2004,
compared to $452,000 and $586,000 for the three- and six-month periods
ended June 30, 2003, a decrease of $440,000 and $571,000, respectively.
This decrease is primarily attributable to the Company's lack of
continuing business operations in 2004. There were 0 and 3,800,000
shares issued related to the consulting expense recorded for the three-
and six-month periods ended June 30, 2004, respectively.
c. Legal Expenses: These expenses were $49,000 and $206,000
for the three and six-month periods ended June 30, 2004, compared to
$175,000 and $488,000 for the three- and six-month periods ended June
30, 2003, a decrease of $126,000 and $282,000, respectively. This
decrease is primarily attributable to the high level of legal
assistance required in 2003 for matters such as (i) addressing NASDAQ
compliance issues (ii) a major shift in the Company's core business,
and (iii) numerous stock issuances to consultants.
d. Settlement Charge: These expenses were $163,000 and $0 for
the three and six-month periods ended June 30, 2004, compared to $0 and
$0 for the three- and six-month periods ended June 30, 2003, an
increase of $163,000 and $0, respectively. This increase is
attributable to the settlement reached in the Flight Options,Inc.
litigation, in which the Company may be obligated to pay up to
approximately $163,000 to Flight Options,Inc. (See Part II, Item 1
"Legal Proceedings" below.)
-15-
EXPENSES ASSOCIATED WITH STOCK ISSUED FOR SERVICES
During the three- and six-month periods ended June 30, 2004, the
Company issued 0 and 9,180,000 shares of its common stock, respectively, to
approximately 14 individuals, comprised of consultants, directors and employees.
Of this amount for the six-month period ended June 30, 2004, 5,980,000 shares
were issued from the Company's 2004 Equity Plan and the Company recorded a
selling, general and administrative expense in the amount of $333,000 for such
issuances. During the three- and six-month periods ended June 30, 2003, the
Company issued 2,330,000 and 11,217,329 shares of its common stock to
approximately 39 individuals, comprised of employees, directors, consultants and
advisory board members. These shares were issued from the Company's 2002 and
2003 stock compensation plans. With respect to these issuances, the Company
recorded a selling, general and administrative expense in the amount of $243,000
and $1,257,000 for the three- and six-month periods ended June 30, 2003. Of the
$333,000 recorded in the six-month period ended June 30, 2004, $135,000 related
to consulting services, $80,000 related to Board of Directors expense, and
$118,000 related to salary expense. Of the $243,000 recorded for the six-month
period ended June 30, 2003, $88,000 related to consulting services, $30,000
related to advisory board expense, none related to salary expense, and $125,000
related to legal expense.
DISCONTINUED OPERATIONS
As discussed above and in the notes to our consolidated financial
statements contained in this report, we have disposed of all of our operating
entities or discontinued all of our operations. The Company recorded a loss from
discontinued operations for the three-month period ended June 30, 2003 of
$214,000, and a net loss from continuing operations for the three-month period
ended June 30, 2003 of $904,000.
NET LOSS
Net loss for the three- and six-month periods ended June 30, 2004 was
$330,000 and $799,000 or $(0.01) and $(0.02) per share respectively.
Comparatively, for the three- and six-month periods ended June 30, 2003, the net
loss was $1,118,000 and $6,112,000, respectively, or $(0.04) per share, and
$(0.24) per share.
The Company has relied upon its 2004 Equity Plan to compensate
consultants and employees who have assisted in developing and executing the
Company's business plan. This reliance, together with issuances of stock by the
Company other than pursuant to these plans, has significantly narrowed the loss
per share by increasing the total number of the Company's outstanding common
stock.
-16-
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Cash and cash equivalents totaled $182 at June 30, 2004. We had no
revenues in the three- and six-month periods ended June 30, 2004 and were forced
to consume cash on hand to fund operations. The Company's cash position is
insufficient to meet its expenses. The Company will be required to raise
additional capital to sustain basic operations through the remainder of 2004 and
until a merger candidate with operations of its own is located and a transaction
is consummated. While the Company is actively seeking investments through
private investors and other parties, there is no assurance that the Company will
be able to raise additional capital for the entire period required.
The Company's consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. As of June 30, 2004, the Company had limited liquid and capital
resources and management is incurring personal losses, while seeking acquisition
opportunities.
Ultimately, the Company's ability to continue as a going concern is
dependent upon its ability to attract new sources of capital, establish an
acquisition or reverse merger candidate with continuing operations, attain a
reasonable threshold of operating efficiencies and achieve profitable
operations.
For the three- and six-month periods ended June 30, 2004, the Company
raised $37,947 and $109,906. During the remainder of 2004, the Company raised an
additional $111,127, for a total of $221,033. These funds were raised through
straight debt financing, convertible debt financing, and equity financing, as
described below.
STRAIGHT DEBT FINANCING
The Company's President, Dennis Calvert, loaned money to the Company by
paying from his personal funds certain of the Company's expenses. A significant
portion of these personal funds was obtained by Mr. Calvert by refinancing his
primary residence and cashing out equity thereon. For the three- and six-month
period ended June 30, 2004, Mr. Calvert loaned to the Company $37,947 and
$104,906, respectively. From October, 2003 to February 28, 2005, Mr. Calvert
loaned the Company a total of $143,141. As of June 30, 2004, and February 28,
2005, the Company repaid $105 and $41,371 of this amount, respectively. On March
7, 2005, the Company and Mr. Calvert agreed such that the $101,770 still
outstanding and owed by the Company to Mr. Calvert will be repaid under the
terms of a promissory note bearing interest of 10% per annum, requiring monthly
payments and maturing on January 15, 2006.
-17-
CONVERTIBLE DEBT FINANCING
For the three- and six-month periods ended June 30, 2004, the Company
did not raise any funds through convertible debt financing. During the remainder
of 2004, the Company raised $60,000 and issued convertible promissory notes due
and payable one year from the date of issuance. The notes bear interest at a
rate of 10% per annum, payable on the maturity date, and can be converted, in
whole or in part, into shares of the Company's Series A Preferred stock, on the
basis of $.005 per share, at any time prior to maturity by either the Company or
the lender. Each share of Series A Preferred Stock may be converted by the
holder into one share of the Company's common stock. If the noteholder converts
the note into Series A Preferred Stock, on or after the note's original maturity
date, the noteholder may require the Company to buy back the shares of Series A
Preferred Stock for 110% of the principal amount of the promissory note. If the
Company is unable to do so, the Company's president, Dennis Calvert, has agreed
to buy back the shares on the same terms. If shares of Series A Preferred Stock
are converted into common stock, the holder has the right to include (piggyback)
the shares of common stock in a registration of securities filed by the Company
(other than on Form S-4 or Form S-8). Please see Part II, Item 2 "Changes in
Securities".
EQUITY FINANCING
During the three- and six-month periods ended June 30, 2004, the
Company received gross and net proceeds of $0 and $5,000, respectively, from the
sale of 156,250 shares of its common stock which were restricted and
unregistered. During the remainder of 2004, the Company received gross and net
proceeds of $50,000 from the sale of 5,000,000 shares of its common stock which
were restricted and unregistered. Please see Part II, Item 2 "Changes in
Securities".
OTHER OBLIGATIONS
Significant debt obligations at June 30, 2004 included:
(i) $420,000 (plus interest) due to Augustine II, LLC (the
"Augustine Fund"), described in more detail below;
(ii) a $1,120,000 note payable which was purchased in March
2003 by New Millennium Capital Partners, LLC, an entity owned and
controlled by the Company's president, Dennis Calvert, and certain
members of his family, together with accrued but unpaid interest,
described in more detail below.
(iii) approximately $26,000 outstanding remaining on a
settlement agreement with former convertible debenture holders; and
(iv) $32,100 due to a former advisory board member, reduced
from a promissory note dated November 20, 2003 in the principle amount
of $65,000.
For the three- and six-month periods ended June 30, 2004, there was
$47,000 and $90,000, respectively, of accrued interest recorded related to these
obligations. As of December 31, 2004, there was $189,000 of accrued interest
recorded related to these obligations.
-18-
AUGUSTINE FUND NOTE
On June 10, 2003 the Company entered into a Term Loan Agreement ("Loan
Agreement") with the Augustine Fund, pursuant to which the Augustine Fund agreed
to lend the Company $420,000, payable in installments of $250,000, $100,000, and
$70,000 (the "Augustine Loan"). The proceeds of the Augustine Loan were used by
the Company for working capital.
Principal and interest, at an annual rate of 10%, of the Augustine
Loan, was originally due on February 29, 2004. In addition, the Loan Agreement
contains certain requirements that the Company make mandatory prepayments of the
Augustine Loan from the proceeds of any asset sales outside of the ordinary
course of business, and, on a quarterly basis, from positive cash flow. In
addition, all or any portion of the Augustine Loan may be prepaid by the Company
may prepay all or any portion of the Augustine Loan at any time without premium
or penalty.
As additional consideration for making the Augustine Loan, the
Augustine Fund received five-year warrants to purchase up to 6,158,381 shares of
the Company's common stock at an exercise price of $0.16 per share. The Company
could require that the warrants be exercised if certain conditions were
satisfied. Since these conditions were not fully satisfied by the maturity date,
the Loan Agreement provides that the Augustine Fund may, at any time following
the maturity date and so long as the warrants remain exercisable, elect to
exercise all or any portion of the warrants pursuant to a "cashless exercise",
whereby the Augustine Fund would be issued the net amount of shares of our
common stock, taking into consideration the difference between the exercise
price of the warrants and the fair market value of our common stock at the time
of exercise, without having to pay anything to the Company for such exercise.
As security for the Augustine Loan, New Millennium Capital Partners LLC
("New Millennium"), a company controlled and owned by the Company's president,
Dennis Calvert, and members of his family, pledged 2.5 million shares of the
Company's common stock owned by New Millennium, and, in addition, the Company
has granted the Augustine Fund a security interest in its 51% membership
ownership interest in NuWay Sports. As a result, the Company will need to
consent of the Augustine Fund to release its security interest in NuWay Sports
if the Company is able to sell NuWay Sports.
Prior to the original maturity date of the Augustine Loan, the Company
spoke with representatives of the Augustine Fund and advised them that the
Company was unable to pay the amount due under the Augustine Loan by the
February 29, 2004 maturity date. On March 30, 2004, the Augustine Fund agreed to
extend the maturity date of the Loan Agreement to August 2004. In addition to
the extension of the maturity date, the Augustine Fund was given the option of
having the Augustine Loan satisfied in cash or by the conversion of any
remaining principal balance and any accrued interest on the Augustine Loan to
shares of the Company's common stock at a 15% discount to market, so long as
Augustine Fund's holdings do not exceed 4.9% of the total issued and outstanding
shares of the Company's common stock at any time. In addition, the warrants held
by the Augustine Fund to purchase 6,158,381 shares of the Company's common stock
were re-priced to an exercise price of $.035 per share. Exercise of the warrants
is also subject to the limit that the Augustine Fund does not hold more than
4.9% of the issued and outstanding shares of the Company's common stock. The
Company recorded $29,000 and $42,000 of interest expense for the three- and
six-month periods ended June 30, 2004, related to the Augustine Loan.
-19-
On March 7, 2005, the Company and the Augustine Fund agreed to extend
the maturity date of the Augustine Loan to May 2006, in exchange for the
issuance of a warrant that gives the Augustine Fund the right to purchase
8,000,000 shares of the Company's common stock at $0.005 per share for a period
of five years. The final documentation of the extension and the warrant is being
finalized and has not yet been completed.
OBLIGATION TO NEW MILLENNIUM
In conjunction with the acquisition from Med Wireless of the license
for the Med Wireless and PRLS technologies on August 21, 2002, the Company
assumed a $1,120,000 note (the "Note") with interest at 10% per annum payable by
Med Wireless to Summitt Ventures, Inc. ("Summitt Ventures"). Summitt Ventures is
controlled by Mark Anderson, a former consultant and principal stockholder of
the Company. The Note is secured by the Company's assets and was originally due
on June 15, 2003.
As part of a series of transactions that the Company undertook to
separate itself completely from Mr. Anderson, on March 26, 2003, Summitt
Ventures sold the Note, together with 4,182,107 shares of the Company's common
stock owned by Mr. Anderson's affiliates, Camden Holdings and Summit Healthcare,
Inc. ("Summit Healthcare"), to New Millennium, in exchange for a $900,000
promissory note issued by New Millennium in favor of Summitt Ventures, Camden
Holdings, and Summit Healthcare (the "New Millennium Note"). The New Millennium
Note is secured by all of the stock of the Company owned by New Millennium and
Mr. Calvert. (See "Augustine Fund Note" above.) Other than Mr. Calvert, no
individual, entity or party presently or previously associated with the Company
has ever had any ownership interest in New Millennium. Mr. Anderson, a principal
of those companies that sold and/or licensed the technologies to the Company,
conditioned the transaction with New Millennium on the Company's agreeing to
convert the Note to common stock.
Since New Millennium purchased the Note, the Company has attempted
multiple times to convert the Note, but has been unable to obtain the required
stockholder vote, due to a lack of quorum, to do so. The three attempts are
described below.
On March 26, 2003, the Company's board of directors voted to convert
the Note by New Millennium into 22,400,000 shares of common stock of the
Company, at a conversion price discounted 37.5% from the then market price of
$0.08. New Millennium agreed to this conversion.
-20-
In arriving at a conversion price, the board of directors determined
that a 37.5% discount to market price was appropriate based on a number of
factors, including that (i) with the quantity of the shares that would be
issued, a block of shares that size could not be liquidated without affecting
the market price of the shares, and (ii) the shares would be "restricted shares"
and could therefore not be sold by New Millennium in the public markets prior to
two years from the date of the conversion, and thereafter would be subject to
the volume and manner of sale limitations of Rule 144 under the Securities Act
of 1933.
Subsequent to the vote by the board to convert the Note, the Company
received notification from Nasdaq's Listing Qualifications Department that
converting the Note without stockholder approval violated certain Nasdaq
Marketplace Rules. In response to this notification, the board, with the
concurrence of New Millennium, voted to amend its resolution and delay
conversion of the Note until the Company's stockholders approved the conversion.
At the Company's June 6, 2003 board meeting, Mr. Calvert, on behalf of
New Millennium, and the Company, through the unanimous action of the board (with
Mr. Calvert abstaining), agreed that, in light of current market conditions
(namely the significant increase in the trading price of the Company's common
stock since March 26, 2003, the date on which the conversion of the Note was
originally approved by the board, from $0.08 to $0.28 as of June 6, 2003), it
would be inequitable for New Millennium to convert the Note at the originally
agreed to $0.05 per share price. Mr. Calvert, on behalf of New Millennium, and
the Company orally agreed to rescind the agreement to convert the Note.
In addition, New Millennium orally agreed with the Company to extend
the maturity date of the Note to a first payment due October 1, 2003 in the
amount of $100,000 and the balance of the principal due on April 1, 2004, with
interest due according to the original terms of the Note (to correspond to the
payment terms of the New Millennium Note), and furthermore to reduce the
Company's obligation on the Note to the extent that New Millennium might be able
to reduce its obligation on the New Millennium Note. While the prior holder of
the Note, Summitt Ventures, purported to condition New Millennium's purchase on
the conversion of the Note, Mr. Calvert has represented to the Company that due
to Mr. Anderson's actions (as previously described by the Company in its
Quarterly Report on Form 10-QSB for the quarter ended March 31, 2003), Mr.
Calvert now believes that conversion of the Note is no longer a required term of
the agreement between New Millennium and Summitt Ventures.
The Company was unable to make the $100,000 payment on the Note on the
extended due date of October 1, 2003. At a board meeting on October 15, 2003,
the board decided to put the issue of conversion of the Note to the Company's
stockholders at a special meeting of the stockholders scheduled for December 9,
2003. The stockholders meeting was held on December 9, 2003, but adjourned
without a vote, because not enough shares to constitute a quorum were
represented. The stockholders meeting was rescheduled for December 30, 2003, at
which a quorum was also not present. Because this was the second attempt to
obtain a quorum, and more than 4,000,000 additional shares were required to be
voted to obtain a quorum, the board adjourned the meeting indefinitely. As a
result, the Note was not converted into stock and the outstanding principal
amount, together with accrued and unpaid interest, remains as a liability of the
Company.
-21-
In conjunction with the Company's January 31, 2004 purchase of Premium
Medical Group ("PMG") (later rescinded in October 2004), and as a condition to
that transaction, the Premium Medical Group shareholders (the "PMG
Shareholders") required the Company to convert the note so as to eliminate the
obligation from the Company's balance sheet. At a meeting on February 10, 2004,
the board of directors voted to convert the note into 30,869,992 shares of its
common stock, at a conversion price of $0.04, discounted 20% from the then
market price of $0.05. New Millennium agreed to this conversion. In arriving at
a conversion price, the board of directors determined that a 20% discount to
market price was appropriate based on a number of factors, including (i) the
holding period of the stock will be two years, and thus is not liquid until that
point, and (ii) the amount of the stock issued would make it impossible to
liquidate the stock at the current market price. This discount was equal to the
discount proposed to the stockholders in December 2003 at the abandoned
stockholders meeting, and less than the discount used by the board at the first
conversion attempt in April 2003.
The board approved the conversion knowing that, since its conversion
was a condition imposed by the PMG Shareholders, they (who would hold 45% of the
Company's common stock at the time of such meeting) would provide the additional
shares necessary to obtain a quorum and formal stockholder approval. Stockholder
approval was also necessary to increase the number of authorized shares
necessary to convert the Note. However, due to lack of operational capital, the
Company was unable to remain current in its SEC filings, and thus was unable to
hold the required stockholder meeting.
In October 2004, the Company, PMG and the PMG Shareholders rescinded
the Stock Purchase Agreement. Because the board of director's decision to
convert the Note was based in part on the requirements of the PMG Stock Purchase
Agreement, the board on October 28, 2004, determined not to convert the Note.
Considering that the Company at the time was a shell corporation with no
operations, Mr. Calvert also agreed to extend the maturity of the Note
indefinitely until the Company's status changed.
Accordingly, as of June 30, 2004, the principal amount of the loan,
together with $57,200 in accrued but unpaid interest, had not been repaid.
Under the terms of the New Millennium Note, it is possible that Summitt
Ventures, Camden Holdings, and Summit Healthcare may have a claim to reacquire
the shares of the Company's common stock that were sold to New Millennium. The
New Millennium Note is purportedly secured by the purchased shares of the
Company's common stock; however, New Millennium and Mr. Calvert believe that Mr.
Anderson and his affiliates have not perfected their security interest in those
shares. In addition, the Augustine Fund is the pledgee of 2,500,000 of these
shares and has physical possession of those shares.
-22-
New Millennium has informed the Company's board of directors that New
Millennium still intends to fully convert the Note to stock as soon as it is
practical, following stockholder approval. As of the date of the filing of this
report, the stockholder vote has not taken place and the Note has not been
converted into shares of the Company's common stock.
CRITICAL ACCOUNTING POLICIES
The SEC recently issued Financial Reporting release No. 60, "Cautionary
Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"),
suggesting companies provide additional disclosure and commentary on their most
critical accounting policies. In FRR 60, the SEC defined the most critical
accounting policies as the ones that are most important to the portrayal of a
company's financial condition and operating results, and require management to
make its most difficult and subjective judgments, often as a result of the need
to make estimates of matters that are inherently uncertain. Based on this
definition, the Company's most critical accounting policies include: non-cash
transactions and compensation valuations that affect the total expenses reported
in the current period and/or values of assets received in exchange.
The Company has established a policy relative to the methodology to
determine the value assigned to each intangible acquired with or licensed by the
Company and/or services or products received for non-cash consideration of the
Company's common stock. The value is based on the market price of the Company's
common stock issued as consideration, at the date of the agreement of each
transaction or when the service is rendered or product is received, as adjusted
for applicable discounts.
The methods, estimates and judgments the Company uses in applying these
most critical accounting policies have a significant impact on the results of
the Company reports in its financial statements.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures: Our management
evaluated, with the participation of our Chief Executive Officer and Chief
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-QSB.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms. It should be noted that 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.
-23-
(b) Changes in internal control over financial reporting: There was no
change in our internal control over financial reporting that occurred during the
period covered by this Quarterly Report on Form 10-QSB that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
-24-
PART II
ITEM 1. LEGAL PROCEEDINGS
In June 2002, Geraldine Lyons, the Company's former Chief Financial
Officer, sued the Company and the Company's former president Todd Sanders, for
breach of her employment contract. The lawsuit was brought in the Circuit Court
of the 11th Judicial Circuit in Miami-Dade County in Florida. Ms. Lyons seeks
approximately $25,000 due under the contract and the issuance of 100,000 shares
of common stock, with a guarantee that the stock could be sold by Ms. Lyons for
$300,000. Ms. Lyons alleges that additional funds are due under her employment
contract; that the contract requires the Company guarantee that she can sell for
$300,000 the 100,000 shares of stock the Company is required to issue her; and,
that Mr. Sanders promised to purchase from her 100,000 shares of Company common
stock held by her at the price of $4.00 per share.
The Company has counter-sued Ms. Lyons for breach of fiduciary duty,
fraud, violation of Section 12(a)(2) of the Securities Act of 1933, violation of
Section 517.301 of the Florida Statutes, negligent misrepresentation, conversion
and unjust enrichment resulting from the required restatement of the Company's
financial statements for the years ended December 31, 2000 and December 31,
1999. The restatements corrected the previous omission of certain material
expenses related primarily to compensation expense arising from warrants issued
and repriced stock options, as well as other errors.
The case is ongoing at this time, although it is not being vigorously
prosecuted by Ms. Lyons or the Company, in the Company's case primarily because
the Company currently lacks the resources to do so. While the Company believes
that it has meritorious positions in this litigation, given the inherent nature
of litigation, it is not possible to predict the outcome of this litigation or
the impact it would have on the Company.
In May 2004, the Company was sued by Flight Options, Inc.("Flight
Options"), a jet plane leasing company, in the Superior Court of Orange County
California. The lawsuit alleges that the Company owes Flight Options
approximately $418,300, pursuant to a five-year lease assigned to the Company by
the Company's former president Todd Sanders, from his corporation, Devenshire
Management Corporation ("Devenshire"). Management of the Company believes that
the assignment of the lease was not properly authorized or approved by the
Company, and that by Mr. Sander's failure to identify the lease in a December
2002 settlement agreement with the Company, he breached the terms of that
settlement agreement and, pursuant to the settlement agreement, must indemnify
the Company for any losses owed to Flight Options. The Company has
cross-complained against Mr. Sanders for indemnity, and has added the
affirmative claim of breach of fiduciary duty.
On March 17, 2005, the Company settled the lawsuit with the plaintiff
pursuant to a stipulation that allows the Company to either pay Flight Options
$100,000 on or before August 5, 2005, or allows Flight Options to file a
judgment against the Company for $163,310 after such date. The Company's claims
against Devenshire and Mr. Sanders will be litigated through binding arbitration
prior to the date on which it must pay $100,000 to Flight Options. While the
Company believes that it has meritorious positions against Devenshire and Mr.
Sanders, given the inherent nature of litigation, it is not possible to predict
the outcome of this litigation or the impact it would have on the Company.
-25-
On December 4, 2004, the Company was sued by the law firm of Enenstein
Russell and Saltz, LLP to collect fees that had been billed to the Company in
the amount of $15,233, which had been disputed by the Company. The Company is
defending its rights in the lawsuit. The case is in its beginning stage, and a
trial date has not been set. While the Company believes that it has meritorious
positions in this litigation, given the inherent nature of litigation, it is not
possible to predict the outcome of this litigation or the impact it would have
on the Company.
The Company is party to various other claims, legal actions and
complaints arising periodically in the ordinary course of business. In the
opinion of management, no such matters will have a material adverse effect on
the Company's financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES
On September 3, 2004, the Company received gross and net proceeds of
$25,000 from two individual investors in connection with the sale of 5,000,000
shares of the Company's common stock.
On October 4, 2004, the Company received gross and net proceeds of
$50,000 from an outside investor and issued its convertible promissory note due
and payable one year from the date of issuance. The note bears interest at a
rate of 10% per annum, payable on the maturity date. The note can be converted,
in whole or in part, into shares of the Company's Series A Preferred stock, on
the basis of $.005 per share, at any time prior to maturity by either the
Company or the lender. Each share of Series A Preferred Stock may be converted
by the holder into one share of the Company's common stock. If the noteholder
converts the note into Series A Preferred Stock, on or after the note's original
maturity date the noteholder may require the Company to buy back the shares of
Series A Preferred Stock for 110% of the principal amount of the promissory note
(the "Buy Back Provision"). If the Company is unable to do so, the Company's
president, Dennis Calvert, has agreed to buy back the shares on the same terms.
If shares of Series A Preferred Stock are converted into common stock, the
holder has the right to include (piggyback) the shares of common stock in a
registration of securities filed by the Company (other than on Form S-4 or Form
S-8).
The Company's payment obligations under the note may be accelerated
upon the following events: (i) the sale of the Company's assets outside the
ordinary course of business; (ii) a breach of the representations and warranties
contained within the agreement evidencing the loan; (iii) the failure to timely
pay the note; (iv) the Company's default in any other loan obligation greater
than $100,000; (v) the Company's dissolution, liquidation, merger,
consolidation, bankruptcy, or future insolvency; and (vi) the commencement of
any suit that threatens to have a material adverse effect on the Company,
including the entry of a final judgment or settlement in excess of $100,000.
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On November 4, 2004, the Company received gross and net proceeds of
$10,000 from an outside investor and issued a convertible promissory note on
substantially the same terms as the previously described note.
On December 16, 2004, the Company issued 500,000 shares of its common
stock to its remaining former convertible debenture holder to partially satisfy
its obligations on a settlement agreement. The shares issued reduced the
Company's settlement obligations by approximately $8,700.
On January 6, 2005, the Company received gross and net proceeds of
$25,000 from an outside investor and issued a convertible promissory note on
substantially the same terms as the previously described note.
On January 7, 2005, the Company received gross and net proceeds of
$75,000 from two outside investors and issued convertible promissory notes on
substantially the same terms as the previously described notes, except the notes
do not include Buy Back Provisions, and allow conversion into a total of
18,000,000 shares of common stock (at $0.0042 per common share, rather than
$0.005 per Series A Preferred share).
On February 10, 2005, the Company amended its obligations to Dr. James
Seay (the "noteholder") under its promissory note dated November 20, 2003 in the
principal amount of $50,000 and which matured on February 18, 2004. On the
maturity date of the note the Company was obligated to pay the noteholder
$65,000. The Company has paid the noteholder $30,000 and the balance of $35,000
remains outstanding. The amendment to the note entered into on February 10,
2005, (i) extends the maturity date of the note to February 3, 2006, (ii)
provides for interest to accrue at a rate of 10% per annum (15% upon default),
and (iii) allows for the conversion of the note into 7,000,000 shares of the
Company's common stock, or $.005 per share.
In February, 2005, the Company received gross and net proceeds of
$16,000 from three outside investors and issued convertible promissory notes on
substantially the same terms as the previously described notes, except the note
does not include Buy Back Provisions, and allow conversion into a total of
2,261,701 shares of common stock (at $0.007 per common share, rather than $0.005
per Series A Preferred share).
On February 24, 2005, the Company received gross proceeds of $40,000
and net proceeds of $36,000 from two outside investors and issued convertible
promissory notes on substantially the same terms as the previously described
notes, except the notes do not include Buy Back Provisions, and allow conversion
into a total of 4,000,000 shares of common stock (at $0.01 per common share,
rather than $0.005 per Series A Preferred share).
All of these offerings and sales were made in reliance on the exemption
from registration contained in Section 4(2) of the Securities Exchange Act
and/or Regulation D promulgated thereunder as not involving a public offering of
securities.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of June 30, 2004, the Company was in default on the following senior
securities:
(a) $32,100 due to a former advisory board member on a promissory note
dated November 20, 2003 which matured on February 18, 2004. As of the date of
this filing, the amount owed on this indebtedness is $35,000. On February 10,
2004, the maturity date of this note was extended to February 3, 2006.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The exhibits listed below are attached hereto and filed herewith:
EXHIBIT NO. DESCRIPTION
----------- -----------
31.1 Certification of Chief Executive Officer of Quarterly Report
Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e).
31.2 Certification of Chief Financial Officer of Quarterly Report
Pursuant to 18 U.S.C. Section 1350.
32 Certification of Chief Executive Officer and Chief Financial
Officer of Quarterly Report pursuant to Rule 13(a)-15(e) or
Rule 15(d)-15(e).
(a) REPORTS ON FORM 8-K.
None.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
hereunto duly authorized.
NUWAY MEDICAL, INC.
Date: March 23, 2005 By: /s/ Dennis Calvert
------------------------------------
Dennis Calvert
President, Chief Executive Officer
and Interim Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
31.1 Certification of Chief Executive Officer of Quarterly Report
Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e).
31.2 Certification of Chief Financial Officer of Quarterly Report
Pursuant to 18 U.S.C. Section 1350.
32 Certification of Chief Executive Officer and Chief Financial
Officer of Quarterly Report pursuant to Rule 13(a)-15(e) or
Rule 15(d)-15(e).
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