SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________.
Commission File Number 33-43423
NUWAY MEDICAL, INC.
-------------------
(exact name of small business issuer as specified in its charter)
Delaware 65-0159115
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
23461 South Pointe Drive, Suite 200 Laguna Hills, California 92653
------------------------------------------------------------------
(Address of principal executive offices)
(949) 454-9011
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [X] No [ ]
Number of shares outstanding of each of the issuer's classes of common equity,
as of February 17, 2004: 36,386,486 shares of common stock, $0.00067 par value
per share.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements 3
Consolidated Balance Sheets - as of September 30, 2003 (unaudited) and
December 31, 2002 3
Consolidated Statements of Operations - for the three and nine
months ended September 30, 2003 and September 30, 2002
(unaudited) 4
Consolidated Statements of Cash Flows - for the nine months ended
September 30, 2003 and September 30, 2002 (unaudited) 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 21
Item 3. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 31
Certifications 32
2
NUWAY MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
ASSETS
September 30, 2003 December 31, 2002
(unaudited)
------------------- ---------------------
CURRENT ASSETS
Cash and Cash Equivalents $ 4,610 $ 521
------------------- ---------------------
Total Current Assets 4,610 521
------------------- ---------------------
PROPERTY AND EQUIPMENT, net 22,430 28,844
------------------- ---------------------
OTHER ASSETS
Marketing Database, net - 255,000
Med Wireless License, net 1,826,906 4,090,000
------------------- ---------------------
Total Other Assets 1,826,906 4,345,000
------------------- ---------------------
TOTAL ASSETS $ 1,853,946 $ 4,374,365
=================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 944,472 $ 1,131,579
Notes Payable, net 1,384,986 1,120,000
Debentures Payable, net 150,000 150,000
------------------- ---------------------
Total Current Liabilities 2,479,458 2,401,579
------------------- ---------------------
COMMITMENTS AND CONTINGENCIES AND
SUBSEQUENT EVENTS (Notes 8, 9, 10 and 11)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, $.00067 Par Value, 25,000,000
Shares Authorized, 559,322 and No Shares Issued
and Outstanding at September 30, 2003 and
December 31, 2002, respectively 375 -
Common Stock, $.00067 Par Value, 100,000,000
Shares Authorized, 35,761,486 and 17,137,727 Shares
Issued and Outstanding at September 30, 2003 and
December 31, 2002, respectively 23,959 11,483
Additional Paid-In Capital 22,977,835 20,289,936
Accumulated Deficit (23,500,677) (18,201,629)
Treasury Stock at cost, 44,900 shares as of
September 30, 2003 and December 31, 2002 (127,004) (127,004)
------------------- ---------------------
Total Stockholders' Equity (Deficit) (625,512) 1,972,786
------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 1,853,946 $ 4,374,365
=================== =====================
3
NUWAY MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 and 2002
Three Months Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
-------------- --------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue
License of Software $ - $ - $ 40,165 $ -
-------------- --------------- -------------- --------------
Total Sales
- - 40,165 -
-------------- --------------- -------------- --------------
Costs and Expenses
Selling, General and Administration 614,075 737,317 2,618,183 1,825,205
Depreciation and Amortization 219,388 2,600 658,164 7,800
Impairment of Intangible Assets (Note 4) 1,866,344 - 1,866,344 -
Cancellation of Stock Warrants Previously
Expensed - - - (1,659,750)
-------------- --------------- -------------- --------------
Total Costs and Expenses
2,699,807 739,917 5,142,691 173,255
-------------- --------------- -------------- --------------
Operating (Loss) (2,699,807) (739,917) (5,102,526) (173,255)
-------------- --------------- -------------- --------------
Other (Expenses) Income
Interest (Expense) Income (121,567) - (196,523) 6,629
-------------- --------------- -------------- --------------
Net Other (Expenses) (121,567) - (196,523) 6,629
-------------- --------------- -------------- --------------
(Loss) Income Before Income Taxes (2,821,374) (739,917) (5,299,049) (166,626)
Income Taxes (Provision) Benefit - - - -
-------------- --------------- -------------- --------------
Net (Loss) Income from Continuing Operations (2,821,374) (739,917) (5,299,049) (166,626)
-------------- --------------- -------------- --------------
Discontinued Operations (Note 2) - (372,833) - (600,986)
-------------- --------------- -------------- --------------
Net (Loss) $ (2,821,374) $ (1,112,750) $ (5,299,049) $ (767,612)
============== =============== ============== ==============
(Loss) Earnings Per Common Share and Common Share
Equivalents Basic and Fully Diluted
Common Share Equivalents Outstanding 33,769,193 9,999,062 28,628,360 7,437,069
============== =============== ============== ==============
Net (Loss) Income Per Share $ (0.08) $ (0.11) $ (0.19) $ (0.10)
============== =============== ============== ==============
4
NUWAY MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(unaudited)
Nine Months Ended September 30,
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(5,299,049) $ (767,612)
Adjustments to Reconcile Net Loss to Cash Used in Operating Activities:
Depreciation and Amortization 658,164 7,800
Impairment of Intangible Assets (Note 4) 1,866,344 --
Amortization of Discount on Note 93,092 --
Issuance of Stock for Services and Interest 2,162,984 727,582
Cash Used in Discontinued Operations -- 889,096
Cancellation of Warrants Previously Recorded as Expense -- (1,659,750)
Bad Debt Expense 10,000 --
Increase in Prepaid Expenses and Other Current Assets 5,400
Decrease in Accounts Payable and Accrued Expenses (187,107) (18,931)
----------- -----------
(695,572) (816,415)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Used in Discontinued Operations -- (23,107)
Increase in Other Assets -- 23,703
----------- -----------
Net Cash Used in Investing Activities -- 596
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Convertible Debentures -- (50,000)
Reduction of Loan from Officers & Affiliates -- 380,377
Proceeds from the Sale of Securities -- 250,000
Proceeds from the Sale of Preferred Stock 279,661 --
Proceeds from Term Loan 420,000 --
----------- -----------
Net Cash Provided by Financing Activities 699,661 580,377
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,089 (235,442)
CASH AND CASH EQUIVALENTS - BEGINNING 521 244,344
----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 4,610 $ 8,902
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Interest $ -- $ --
Income Taxes $ -- $ --
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING TRANSACTIONS
Conversion of Debentures $ -- $ 2,200,000
ISSUANCE OF STOCK FOR CAPITALIZED ASSETS
Software $ -- $ 300,000
Med Wireless License, net $ -- $ 4,620,000
Increase in Debt for Med Wireless License $ -- $ 1,120,000
Effective Discount on Note Payable $ 245,420 $ --
5
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
a) Principles of Consolidation and Basis of Presentation
In the opinion of the management of NuWay Medical, Inc. (the
"Company") the accompanying unaudited consolidated financial
statements contain all adjustments (which are normal recurring
accruals) necessary to present fairly the consolidated financial
position as of September 30, 2003; the consolidated results of
operations for the three and nine months ended September 30, 2003 and
2002; and the consolidated cash flows for the nine months ended
September 30, 2003 and 2002. Interim results for the three and nine
months ended September 30, 2003 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2003.
The interim consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements for
the year ended December 31, 2002 included in the Company's Form
10-KSB, filed May 23, 2003.
The consolidated balance sheets at September 30, 2003 and December
31, 2002 include the accounts of NuWay Medical, Inc. and its joint
venture subsidiary, NuWay Sports, LLC ("NuWay Sports") (collectively
referred to as the "Company"). NuWay Medical, Inc. owns 51% of NuWay
Sports and the remaining 49% is owned by Rasheed & Associates, and
operations for NuWay Sports commenced in January 2003. Thus,
operations are consolidated. As there is no equity in NuWay Sports,
100% of this entity is absorbed by NuWay Medical, Inc. All
significant inter-company balances have been eliminated in
consolidation.
b) Management's Plans
The Company had approximately $3,000 of cash on hand at March 1,
2004. From June 2003 to August 2003 the Company received $420,000 in
the form of a Note Payable as described in Note 7 below. On November
20, 2003, the Company received $50,000 in the form of a Promissory
Note as described in Note 11 below. Notwithstanding these financing
activities, the Company will need to raise additional capital to
sustain operations and implement its growth strategy until such time,
if ever, that the Company achieves profitability. As of the date of
this filing, the Company was not a party to any definitive agreements
to provide such financing. Although the Company is in the process of
actively reviewing additional proposals made by private investors and
6
investment bankers, there can be no assurance that the Company will
be able to consummate any such transactions on terms satisfactory to
the Company, or at all, or if consummated, that such financings will
provide the Company with sufficient capital. If the Company is unable
to secure additional financing within the next 120 days it would need
to significantly curtail and perhaps shut down its operations. It is
unlikely that the Company will be able to qualify for bank debt until
such time as the Company is able to demonstrate sufficient financial
strength to provide confidence for a lender.
The Company's shares were delisted effective as of June 10, 2003 from
trading on the Nasdaq SmallCap Market. The shares are currently
quoted on the pink sheets. Although a market maker has submitted an
application for quotation of the Company's shares on the
Over-the-Counter Bulletin Board, there can be no assurance that this
application will be approved by NASD (and, if not, that any other
applications that may in the future be filed), or the Company will be
cleared to trade on the Bulletin Board, in particular in light of the
public interest concerns raised by Nasdaq in connection with the
delisting of the Company's shares. This Nasdaq delisting has made it
more difficult to effect trades and has led to a significant decline
in the frequency of trades and trading volume. The delisting could
also adversely affect the Company's ability to obtain financing due
to the decreased liquidity of the Company's shares.
Although the primary development of the Player Record Library System
("PRLS") has been completed, management plans on periodically
upgrading its PRLS software application through additional research
and development, including tailoring its application to the specific
needs of its clients as those needs are brought to the Company's
attention. The Company will be unable to accomplish the foregoing on
a long-term basis, however, unless and until the additional financing
referred to above is secured.
Based on its current business plan, and assuming sufficient financing
is obtained, management believes it will be able to generate
meaningful sales of its PRLS software application and that it may be
able to secure sales or license agreements as early as the first half
of 2004. The Company has entered into an agreement with its first NBA
franchisee to implement the PRLS system for that franchise. The
Company's PRLS was introduced to the marketplace in January 2003 and
generated a total of approximately $40,000 in revenues during the
first and second quarters of 2003 through the sale of a scaled-down
version of the product to 18 National Football League ("NFL") teams
at the 2003 NFL Combine. Pursuant to these transactions, the Company
digitized over 60,000 medical images for use by NFL teams in their
evaluation of potential draft picks. Management believes that its
PRLS is already being referred by its customers and prospects as the
best of brand for its sports industry focus. The Company is marketing
the PRLS to multiple sports leagues and is actively seeking
additional vertical market opportunities. There can be no assurance,
however, that the Company will be able to secure any further
agreements for its product, that such agreements will ever generate
meaningful revenue for the Company, or that the Company will be able
to successfully capture any such vertical market opportunities.
Ultimately, the Company's ability to continue as a going concern is
dependent upon its ability to establish and grow a revenue stream,
attain a reasonable threshold of operating efficiencies, achieve
profitable operations and attract new sources of capital. The
consolidated financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
c) Property and Equipment
Property and Equipment are stated at cost. Depreciation is provided
on a straight-line basis over the estimated useful life of the
respective asset. Maintenance and repairs are charged to expense as
incurred; major renewals and betterments are capitalized. When items
of property or equipment are sold or retired the related cost and
accumulated depreciation are removed from the accounts and any gain
or loss is included in the results of operations.
d) Impairment of Long-Lived Assets
The Company periodically reviews its long-lived assets for potential
impairment as required by Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", which supercedes previous
guidance. As discussed in Note 2, the Company discontinued several
operations during the year ended December 31, 2002. Refer to Note 4
7
for discussion of impairment of certain intangible assets as of
September 30, 2003.
e) Revenue Recognition
The Company recognizes revenue from its new medical technology
business in accordance with SEC Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements." For hardware sales,
revenue would be recognized upon shipment to customers. To date, no
such sales have been made.
Revenue from the licensing of software products is recognized when a
contract is executed (when applicable), all delivery obligations have
been met, the fee is fixed or determinable, and collectability is
probable. When licenses are sold together with services, in
accordance with the provisions of the American Institute of Certified
Public Accountants' Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"), license fees are recognized upon delivery,
provided that (1) the above criteria have been met, (2) payment of
the license fees is not dependent upon the performance of the
services, (3) the services do not include significant modifications
to the features and functionality of the software, and (4) the
services are not essential to the functionality of the software. If
revenue is received from software maintenance agreements, it will be
recognized ratably over the term of the agreement, as will annual
software maintenance charges and upgrade fees be recognized ratably
over the period covered. To date, no such maintenance revenue has
been received by the Company.
f) Earnings (Loss) Per Share
The Company reports basic and diluted earnings per share ("EPS") for
common and common share equivalents. Basic EPS is computed by
dividing reported earnings by the weighted average shares
outstanding. Diluted EPS is computed by dividing reported earnings by
the weighted average shares outstanding adjusted for all potentially
dilutive shares, which include shares issuable upon the exercise of
outstanding stock options, warrants and convertible preferred stock
using the "if-converted" method. For the three and nine months ended
September 30, 2003 and 2002, the denominator in the diluted EPS
computation was the same as the denominator for basic EPS computation
due to the antidilutive effect of the warrants and stock options on
the Company's net loss.
8
For the three and nine months ended September 30, 2003 and September
30, 2002, the computation of basic and diluted EPS was as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Basic and Diluted EPS:
----------------------
Numerator - Net (Loss) from
Continuing Operations $ (2,821,374) $ (739,917) $ (5,299,049) $ (166,626)
Denominator - Weighted Average
Shares Outstanding 33,769,193 9,999,062 28,628,360 7,437,069
------------ ------------ ------------ ------------
(Loss) Income per Share $ (0.08) $ (0.07) $ (0.19) $ (0.02)
------------ ------------ ------------ ------------
Numerator - Net (Loss) Income from
Discontinued Operations $ -- $ (372,833) $ -- $ (600,986)
Denominator - Weighted Average
Shares Outstanding -- 9,999,062 -- 7,437,069
------------ ------------ ------------ ------------
(Loss) Income per Share $ -- $ (0.04) $ -- $ (0.08)
------------ ------------ ------------ ------------
Numerator - Net (Loss) Income $ (2,821,374) $ (1,112,750) $ (5,299,049) $ (767,612)
Denominator - Weighted Average
Shares Outstanding 33,769,193 9,999,062 28,628,360 7,437,069
------------ ------------ ------------ ------------
(Loss) Income per Share $ (0.08) $ (0.11) $ (0.12) $ (0.10)
------------ ------------ ------------ ------------
g) Use of 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, the disclosure of
contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the periods reported.
Actual results could differ from those estimates. Estimates are used
when accounting for stock-based transactions, uncollectable accounts
receivable, asset impairment, depreciation and amortization, and
taxes, among others.
h) Stock Options and Warrants Issued for Services
As permitted under the Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," the
Company accounts for its stock-based compensation to employees in
accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. The Company provides the pro forma net
earnings, pro forma earnings per share, and stock-based compensation
plan disclosure requirements set forth in SFAS No. 123.
10
Had compensation cost for options issued under the 1994 Stock Option
Plan, as described more fully in Note 6, been determined based upon
fair value at the grant date for options granted, consistent with the
provision of SFAS 123, the Company's net (loss) income and net (loss)
income per share would have been reduced to the pro forma amounts
indicated below:
Three Months Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
-------------- ------------- ------------ ------------
Net (Loss) - as reported $ (2,821,374) $ (1,112,750) $ (5,299,049) $ (767,612)
Deduct: stock based employee
compensation expenses determined
under fair value based method - - - -
-------------- ------------- ------------ ------------
Net (Loss) - pro forma $ (2,821,374) $ (1,112,750) $ (5,299,049) $ (767,612)
============== ============= ============ ============
Net (Loss) per share - as reported
Basic $ (0.08) $ (0.11) $ (0.19) $ (0.10)
============== ============= ============ ============
Diluted $ (0.08) $ (0.11) $ (0.19) $ (0.10)
============== ============= ============ ============
Net (Loss) per share - pro forma
Basic $ (0.08) $ (0.11) $ (0.19) $ (0.10)
============== ============= ============ ============
Diluted $ (0.08) $ (0.11) $ (0.19) $ (0.10)
============== ============= ============ ============
For stock issued to consultants and other non-employees for services,
the Company records the expense based on the fair market value of the
securities as of the date of stock issuance or agreement for such
services.
i) Reclassifications
Certain amounts in the accompanying 2002 consolidated financial
statements have been reclassified to conform to 2003 presentation,
primarily those items having to do with discontinued operations. (See
Note 2)
NOTE 2. DISCONTINUED OPERATIONS
Effective October 1, 2002, the Company sold its oil and gas operations, namely
the stock of NuWay Resources Ltd., to Summit Oil and Gas, Inc. The purchase
price for the stock was $100,000 less all outstanding liabilities of NuWay
Resources, Ltd. As the offsetting liabilities exceeded the purchase price, the
Company received no funds. The Company recorded a loss from these operations
through September 30, 2002 of $68,650 and a loss of $1,290,948 on disposal.
Effective October 1, 2002, the Company sold the stock of its wholly owned casino
rental subsidiaries (Latin American Casinos del Peru S.A., and Latin American
Casinos of Colombia, LTDA) to Casino Venture Partners, a Nevada partnership. The
purchase price for the stock was $300,000 less all outstanding liabilities of
the two subsidiaries. As the offsetting liabilities exceeded the purchase price,
the Company received no funds. The Company recorded a loss from these operations
through September 30, 2002 of $147,247 and a loss of $1,376,733 on disposal.
The Company discontinued the operations of World's Best Rated Cigar Company on
October 1, 2002 by donating any remaining inventory and terminating all
outstanding warehouse lease agreements without penalty. A loss of $385,089 was
incurred from these operations until the point of disposal and a loss of
$179,750 was recorded upon disposal of the net assets.
11
The results of operations of the Company's oil and gas, casino, and cigar
distribution operations have been shown as discontinued operations as follows:
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
--------------------- ---------------------
Revenues $ 185,605 $ 629,415
Operating Expenses 558,438 1,230,401
--------------------- ---------------------
Loss from Discontinued Operations $ (372,833) $ (600,986)
===================== =====================
NOTE 3. PROPERTY AND EQUIPMENT
Property and Equipment are summarized as follows:
September 30, 2003 December 31, 2002
--------------------- --------------------
Furniture, Fixtures & Office Equipment $ 42,753 $ 42,753
Less: Accumulated Depreciation 20,323 13,909
--------------------- --------------------
Property and Equipment, net $ 22,430 $ 28,844
===================== ====================
Furniture, fixtures and office equipment are carried at cost and depreciated
using the straight-line method over the estimated useful lives of the assets,
which is estimated to be five years.
NOTE 4. INTANGIBLE ASSETS
The Company had the following Intangible Assets at September 30, 2003: a
marketing database purchased from Genesis Health Tech, Inc. on September 28,
2002 and certain software technology licensed from Med Wireless, Inc. on August
21, 2002. The database is a comprehensive listing of healthcare providers in the
U.S. and represents what the Company believes to be a valuable tool for phone,
mail and direct marketing activities related to the Company's new medical
technology products. The technology licensed from Med Wireless relates to the
movement of medical images and data over the Internet and via handheld wireless
devices and is critical to the Company's PRLS product as well as potential
future products. No amortization was recorded for these intangible assets in
2002 as the Company did not begin to utilize the database nor generate sales of
products derived from this technology until 2003. In January 2003, the Company
began to amortize both assets on a straight-line basis over estimated five year
useful lives and a total of $217,250 and $651,750 in amortization expense was
recorded for the three and nine month periods, respectively.
In Note 5 to the Company's audited financial statements for the year ended
December 31, 2002 appearing in the Company's Form 10-KSB filed May 23, 2003, the
Company disclosed the fact that the value of the database was discounted and the
discount in the Med Wireless license was increased after discussions with
"valuation experts" and the Company's accountants. To clarify this disclosure,
it is noted that the discussions with the valuation experts were conducted by
the Company's accountants in the course of their audit, and not by the Company,
and that these experts did not evaluate or otherwise pass upon the value of the
Company's assets (nor has the Company at any time had such an evaluation from a
third party expert).
12
The Company is required to assess the impairment of goodwill and other
intangible assets annually, or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors that could
trigger an impairment review include significant underperformance relative to
projected future operating results, significant changes in the manner of our use
of the acquired assets or the strategy for the Company's overall business,
significant negative industry or economic trends, and a market value of the
Company's common stock lower than the Company's assets' book value. The net
carrying value of goodwill and other intangible assets not recoverable is
reduced to fair value. The Company's common stock traded at a high of $0.34 on
June 6, 2003, four days before the stock was de-listed from the Nasdaq SmallCap
exchange on June 10, 2003. The stock value decreased to $0.10 just after it was
delisted, and stayed at approximately $0.10 through the end of the second
quarter 2003. It traded at a high of $0.09 on the last day of the second
quarter. During the third quarter, the stock continued to decrease in price, and
traded as low as $0.38 per share. On the last day of third quarter 2003, the
stock closed at $0.06. Because the Company's common stock had continually traded
lower during the third quarter 2003, lowing the market capitalization of the
Company to a low of $1,609,266 during that period (on September 11, 2003),
Management determined that it was appropriate during the third quarter to
conduct an impairment analysis of the intangible assets on its books that were,
in the aggregate, valued at over twice the market value of Company.
Management conducted an impairment analysis of the two intangible
assets on its books: the marketing database and Med Wireless license. These two
assets were listed on the Company's financial statements for the period ending
June 30, 2003 at values of $229,500 and $3,681,000, respectively. Depreciation
for the period ending September 30, 2003, would have decreased the value of
those assets to $216,750 and $3,476,500 respectively.
With respect to the marketing database, although Management intends to
use the database to market products offered by its recently acquired Premium
Medical Group, Inc. subsidiary, it has no way of predicting what success it will
have in that marketing effort, and has not at this time used the marketing
database to market any product or generate any revenue for the Company, and has
thus determined to record a 100% impairment of that asset in the amount of
$216,750.
With respect to the Med Wireless license, Management analyzed the sales
prospects of its PRLS system (which is based upon the technology licensed from
Med Wireless) to the various professional and collegiate sports organizations,
the limited successes the Company's NuWay Sports subsidiary has had thus far in
its sales efforts, and the projected revenue from projected future sales, and
has determined to record an impairment charge to the recorded value of the Med
Wireless license of $1,649,594. This amount was calculated projecting sales over
a three year period (calendar years 2004, 2005 and 2006), factoring in the costs
of sales and the product costs, discounting projected net revenue to their
present value using a 7.5% interest factor, and further discounts of the
Company's projections for uncertainties relative to the timing of acceptance of
this technology.
Management does not believe that a further impairment of these assets
will be necessary as of the period ending December 31, 2003.
NOTE 5. STOCK, STOCK OPTIONS AND WARRANTS
During the nine months ended September 30, 2003, the Company issued an aggregate
of 18,623,759 shares of its common stock. Of these shares, 2,633,590 were issued
in consideration for $645,648 of obligations previously accrued at December 31,
2002, and 15,990,169 shares were issued as consideration for $1,530,000 of
services provided to the Company during the nine month period ended September
30, 2003. Of this amount approximately $1,020,600 represents consulting expense,
$394,000 represents legal expenses, and the balance of $115,000 represents
compensation, advisory board fees, and board of directors' expenses.
13
In March 2003, Dennis Calvert, the Company's CEO and president, was granted
3,000,000 shares of common stock under the Company's 2003 Stock Compensation
Plan as a bonus for services rendered by Mr. Calvert to the Company. Following
this issuance, however, Mr. Calvert returned the shares to the Company pending a
shareholder vote to approve or disapprove the issuance. Mr. Calvert and the
Company have since agreed not to seek shareholder approval for the issuance and
to rescind the issuance in its entirety. Mr. Calvert and the compensation
committee of the Board of Directors plan to negotiate an alternative bonus
arrangement with Mr. Calvert (which could be in the form of cash, shares of
stock, or a combination thereof). The amount and timing of such bonus has not
yet been determined.
The Company had the following outstanding convertible securities at September
30, 2003: (a) stock options issued under the 1994 Stock Option Plan to purchase
up to 65,000 shares of the Company's common stock (see Note 6); (b) five-year
warrants to acquire up to 300,000 shares of common stock at an exercise price of
$1.75 per share; (c) a warrant to purchase up to 100,000 shares of common stock
at an exercise price of $0.30 per share exercisable through February 23, 2004,
issued in 2002 to a former executive of the Company; and (d) warrants to
purchase up to 559,322 shares of common stock at an exercise price of $.20 per
share, exercisable for a period of three years, issued in conjunction with the
Company's sale of 559,322 shares of Convertible Preferred Stock during the first
quarter of 2003, and which are not convertible until nine months from the date
of issuance (Note 9).
At September 30, 2003, the Company also had outstanding 1,725,000 publicly
traded warrants (NMEDW) to purchase the Company's common stock at an exercise
price of $3.00 per share. These warrants expired December 11, 2003.
See Note 7 for discussion of warrants issued in conjunction with debt entered
into in September 2003.
NOTE 6. INCENTIVE STOCK OPTION PLAN
On June 13, 1994, the Company adopted the 1994 Stock Option Plan providing for
the issuance of options to purchase up to 1,000,000 shares of the Company's
common stock. The term of each option may not exceed ten years from the date of
grant (five years for options granted to employees owning more than 10 percent
of the outstanding shares of the voting stock of the Company). The 1994 Plan
will terminate in June 2004, unless terminated earlier by action of the board of
directors. In June 1999, the Company increased the shares allocated under the
plan to 1,500,000.
At September 30, 2003 and December 31, 2002, the Company had options outstanding
and exercisable as follows:
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Number of
Shares Price Per Share
------------- -----------------
Options Outstanding at December 31, 2002 65,000 $1.00 - $1.75
Options Issued -
Options Expired -
Options Exercised -
------------- -----------------
Options Outstanding at September 30, 2003 65,000 $1.00 - $1.75
=============
All outstanding stock options were fully exercisable at September 30, 2003.
NOTE 7. NOTES PAYABLE
In conjunction with the acquisition of the technology license from Med Wireless,
Inc. on August 21, 2002, the Company assumed a $1,120,000 note with interest at
10% per annum payable by Med Wireless to Summitt Ventures, Inc., a company
controlled by Mark Anderson. The note is secured by the Company's assets and was
originally due on June 15, 2003. On March 26, 2003, Summitt Ventures sold the
note, together with 4,182,107 shares of the Company's common stock, to New
Millennium Capital Partners LLC ("New Millennium"), a limited liability company
controlled and owned in part by the Company's CEO and president, Dennis Calvert,
in exchange for a $900,000 promissory note issued by New Millennium in favor of
Summitt Ventures. This note is secured by all of the stock of the Company owned
by New Millennium and Mr. Calvert. On March 26, 2003, the Company's board of
directors voted to convert the $1,120,000 note held by New Millennium into
22,400,000 shares of restricted common stock of the Company (at a conversion
price discounted 37.5% to the then market price of $0.08). New Millennium agreed
to this conversion. 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 shareholder 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 withhold
issuance of the shares to New Millennium until the Company's shareholders
approved the conversion. This shareholder vote has not taken place as of the
filing of this report, and the shares have not been issued to New Millennium.
The business purpose of the original decision to convert the note into equity
was to retire $1,120,000 in debt owed by the Company thereby increasing
shareholder equity by that amount and avoiding a default on the note and the
insolvency and possible liquidation of the Company. 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 (an affiliate of the Company) 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.
To allow time for a shareholder vote with respect to the conversion, New
Millennium agreed to extend the terms of the note, from June 15, 2003 to October
1, 2003.
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 to equity 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
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agreed to $0.05 per share price. In this regard, 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 note made by New Millennium in favor of Summitt), and
furthermore to reduce the Company's obligation on the note to the extent that
New Millennium is able to reduce its obligation on its note with Summitt
Ventures. 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 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 Summit.
The Company was unable to pay the note at the due date of October 1, 2003. At
the board meeting on October 15, 2003, the board determined to put the issue of
conversion of the note to the Company's shareholders at a special meeting of the
shareholders scheduled for December 9, 2003. On November 7, 2003, a Definitive
14a was filed by the Company with respect to that meeting. The shareholders
meeting was held on December 9, 2003, but adjourned without a vote due to a lack
of quorum. The meeting was rescheduled for December 30, 2003. At the December
30, 2003 shareholder meeting, the board was again advised that there was not a
quorum, and therefore the vote could not be held. 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 voted to adjourn the meeting
indefinately. As of January 1, 2004, the loan is in default status and has not
been repaid.
On February 10, 2004, the board voted and resolved to convert the note into
shares of the Company as required in its acquisition agreement with Premium
Medical Group, Inc., a privately held Florida corporation. New Millennium
Capital Partners, LLC agreed to convert its secured promissory note in the
principal amount of $1,120,000 (together with $114,800 in accrued but unpaid
interest thereon) into 30,869,992 shares of the Company's Common Stock. We
expect the conversion to occur within the next 60 days.
On June 10, 2003 the Company entered into a Term Loan Agreement ("Loan
Agreement") with Augustine II, LLC ("Augustine"), pursuant to which Augustine
agreed to loan the Company $420,000, payable in installments of $250,000,
$100,000, and $70,000 (the "Loan"). The Company received all scheduled
installments, and principal and interest (at an annual rate of 10%) were due in
full on February 29, 2004. The Company has spoken with representatives of the
Augustine II, LLC, and have advised them that the Company is unable to pay the
amount due under the note by February 29, 2004. The Augustine II, LLC
representatives indicated a desire to restructure the terms of the note to allow
a longer time frame for the Company to repay the obligation. Those negotiations
are yet to be finalized. The Company recorded $11,717 of interest expense as of
September 30, 2003. The Loan Agreement is subject to certain requirements that
the Company make mandatory prepayments of the 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 Loan may
be prepaid by the Company at any time without premium or penalty. The proceeds
of the Loan were used by the Company for working capital.
As additional consideration for making the Loan, Augustine 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 can require that the warrants be
exercised if the Company's shares trade at or above $0.60 per share for each
trading day within the 30 calendar days prior to the maturity date of the Loan,
trading volume of the shares equals or exceeds 100,000 shares per day during
such period, and the shares of the Company's common stock underlying the
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warrants have been included on a registration statement filed with and declared
effective by the SEC prior to the maturity date. If these conditions are not
fully satisfied by the maturity date, then Augustine 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 the "cashless exercise"
provisions of the warrants. Using the Black-Scholes pricing model, the Company
allocated approximately $245,000 of the Loan proceeds to the warrants and
$175,000 to the note payable, which allocations were made on a pro rata basis
based on the fair value of the warrants. The Black Scholes calculation assumed a
discount rate of approximately four percent, volatility of 257 percent and no
dividends. Given that the warrants were issued in conjunction with Loan
Agreement, such fair value represents an effective discount on the debt and will
be amortized over the term of the loan. Amortization of this discount for the
quarter ended September 30, 2003 was approximately $93,000 and is recorded as
effective interest expense in the accompanying consolidated statement of
operations.
As security for the Loan, New Millennium (an affiliate of Mr. Calvert) pledged
2.5 million shares of the Company's common stock owned by New Millennium, and
the Company has granted Augustine a security interest in its ownership interest
in the Company's subsidiary, NuWay Sports, LLC.
NOTE 8. CONVERTIBLE DEBENTURES
In December 2000, the Company, through a private placement, issued $3,500,000
principal amount of 6 percent Convertible Debentures to several investors. These
debentures were originally due June 13, 2001 and their maturity date was
subsequently extended to December 13, 2001. They are convertible into common
stock at a price of $1.75 per share. The interest on the debentures is payable
either in cash or shares of common stock, at the discretion of the Company.
During 2001, $1,100,000 of the debentures plus accrued interest were converted
into 666,283 shares of the Company's common stock. During 2002, $2,250,000 of
the remaining debentures plus accrued interest were converted into 1,332,570
shares of common stock. In December 2002 the Company received a notice from the
remaining two debenture holders (the "Remaining Debenture Holders") requesting
conversion of the remaining outstanding $150,000 of debentures. The notice
provided that, as a condition to conversion, the certificates representing the
shares issuable upon conversion of the debentures would need to be delivered to
the Remaining Debenture Holders prior to the end of 2002. Pursuant to the
request, and to complete the conversion, the Company issued to the Remaining
Debenture Holders 96,006 shares of common stock and promptly notified the
Remaining Debenture Holders' counsel and the Company's transfer agent of the
approval and ratification of the issuance. However, the actual certificates
representing the shares were not delivered to the Remaining Debenture Holders
until the first quarter of 2003. The Remaining Debenture Holders then refused
acceptance of the shares, claiming that because the actual certificates
representing the shares were not delivered in 2002 as specified in the
conversion notice, the conversion was invalid and the debentures would therefore
remaining outstanding and continue to accrue interest until repaid in full. The
Remaining Debenture Holders have since demanded full payment on their $150,000
of debentures (plus accrued interest). In June 2003, the Remaining Debenture
Holders filed suit in the Orange County Superior Court against the Company
claiming it breached the debenture agreement by failing to honor the terms of
the notice of conversion. Although the Company's financial statements reflect
the $150,000 of debentures as still being outstanding, the Company disputes the
Remaining Debenture Holders' claims that the conversions were invalid. The
Company and the Remaining Debenture Holders have, since the lawsuit was filed,
17
entered into a settlement agreement in which the remaining Debenture holders
would convert the debentures into common stock equal to approximately $70,000.
The settlement agreement calls for conversion into stock over a period of three
months. The Company has partially satisfied the obligations under this
agreement, and expects to fully satisfy its obligations in the first quarter
2004.
NOTE 9. CONVERTIBLE PREFERRED STOCK
During the nine month period ended September 30, 2003, the Company entered into
two Convertible Preferred Stock and Warrant Purchase Agreements whereby the
Company sold an aggregate of 559,322 shares of a newly created series of
Preferred Stock, Series A Convertible Preferred Stock, par value $.00067, for a
total consideration of $279,661. Each share of the Series A Preferred Stock is
convertible into one share of the Company's common stock. In addition, each
share of preferred sold entitles the purchaser to one warrant to purchase one
share of common stock at a price of $0.20 per share. Using the Black-Scholes
pricing model, the Company estimated the fair value of these warrants to be
approximately $35,000, and such amount has been netted in additional paid in
capital on the September 30, 2003 consolidated balance sheet. The Black Scholes
calculation assumed a discount rate of approximately five percent, volatility of
180 percent and no dividends. The Series A Preferred Stock may be converted by
the holder at any time after six months from the purchase date and the warrant
is exercisable for a period of three years from the purchase date.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Litigation
During 2002, Ms. Geraldine Lyons, the Company's former Chief Financial Officer,
sued the Company for breach of her employment contract. The lawsuit is venued in
the Circuit Court of the 11th Judicial Circuit in Miami-Dade County in the State
of Florida and was initiated by the filing of a complaint in June 2002. The
principal parties in the case are Ms. Lyons, the Company, and the Company's
former president Todd Sanders. Ms. Lyons alleges that $25,000 is due to her
under her employment contract; that the contract requires the Company to
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
for $4.00 per share 100,000 shares of stock held by her. The Company has
counter-sued Ms. Lyons for breach of fiduciary duty, fraud, violation of section
12(a)(2) of the 1933 Securities Act of 1933, violation of section 517.301 of the
Florida Statutes, negligent misrepresentation, conversion, and unjust enrichment
resulting from the restatement of the Company's financial statements for the
years ended December 31, 2000 and December 31, 1999 that the Company believes
was required as a result of her activities. 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. The Company intends to
vigorously defend its actions and pursue its affirmative claims to the fullest
extent possible. Management does not expect that this case will have a material
adverse effect on the Company's financial position.
See Note 8 for a discussion of a claim relating to the conversion of the
Company's 6% Convertible Debentures.
Employment Agreements
In December 2002, the Company entered into a five-year employment agreement with
the Company's current President, Dennis Calvert. His agreement calls for a base
monthly salary of $14,000 plus performance bonuses and employee related
benefits. Mr. Calvert serves as President, Chief Executive Officer, Interim CFO
and Chairman of the Board.
18
In March 2003, the Company entered into a five-year employment agreement with
Joseph Provenzano who serves the Company as Secretary, Board Member and Senior
Executive reporting to Mr. Calvert. His agreement calls for him to receive not
less than $10,900 per month in salary plus incentive bonuses, stock ownership
participation and employee related benefits. At the Company's discretion, the
Company may choose to pay up to $4,900 of this monthly salary with stock in lieu
of cash.
Lease Commitment
The Company is obligated on a month-to-month office lease at its California
facility. This lease required monthly rentals of $7,850 through May 2003 and was
increased to $8,750 at June 2003. All other leases are of short duration or are
on a month-to-month arrangement. Rent expense for the nine months ended
September 30, 2003 and the year ended December 31, 2002 was approximately
$74,500 and $96,500, respectively.
Stock-based Commitments
The Company currently utilizes the services of a number of consultants who are
compensated with shares of common stock. While each agreement can generally be
terminated with a 15 day notice, the Company may be obligated to issue
additional shares to the consultants.
NOTE 11. SUBSEQUENT EVENTS
On October 29, 2003, the Company issued an unvested warrant to an individual to
purchase 2,000,000 shares of common stock at $0.05 a share. The warrant expires
on October 29, 2004. The Warrant is not exercisable unless and until the Holder
introduces to the Company an investor or investors which investor or investors
invest net proceeds in the Company of at least $250,000 within 3 months of the
introduction. The closing of any such investment shall be in the sole and
absolute discretion of the Company. In the event investments of at least
$250,000 are not so made by May 1, 2004, or are made by or through parties other
than the Holder, the Warrant shall expire in its entirety and be of no further
force or effect.
On November 20, 2003, the Company received proceeds of $50,000 in exchange for a
promissory note in which it agreed to pay $65,000 to the investor 90 days from
the date of the loan. The Company's CEO and president Dennis Calvert personally
guaranteed the note. As of March 1, 2004 the Company has paid back $23,000 to
the investor, and has made arrangements with the investor to extend the terms of
the note to allow payment of the remainder due by March 20, 2004.
On January 30, 2004, the Company entered into a tax free reorganization with
Premium Medical Group, Inc., a Florida corporation ("Premium") pursuant to a
Stock Purchase Agreement (the "Agreement") that called for the Company to
acquire 100% of the shares of Premium from Eduardo A. Ruiz and Luis A. Ruiz,
Premium's sole shareholders, in exchange for 30,000,000 shares of the Company's
common stock, subject to adjustment as more fully described in the Agreement
(the "Transaction"). Based on the closing bid price for the Company's common
stock on January 31, 2004, the shares issued to the Premium shareholders in
connection with the Transaction have been valued at approximately $1,500,000.
The Agreement was attached as Exhibit 2.1 to the Form 8-K filed by the Company
on February 17, 2004, and the description of the Transaction contained herein is
qualified in its entirety by reference to the Agreement.
19
The consideration for the Transaction was determined through arms'-length
negotiation between the Company and Premium and its shareholders, giving due
consideration to the market value of the Company's common stock and the
estimated value of Premium. The 30,000,000 shares issued in the Transaction are
being held in escrow and are subject to downward adjustment pursuant to an
agreed upon formula, as more fully described in the Agreement. Eduardo A. Ruiz
and Luis A. Ruiz retain the full voting rights of these shares while they are
held in escrow. In addition, the consideration for the Transaction includes an
earn out bonus pursuant to which the Premium shareholders shall be entitled to
receive additional consideration equal to the following percentages of Premium's
net income (calculated in accordance with generally accepted accounting
principles) during calendar year 2004: (i) 20% of net income for net income of
up to $1,000,000; (ii) 15% of net income for net income of $1,000,000 up to
$2,000,000; (iii) 10% of net income for net income over $2,000,000. This
additional consideration shall be paid in the form of warrants to purchase the
Company's common stock.
Immediately following the Transaction, the Company's capitalization consisted of
66,386,486 shares of common stock outstanding, of which the Company's
shareholders prior to the Transaction held 36,386,486 shares, and the former
Premium shareholders held 30,000,000 shares. The 30,000,000 shares represent
approximately 45% of the post-Transaction outstanding common shares of the
Company.
As a condition to Premium entering into the Agreement, New Millennium Capital
Partners, LLC (a company controlled by Dennis Calvert, the Company's CEO and
President), agreed to convert its secured promissory note in the principal
amount of $1,120,000 (together with $114,800 in accrued but unpaid interest
thereon) into 30,869,992 shares of the Company's Common Stock. Following this
conversion, the Company's capitalization will consist of 97,256,478 shares of
common stock outstanding, and Mr. Calvert will be the beneficial owner of
approximately 35,651,992 shares of common stock or approximately 37% of our
outstanding stock, which includes the 4,782,000 shares he currently owns. We
expect the conversion to occur within the next 60 days.
Additionally, pursuant to the Agreement, the Company agreed to appoint Mr. Luis
A. Ruiz to the Company's Board of Directors, subject to Mr. Ruiz's formal
acceptance of the position and a standard application and background check
process that the Company expects to be completed within the next 30 days. Once
Mr. Ruiz has been appointed to the board, our Board of Directors will consist of
Mr. Dennis Calvert, Mr. Gary Cox, Mr. Steven Harrison, Mr. Joseph Provenzano and
Mr. Luis A. Ruiz. There are no other material relationships between Premium or
the shareholders thereof, and the Company or any of its affiliates or any of its
officers or directors.
On February 23, 2004, the Company issued an unvested warrant 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.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION AND FORWARD LOOKING STATEMENTS
The following discussion and analyses should be read in conjunction with our
consolidated financial statements and the related notes to the consolidated
financial statements included elsewhere in this report.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations, as well as other sections of this Form 10-QSB, contain
"forward looking statements" within the meaning of Rule 175 under the Securities
Act of 1933, as amended, and Rule 3b-6 under the Securities Act of 1934, as
amended, including statements regarding, among other items, the Company's
business strategies, continued growth in the Company's markets, projections, and
anticipated trends in the Company's business and the industry in which it
operates. The words "believe," "expect," "anticipate," "intends," "forecast,"
"project," and similar expressions identify forward-looking statements. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, certain of which are beyond
the Company's control. The Company cautions that these statements are further
qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements, including, among
others, the following: the Company's ability to raise additional financing or
generate revenue sufficient to sustain the Company's operations, demand for the
Company's products, competitive pricing pressures, changes in the market price
of technologies used in the Company's products, the level of expenses incurred
in the Company's operations, the scope, duration and results of the SEC's
inquiry into the Company, the possibility that such inquiry will result in a
formal investigation of the Company by the SEC, the possibility that the Company
or its officers and directors will become the subject of criminal proceedings,
the possibility that stockholders or regulatory authorities may initiate
proceedings against the Company and/or its officers and directors as a result of
any past securities law violations, the possibility that the Company's
securities will not become eligible for quotation on the OTC Bulletin Board, and
the effect of the Company's recent Nasdaq delisting on the liquidity of the
Company's stock and its ability to raise capital. In light of these risks and
uncertainties, there can be no assurance that the forward-looking information
contained herein will in fact transpire or prove to be accurate. The Company
disclaims any intent or obligation to update "forward looking statements."
OVERVIEW
NuWay Medical, Inc. (the "Company") recently began to offer medical and health
related technology products and services with an initial focus on the health and
information software technology needs of the sports industry. The Company's
primary product is its Player Record Library System ("PRLS"), a highly
specialized electronic medical record and workflow process software application
designed to address the information technology needs of the sports industry
relating to player health including the need for technology that facilitates
compliance with the Health Insurance Portability and Accountability Act
("HIPAA").
The Company markets its PRLS through its subsidiary NuWay Sports, LLC, a joint
venture formed in December 2002 and owned 51% by the Company and 49% by Rasheed
& Associates. NuWay Sports recently sold the scaled down version of the PRLS to
several NFL teams and is promoting its service to other NFL teams, the NFL
itself, the NFL Trainers Association, the NFL Players Association and the NFL
Player Safety Council. NuWay Sports also markets the PRLS to teams, leagues, and
21
player associations in the National Basketball Association ("NBA"), Major League
Baseball ("MLB"), and other sports such as hockey, soccer, boxing, motor sports,
and entertainment sports. The Company believes that its PRLS would benefit not
only professional sports leagues and participants, but also collegiate programs
and in some cases, high school athletic programs.
The following discussion compares the three and nine month periods ended
September 30, 2003 and September 30, 2002. Due to the recent complete material
change in the Company's business focus and operations, this discussion will not
address the discontinued operations in the areas of oil and gas exploration,
cigar distribution, and gaming equipment rentals which constituted the majority
of the Company's operations during the nine month period ended September 30,
2002.
ANALYSIS OF FINANCIAL CONDITION
The Company had approximately $3,000 of cash on hand at March 1, 2004. In
September 2003, the Company received all scheduled installments of a total loan
commitment of $420,000 as described in Note 7 to the financial statements
appearing elsewhere in this report. On November 20, 2003, the Company received
$50,000 in the form of a Promissory Note as described in Note 11 above.
Notwithstanding this financing, the Company will still need to raise additional
capital to sustain operations and implement its growth strategy until such time,
if ever, that the Company achieves profitability. As of the date of this filing,
the Company was not a party to any definitive agreements to provide such
financing. Although the Company is in the process of actively reviewing
additional proposals made by private investors and investment bankers, there can
be no assurance that the Company will be able to consummate any such
transactions on terms satisfactory to the Company, or at all, or if consummated,
that such financings will provide the Company with sufficient capital. If the
Company is unable to secure additional financing within the next 120 days it
would need to significantly curtail and perhaps shut down its operations. It is
unlikely that the Company will be able to qualify for bank debt until such time
as the Company is able to demonstrate sufficient financial strength to provide
confidence for a lender.
The Company's shares were delisted effective as of June 10, 2003 from trading on
the Nasdaq SmallCap Market. The shares are currently quoted on the pink sheets.
Although a market maker has submitted an application for quotation of the
Company's shares on the Over-the-Counter Bulletin Board, there can be no
assurance that this application will be approved by NASD (and, if not, that any
other applications that may in the future be filed), or the Company will be
cleared to trade on the Bulletin Board, in particular in light of the public
interest concerns raised by Nasdaq in connection with the delisting of the
Company's shares. This Nasdaq delisting has made it more difficult to effect
trades and has led to a significant decline in the frequency of trades and
trading volume. The delisting could also adversely affect the Company's ability
to obtain financing due to the decreased liquidity of the Company's shares.
Although the primary development of the PRLS system has been completed,
management plans on periodically upgrading its PRLS software application through
additional research and development, including tailoring its application to the
specific needs of its clients as those needs are brought to the Company's
attention. The Company will be unable to accomplish the foregoing on a long-term
basis, however, unless and until the additional financing referred to above is
secured.
Based on its current business plan, and assuming sufficient financing is
obtained, management believes it will be able to generate meaningful sales of
its PRLS software application and that it may be able to secure sales or license
agreements as early as the first half of 2004. The Company has entered into an
agreement with its first NBA franchise to implement the PRLS system for that
franchise. The Company's PRLS was introduced to the marketplace in January 2003
and generated a total of approximately $40,000 in revenues during the first and
second quarters of 2003 through the sale of a scaled-down version of the product
to 18 NFL teams at the 2003 NFL Combine. Pursuant to these transactions, the
Company digitized over 60,000 medical images for use by NFL teams in their
evaluation of potential draft picks. Management believes that its PRLS is
already being referred by its customers and prospects as the best of brand for
its sports industry focus. The Company is marketing the PRLS to multiple sports
leagues and is actively seeking additional vertical market opportunities. There
can be no assurance, however, that the Company will be able to secure any
further agreements for its product, that such agreements will ever generate
meaningful revenue for the Company, or that the Company will be able to
successfully capture any such vertical market opportunities.
Based on its current business plan, management anticipates that the Company will
need to add additional staff over the next 12 months. Although it only had three
full time employees as of September 30, 2003, the Company also relies on at
least 12 consultants who work on behalf of the Company. The Company intends to
add some of these consultants to its full time staff as employees and add
additional staff members on an as needed basis. Based on its anticipated growth
in revenues, and subject to the availability of additional financing, the
Company expects to add up to approximately 20 full time employees before the end
of second quarter 2004.
22
During the latter half of 2002, because the Company was focused on implementing
its new business, it generated no revenues, and thus received no cash from
operations, resulting in negative working capital. Current assets increased from
$521 at December 31, 2002 to $30,860 at September 30, 2003. The increase was due
to the sale of $279,661 of the Company's Preferred Series A shares, $420,000 of
proceeds from the Term Loan Agreement, and $40,000 in revenues generated by the
sale of the Company's PRLS since its introduction to the marketplace in the
first quarter of 2003.
Other assets declined from $4,345,000 at December 31, 2002 to $3,693,250 at
September 30, 2003. The decrease of $651,750 was primarily related to
amortization of our intangible assets.
Current liabilities increased from $2,401,579 at December 31, 2002 to $2,479,458
at September 30, 2003. The increase was due to an increase in Notes Payable of
$420,000 offset by the net effective discount on note of approximately $155,000
related to the warrants attached to the Augustine II, LLC note payable and a
reduction in accounts payable and accrued expenses of $187,000. Accounts payable
and accrued expense obligations were satisfied by cash payments and the issuance
of the Company's common stock.
Total stockholders' equity decreased to a deficit of $625,512 at September 30,
2003. This decrease was due to the net loss of $5,299,049 for the nine month
period ended September 30, 2003, net of the effect of the issuance of the
Company's common stock to compensate consultants and others, approximately
$245,000 recorded as Additional Paid in Capital related to the effective
discount on note and the sale of shares of Series A Preferred Stock, which
generated net proceeds to the Company of $279,661. The net loss for the nine
months ended September 30, 2003 included an impairment charge of $1,866,344
against the recorded value of intangible assets.
RECENT FINANCING
On June 10, 2003 the Company entered into a Term Loan Agreement ("Loan
Agreement") with Augustine II, LLC ("Augustine"), pursuant to which Augustine
agreed to loan the Company $420,000, payable in installments of $250,000,
$100,000, and $70,000 (the "Loan"). The Company received has received all
scheduled installments and principal and interest (at an annual rate of 10%)
were due in full on February 29, 2004. The Company has spoken with
representatives of the Augustine II, LLC, and have advised them that the Company
is unable to pay the amount due under the note by February 29, 2004. The
Augustine II, LLC representatives indicated a desire to restructure the terms of
the note to allow a longer time frame for the Company to repay the obligation.
Those negotiations are yet to be finalized. The Company recorded $11,717 of
interest expense as of September 30, 2003. The Loan Agreement is subject to
certain requirements that the Company make mandatory prepayments of the 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 Loan may be prepaid by the Company at any time without premium or
penalty. The proceeds of the Loan are being used by the Company for working
capital.
23
As additional consideration for making the Loan, Augustine 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 can require that the warrants be
exercised if the Company's shares trade at or above $0.60 per share for each
trading day within the 30 calendar days prior to the maturity date of the Loan,
trading volume of the shares equals or exceeds 100,000 shares per day during
such period, and the shares of the Company's common stock underlying the
warrants have been included on a registration statement filed with and declared
effective by the SEC prior to the maturity date. If these conditions are not
fully satisfied by the maturity date, then Augustine 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 the "cashless exercise"
provisions of the warrants. Using the Black-Scholes pricing model, the Company
allocated approximately $245,000 of the proceeds of the Loan to the warrants and
$175,000 to the note payable, which allocations were made on a pro rata basis
based on the fair value of the warrants. The Black Scholes calculation assumed a
discount rate of approximately four percent, volatility of 257 percent and no
dividends. Given that the warrants were issued in conjunction with Loan
Agreement, such fair value represents an effective discount on the debt and will
be amortized over the term of the loan. Amortization of this discount for the
quarter ended September 30, 2003 was approximately $93,000 and was recorded as
effective interest expense in the accompanying consolidated statement of
operations.
As security for the Loan, New Millennium (an affiliate of Mr. Calvert) pledged
2.5 million shares of the Company's common stock owned by New Millennium, and
the Company has granted Augustine a security interest in its ownership interest
in the Company's subsidiary, NuWay Sports, LLC.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
Revenues
During the three months ended September 30, 2002, there were no revenues from
continuing operations, compared to no revenues in the three months ended
September 30, 2003. During the last half of 2002, the Company changed its
business to focus on fulfilling information technology needs of the sports
industry. This change led to the development of the Company's PRLS.
Consequently, the results of our prior business line operations in gaming
machine rental, oil and gas development and distribution of cigars were
reclassified in our consolidated statements of operations as "discontinued
operations."
Selling, General and Administration Expense ("SG&A")
During the three months ended September 30, 2003, SG&A increased by 10 percent
to $614,075 from $559,100 for the three months ended September 30, 2002. The
largest components of these expenses were:
24
a. Salaries and Payroll-Related Expenses: These expenses were $129,000 for
the three months ended September 30, 2003 as compared to $75,000 in the
same period in 2002. These expenses increased as the Company issued
stock for services in lieu of salary totaling approximately $52,000
which was needed to continue its current marketing strategy related to
the development of PRLS vertical markets.
b. Consulting Expenses: These expenses were consistent for the three
months ended September 30, 2003, totaling $297,000 as compared to
$300,000 for the three months ended September 30, 2002. This amount of
consulting expense is consistent with management's strategy of
maintaining a very low permanent staffing level and supplementing that
with consultants on a project-by-project basis. Further, the
development of new products and technology related to the Company's
change of business required additional consulting assistance in the
areas of applications development, sales, marketing and administration.
These positions were primarily staffed by independent contractors who
were compensated with shares of the Company's common stock.
c. Legal Expenses: These expenses increased from $75,000 for the three
months ended September 30, 2002 to $118,000 for the three months ended
September 30, 2003, an increase of 57 percent. This increase was due 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,(iii) numerous stock issuances, (iv) addressing
subpoenas and interview requests by the grand jury investigating Mark
Anderson, and (v) addressing the SEC's request for documents as part of
its informal investigation.
During the three months ended September 30, 2003, the Company issued an
aggregate of 4,932,840 shares of its common stock as consideration for $443,956
of services provided to the Company during the quarter. It is likely that, until
the Company has sufficient cash on hand, it will continue to utilize an equity
plan registered pursuant to form S-8 to allow compensation for consultants and
employees that provide services to the Company.
Impairment of Intangible Assets
The Company is required to assess the impairment of goodwill and other
intangible assets annually, or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors that could
trigger an impairment review include significant underperformance relative to
projected future operating results, significant changes in the manner of our use
of the acquired assets or the strategy for the Company's overall business,
significant negative industry or economic trends, and a market value of the
Company's common stock lower than the Company's assets' book value. The net
carrying value of goodwill and other intangible assets not recoverable is
reduced to fair value. The Company's common stock traded at a high of $0.34 on
June 6, 2003, four days before the stock was de-listed from the Nasdaq SmallCap
exchange on June 10, 2003. The stock value decreased to $0.10 just after it was
delisted, and stayed at approximately $0.10 through the end of the second
quarter 2003. It traded at a high of $0.09 on the last day of the second
quarter. During the third quarter, the stock continued to decrease in price, and
traded as low as $0.38 per share. On the last day of third quarter 2003, the
stock closed at $0.06. Because the Company's common stock had continually traded
lower during the third quarter 2003, lowing the market capitalization of the
Company to a low of $1,609,266 during that period (on September 11, 2003),
Management determined that it was appropriate during the third quarter to
conduct an impairment analysis of the intangible assets on its books that were,
in the aggregate, valued at over twice the market value of Company.
25
Management conducted an impairment analysis of the two intangible
assets on its books: the marketing database and Med Wireless license. These two
assets were listed on the Company's financial statements for the period ending
June 30, 2003 at values of $229,500 and $3,681,000, respectively. Depreciation
for the period ending September 30, 2003, would have decreased the value of
those assets to $216,750 and $3,476,500 respectively.
With respect to the marketing database, although Management intends to
use the database to market products offered by its recently acquired Premium
Medical Group, Inc. subsidiary, it has no way of predicting what success it will
have in that marketing effort, and has not at this time used the marketing
database to market any product or generate any revenue for the Company, and has
thus determined to record a 100% impairment of that asset in the amount of
$216,750.
With respect to the Med Wireless license, Management analyzed the sales
prospects of its PRLS system (which is based upon the technology licensed from
Med Wireless) to the various professional and collegiate sports organizations,
the limited successes the Company's NuWay Sports subsidiary has had thus far in
its sales efforts, and the projected revenue from projected future sales, and
has determined to record an impairment charge to the recorded value of the Med
Wireless license of $1,649,594. This amount was calculated projecting sales over
a three year period (calendar years 2004, 2005 and 2006), factoring in the costs
of sales and the product costs, discounting projected net revenue to their
present value using a 7.5% interest factor, and further discounts of the
Company's projections for uncertainties relative to the timing of acceptance of
this technology.
Management does not believe that a further impairment of these assets
will be necessary as of the period ending December 31, 2003.
Discontinued Operations
As discussed above and in the notes to our consolidated financial statements,
effective October 1, 2002, the Company disposed of several operations through
the sale of two foreign subsidiaries, Latin American Casinos and NuWay
Resources, and, effective November 2002, ceased operations of its World's Best
Rated Cigar Company subsidiary. Due to the discontinuance of these operations,
the Company has reclassified the historical operating results from these
ventures for the three months ended September 30, 2002 and disclosed such
results below the results from continuing operations in the consolidated
statements of operations. These businesses generated losses from operations of
$261,173 for the three months ended September 30, 2002.
Net (Loss) Income
Net loss for the three months ended September 30, 2003 was $2,821,374, or
$(0.08) per share compared to a net loss of $1,112,750, or $(0.11) per share,
for the three months ended September 30, 2002. Besides the significant growth in
total costs and expenses and the intangible asset impairment charge recorded as
of September 30, 2003 totaling $1,866,344, the net loss per share was affected
by the larger number of weighted average common share equivalents outstanding at
September 30, 2003 as compared to 2002 (33,769,193 at September 30, 2003 as
compared to 9,999,062 at September 30, 2002).
COMPARISON OF THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
26
Revenues
During the nine months ended September 30, 2002, there were no revenues from
continuing operations compared to approximately $40,000 of revenue in the nine
month period ended September 30, 2003 as a result of the sale of a scaled down
version of the Company's PRLS product to 18 NFL teams at the 2003 NFL Combine
and to customers at the Texas High School Combine. During the last half of 2002,
the Company changed its business to focus on fulfilling information technology
needs of the sports industry. This change led to the development of the
Company's PRLS. Consequently, the results of our prior business line operations
in gaming machine rental, oil and gas development and distribution of cigars
were reclassified in our consolidated statements of operations as "discontinued
operations."
Selling, General and Administration Expense ("SG&A")
During the nine months ended September 30, 2003, SG&A increased by 43 percent to
$2,618,183 from $1,825,205 for the nine months ended September 30, 2002. The
largest components of these expenses were:
a. Salaries and Payroll-Related Expenses: These expenses were $262,000 for
the nine months ended September 30, 2003 versus $225,000 in the same
period in 2002, an increase of $37,000. This increase reflects the
additional expense recorded from shares issued as compensation.
b. Consulting Expense: These expenses increased for the nine months ended
September 30, 2003 to $1,466,000 from $1,084,000 for the nine months
ended September 30, 2002, an increase of 26 percent. This increase was
directly related to new management's strategy of maintaining a very low
permanent staffing level and supplementing that with consultants on a
project-by-project basis. Further, the development of new products and
technology related to the Company's change of business required
additional consulting assistance in the areas of applications
development, sales, marketing and administration. These positions were
primarily staffed by independent contractors who were compensated with
shares of the Company's common stock.
c. Legal Expenses: These expenses increased from $225,000 for the nine
months ended September 30, 2002 to $647,000 for the nine months ended
September 30, 2003, an increase of 188 percent. This increase was due
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, (iii) numerous stock issuances, (iv)
addressing subpoenas and interview requests by the grand jury
investigating Mark Anderson, and (v) addressing the SEC's request for
documents as part of its informal investigation.
During the nine months ended September 30, 2003, the Company issued an aggregate
of 18,623,759 shares of its common stock. Of these shares, 2,633,590 were issued
in consideration for $645,648 of obligations previously incurred and 15,990,169
were issued as consideration for $1,530,000 of services provided to the Company
during the nine month period ended September 30, 2003.
Impairment of Intangible Assets
The Company is required to assess the impairment of goodwill and other
intangible assets annually, or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors that could
trigger an impairment review include significant underperformance relative to
projected future operating results, significant changes in the manner of our use
27
of the acquired assets or the strategy for the Company's overall business,
significant negative industry or economic trends, and a market value of the
Company's common stock lower than the Company's assets' book value. The net
carrying value of goodwill and other intangible assets not recoverable is
reduced to fair value. The Company's common stock traded at a high of $0.34 on
June 6, 2003, four days before the stock was de-listed from the Nasdaq SmallCap
exchange on June 10, 2003. The stock value decreased to $0.10 just after it was
delisted, and stayed at approximately $0.10 through the end of the second
quarter 2003. It traded at a high of $0.09 on the last day of the second
quarter. During the third quarter, the stock continued to decrease in price, and
traded as low as $0.38 per share. On the last day of third quarter 2003, the
stock closed at $0.06. Because the Company's common stock had continually traded
lower during the third quarter 2003, lowing the market capitalization of the
Company to a low of $1,609,266 during that period (on September 11, 2003),
Management determined that it was appropriate during the third quarter to
conduct an impairment analysis of the intangible assets on its books that were,
in the aggregate, valued at over twice the market value of Company.
Management conducted an impairment analysis of the two intangible
assets on its books: the marketing database and Med Wireless license. These two
assets were listed on the Company's financial statements for the period ending
June 30, 2003 at values of $229,500 and $3,681,000, respectively. Depreciation
for the period ending September 30, 2003, would have decreased the value of
those assets to $216,750 and $3,476,500 respectively.
With respect to the marketing database, although Management intends to
use the database to market products offered by its recently acquired Premium
Medical Group, Inc. subsidiary, it has no way of predicting what success it will
have in that marketing effort, and has not at this time used the marketing
database to market any product or generate any revenue for the Company, and has
thus determined to record a 100% impairment of that asset in the amount of
$216,750.
With respect to the Med Wireless license, Management analyzed the sales
prospects of its PRLS system (which is based upon the technology licensed from
Med Wireless) to the various professional and collegiate sports organizations,
the limited successes the Company's NuWay Sports subsidiary has had thus far in
its sales efforts, and the projected revenue from projected future sales, and
has determined to record an impairment charge to the recorded value of the Med
Wireless license of $1,649,594. This amount was calculated projecting sales over
a three year period (calendar years 2004, 2005 and 2006), factoring in the costs
of sales and the product costs, discounting projected net revenue to their
present value using a 7.5% interest factor, and further discounts of the
Company's projections for uncertainties relative to the timing of acceptance of
this technology.
Management does not believe that a further impairment of these assets
will be necessary as of the period ending December 31, 2003.
Net (Loss) Income
Net loss for the nine months ended September 30, 2003 was $5,299,049, or $(0.19)
per share, compared to a net loss $767,612, or $(0.10) per share, for the nine
month period ending September 30, 2002. In addition to the significant growth in
total costs and expenses and the intangible asset impairment charge recorded as
of September 30, 2003 totaling $1,866,344, the net loss per share was affected
by the cancellation of stock warrants previously expensed of $1,659,750, and the
larger number of weighted average common share equivalents outstanding for the
nine month period ending September 30, 2003 as compared to 2002 (28,628,360 at
September 30, 2003 as compared to 7,437,069 at September 30, 2002).
28
ITEM 3. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures.
Pursuant to Rule 13a-15(b) under the Exchange Act, the Company's management,
with the participation of the President, Chief Executive Officer and Interim
Chief Financial Officer, evaluated the effectiveness of the Company's disclosure
controls and procedures as of the end of the period covered by this report.
Based on that evaluation, the President, Chief Executive Officer and Interim
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that information required to be disclosed
in reports that the Company files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
b) Changes in internal controls.
No change in the Company's internal control over financial reporting occurred
during the Company's most recent fiscal quarter that materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On October 29, 2003, the Company issued an unvested warrant to an individual to
purchase 2,000,000 shares of common stock at $0.05 a share. The warrant expires
on October 29, 2004. The Warrant is not exercisable unless and until the Holder
introduces to the Company an investor or investors which investor or investors
invest net proceeds in the Company of at least $250,000 within 3 months of the
introduction. The closing of any such investment shall be in the sole and
absolute discretion of the Company. In the event investments of at least
$250,000 are not so made by May 1, 2004, or are made by or through parties other
than the Holder, the Warrant shall expire in its entirety and be of no further
force or effect.
On November 20, 2003, the Company received proceeds of $50,000 in exchange for a
promissory note in which it agreed to pay $65,000 to the investor 90 days from
the date of the loan. The Company's CEO and president Dennis Calvert personally
guaranteed the note. The Company has paid back $23,000 to the investor, and has
made arrangements with the investor to extend the terms of the note to allow
payment of the remainder due by March 20, 2004.
On January 30, 2004, the Company entered into a tax free reorganization with
Premium Medical Group, Inc., a Florida corporation ("Premium") pursuant to a
Stock Purchase Agreement (the "Agreement") that called for the Company to
acquire 100% of the shares of Premium from Eduardo A. Ruiz and Luis A. Ruiz,
Premium's sole shareholders, in exchange for 30,000,000 shares of the Company's
common stock, subject to adjustment as more fully described in the Agreement
(the "Transaction"). Based on the closing bid price for the Company's common
stock on January 31, 2004, the shares issued to the Premium shareholders in
connection with the Transaction have been valued at approximately $1,500,000.
The Agreement was attached as Exhibit 2.1 to the Form 8-K filed by the Company
on February 17, 2004, and the description of the Transaction contained herein is
qualified in its entirety by reference to the Agreement.
29
The consideration for the Transaction was determined through arms'-length
negotiation between the Company and Premium and its shareholders, giving due
consideration to the market value of the Company's common stock and the
estimated value of Premium. The 30,000,000 shares issued in the Transaction are
being held in escrow and are subject to downward adjustment pursuant to an
agreed upon formula, as more fully described in the Agreement. Eduardo A. Ruiz
and Luis A. Ruiz retain the full voting rights of these shares while they are
held in escrow. In addition, the consideration for the Transaction includes an
earn out bonus pursuant to which the Premium shareholders shall be entitled to
receive additional consideration equal to the following percentages of Premium's
net income (calculated in accordance with generally accepted accounting
principles) during calendar year 2004: (i) 20% of net income for net income of
up to $1,000,000; (ii) 15% of net income for net income of $1,000,000 up to
$2,000,000; (iii) 10% of net income for net income over $2,000,000. This
additional consideration shall be paid in the form of warrants to purchase the
Company's common stock.
Immediately following the Transaction, the Company's capitalization consisted of
66,386,486 shares of common stock outstanding, of which the Company's
shareholders prior to the Transaction held 36,386,486 shares, and the former
Premium shareholders held 30,000,000 shares. The 30,000,000 shares represent
approximately 45% of the post-Transaction outstanding common shares of the
Company.
As a condition to Premium entering into the Agreement, New Millennium Capital
Partners, LLC (a company controlled by Dennis Calvert, the Company's CEO and
President), agreed to convert its secured promissory note in the principal
amount of $1,120,000 (together with $114,800 in accrued but unpaid interest
thereon) into 30,869,992 shares of the Company's Common Stock. Following this
conversion, the Company's capitalization will consist of 97,256,478 shares of
common stock outstanding, and Mr. Calvert will be the beneficial owner of
approximately 35,651,992 shares of common stock or approximately 37% of our
outstanding stock, which includes the 4,782,000 shares he currently owns. We
expect the conversion to occur within the next 60 days.
Additionally, pursuant to the Agreement, the Company agreed to appoint Mr. Luis
A. Ruiz to the Company's Board of Directors, subject to Mr. Ruiz's formal
acceptance of the position and a standard application and background check
process that the Company expects to be completed within the next 30 days. Once
Mr. Ruiz has been appointed to the board, our Board of Directors will consist of
Mr. Dennis Calvert, Mr. Gary Cox, Mr. Steven Harrison, Mr. Joseph Provenzano and
Mr. Luis A. Ruiz. There are no other material relationships between Premium or
the shareholders thereof, and the Company or any of its affiliates or any of its
officers or directors.
On February 23, 2004, the Company issued an unvested warrant 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.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
EXHIBITS DESCRIPTION OF EXHIBIT
-------- ----------------------
31.1 Certification of President, Chief Executive Officer and Interim Chief
Financial Officer pursuant to 15 U.S.C. section 7241, as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of President, Chief Executive Officer and Interim Chief
Financial Officer pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the three months ended September
30, 2003.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DATED: March 5, 2004 NUWAY MEDICAL, INC.
By: /s/ Dennis Calvert
----------------------------------
Dennis Calvert, President,
Chief Executive Officer, and
Interim Chief Financial Officer
31