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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005.
or
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 000-19709
NUWAY MEDICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0159115
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2603 Main Street, Suite 1155
Irvine, California 92614
(Address, including zip code, of principal executive offices)
(949) 235-8062
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, $0.0067 par value.
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes |_| No |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
The number of shares of the Registrant's Common Stock outstanding as of
September 30, 2005 was 62,371,236 shares.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
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NUWAY MEDICAL, INC.
FORM 10-QSB
INDEX
PART I
Item 1 Financial Statements.......................................3
Item 2 Management's Discussion and Analysis......................13
Item 3 Controls and Procedures...................................22
PART II
Item 1 Legal Proceedings.........................................23
Item 2 Changes in Securities.....................................24
Item 6 Exhibits..................................................25
Signatures................................................26
Exhibit Index
Exhibit 31.1.........................................................28
Exhibit 31.2.........................................................29
Exhibit 32...........................................................30
- 2 -
PART I
Item 1. Financial Statements
NUWAY MEDICAL, INC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
ASSETS
September 30, December 31,
2005 2004
(unaudited) (unaudited)
---------------- ----------------
CURRENT ASSETS
Cash and Cash Equivalents $ 144,997 $ --
---------------- ----------------
Total Current Assets 144,997 --
---------------- ----------------
TOTAL ASSETS $ 144,997 $ --
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 2,224,142 $ 2,054,270
Notes Payable 2,391,070 1,632,100
Debentures Payable, Net 21,151 21,151
---------------- ----------------
Total Current Liabilities 4,636,363 3,707,521
---------------- ----------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS
SHAREHOLDERS' EQUITY
Convertible Preferred Series A, $.00067 Par Value, 25,000,000
Shares Authorized, 559,322 Shares Issued and
Outstanding at September 30, 2005 and December 31, 2004 375 375
Common Stock, $.00067 Par Value, 100,000,000 Shares
Authorized, 62,371,236 and 51,981,236 Shares Issued
At September 30, 2005 and December 31, 2004, respectively 41,081 34,120
Additional Paid-In Capital 23,396,809 23,299,870
Accumulated Deficit (27,929,631) (27,041,886)
---------------- ----------------
Total Shareholders' Equity (4,491,366) (3,707,521)
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 144,997 $ --
================ ================
See accompanying notes to unaudited consolidated financial statements.
- 3 -
NUWAY MEDICAL, INC AND SUBSIDIARY
STATEMENTS OF OPERATIONS FOR THE THREE- AND NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 2005 AND 2004
Three-Months Nine-Months
Ended September 30, Ended September 30,
2005 2004 2005 2004
---------------- ---------------- ---------------- ----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue
---------------- ---------------- ----------------
Total Revenues -- -- -- --
---------------- ---------------- ---------------- ----------------
Costs and Expenses
Selling, General and Administrative 348,725 119,912 716,401 771,117
Depreciation, Depletion and Amortization -- -- -- --
---------------- ---------------- ---------------- ----------------
Total Costs and Expenses 348,725 119,912 716,401 771,117
---------------- ---------------- ---------------- ----------------
Loss from operations (348,725) (119,912) (716,401) (771,117)
---------------- ---------------- ---------------- ----------------
Other Income and Expense
Interest Expense (66,521) (48,304) (171,344) (200,778)
Other Income -- -- -- 4,600
---------------- ---------------- ---------------- ----------------
Net Other Expenses (66,521) (48,304) (171,344) (196,178)
---------------- ---------------- ---------------- ----------------
Loss Before Income Taxes (415,246) (168,216) (887,745) (967,295)
Provision for Income Taxes (Benefit) -- -- -- --
---------------- ---------------- ---------------- ----------------
Net (Loss) $ (415,246) $ (168,216) $ (887,745) $ (967,295)
================ ================ ================ ================
Loss Per Common Share - Basic and Diluted
Net Loss per Share, rounding $ (.01) $ (.01) $ (.01) $ (.02)
================ ================ ================ ================
Weighted Average Common Share
Equivalents Outstanding 59,209,062 47,844,475 54,416,987 41,410,582
================ ================ ================ ================
See accompanying notes to unaudited consolidated financial statements.
- 4 -
NUWAY MEDICAL, INC AND SUBSIDIARY
STATEMENTS OF STOCKHOLDERS' DEFICIT (UNAUDITED)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2005
Preferred Stock Common Stock
---------------------------- -----------------------------
Number Par Number Par Additional Retained
of Value of Value Paid-In Earnings
Shares $.00067 Shares $.00067 Capital (Deficit)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE DECEMBER 31, 2004 559,322 375 51,981,236 $ 34,120 $ 23,299,870 $(27,041,886)
STOCK ISSUED FOR SERVICES 10,390,000 6,961 96,939
CONVERSION OF
DEBENTURES -- -- --
SALE OF COMMON STOCK -- -- --
NET LOSS (887,745)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE SEPTEMBER 30, 2005 559,322 $ 375 62,371,236 $ 41,081 $ 23,396,809 $(27,929,631)
============ ============ ============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
- 5 -
NUWAY MEDICAL, INC AND SUBSIDIARY
STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDING
SEPTEMBER 30, 2005 AND 2004
Nine Month Periods Ending
September 30,
------------------------------
2005 2004
(unaudited) (unaudited)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (887,745) $ (967,295)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Issuance of Stock for Services
103,900 360,898
Amortization of Discount on Note
-- 62,131
Increase in Accounts Payable and Accrued Expenses 169,872 536,727
------------ ------------
Net Cash Used In Operating Activities (613,973) (7,539)
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES
------------ ------------
No Cash Used In or Provided by Investing Activities -- --
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Loans 758,970 --
Payments to reduce Note Payable -- (22,900)
Proceeds from Sale of Common Stock -- 30,000
------------ ------------
Net Cash Provided By Financing Activities 758,970 7,100
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 144,997 (439)
CASH AND CASH EQUIVALENTS - BEGINNING -- 671
------------ ------------
CASH AND CASH EQUIVALENTS - ENDING $ 144,997 $ 232
============ ============
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION
Cash Paid During the Period for:
Interest $ -- $ --
============ ============
Income Taxes $ -- $ --
============ ============
Conversion of Debentures and Accrued Interest to Capital $ -- $ 98,849
============ ============
See accompanying notes to unaudited consolidated financial statements.
- 6 -
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Accounting Policies-Basis of Presentation
In the opinion of management, the accompanying balance sheets and related
interim statements of operations, cash flows, and stockholders' equity include
all adjustments, consisting only of normal recurring items, necessary for their
fair presentation in conformity with accounting principles generally accepted in
the United States of America (U.S. GAAP). Preparing financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, and expenses. Actual results and
outcomes may differ from management's estimates and assumptions. Estimates are
used when accounting for stock-based transactions, uncollectible accounts
receivable, asset depreciation and amortization, and taxes, among others.
Interim results are not necessarily indicative of results for a full year.
The information included in this Form 10-QSB should be read in conjunction with
Management's Discussion and Analysis and financial statements and notes thereto
included in the NuWay Medical, Inc. Annual Report on Form 10-KSB for the year
ended December 31, 2004.
Note 2. Business and Organization
Outlook
The Company had no continuing business operations as of September 30,
2005. The Company operated as a public shell during the three- and nine-month
periods ended September 30, 2005, and operations primarily consisted of the
Company's president seeking funding, maintaining the corporate entity, complying
with the requirements of the Securities Exchange Commission (the "SEC") and
seeking merger and acquisition candidates or new business opportunities. (See
discussion of the letter of intent with IOWC Technologies, Inc. ("IOWC"), in
Note 5.)
The Company will need working capital resources to maintain the Company's
status and to fund other anticipated costs and expenses during the year ending
December 31, 2005 and beyond, as well as to consummate the transactions with
IOWC and fund the operations of the Company after the transactions are
consummated. The Company's ability to continue as a going concern is dependent
on the Company's ability to raise capital to, at a minimum, meet its corporate
maintenance requirements. If the Company is able to acquire IOWC or another
ongoing business and/or technology that must be exploited, it would need
additional capital until and unless that prospective operation is able to
generate positive working capital sufficient to fund the Company's cash flow
requirements from operations.
The financial statements accompanying this Report have been prepared on a
going concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of our business.
We had a net loss of $415,246 and $887,745 for the three- and nine-month periods
- 7 -
ended September 30, 2005, respectively; a negative cash flow from operating
activities of $613,973 for the nine-month period ended September 30, 2005; and a
stockholders' deficiency of $27,041,886 and $27,929,631 as of December 31, 2004
and September 30, 2005, respectively.
As of September 30, 2005, the Company has limited liquid and capital
resources although it is seeking acquisition opportunities. These factors raise
substantial doubt about its ability to continue as a going concern. Ultimately,
the Company's ability to continue as a going concern is dependent upon its
ability to attract new sources of capital, establish an acquisition or reverse
merger candidate with continuing operations, attain a reasonable threshold of
operating efficiencies and achieve profitable operations. The financial
statements do not include any adjustments that might be necessary if we are
unable to continue as a going concern.
For the nine-month period ended September 30, 2005, the Company raised
gross and net proceeds of $786,120 and $766,870, respectively, through
convertible debt financing.
Note 3. Due to President - Unreimbursed business expenses
In 2003 and 2004 the Company's President, Dennis Calvert, loaned money to
the Company by paying from his personal funds certain of the Company's expenses.
A significant portion of these personal funds were obtained by Mr. Calvert by
refinancing his primary residence and cashing out equity thereon. On March 7,
2005, the Company and Mr. Calvert agreed such that the $101,770 still
outstanding and owed by the Company to Mr. Calvert will be repaid under the
terms of a promissory note bearing interest of 10% per annum, requiring monthly
payments and maturing on January 15, 2006. As of September 30, 2005, the Company
had repaid approximately $63,000 of this loan; approximately $38,000 principle
remains outstanding.
As of September 30, 2005, the Company had accrued an expense related to
the unpaid accrued compensation due its president, Mr. Calvert, in the amount of
$296,821.
Note 4. Sales of Unregistered Securities
In January, 2005, the Company received gross and net proceeds of $25,000
from an outside investor and issued its convertible promissory note due and
payable one year from the date of issuance. The Note bears interest at a rate of
10% per annum, payable on the maturity date. The ("Note") can be converted, in
whole or in part, into 5,000,000 shares of the Company's Series A Preferred
stock, on the basis of $.005 per share, at any time prior to maturity by either
the Company or the lender. Each share of Series A Preferred Stock may be
converted by the holder into one share of the Company's common stock. If the
noteholder converts the Note into Series A Preferred Stock, on or after the
Note's original maturity date the noteholder may require the Company to buy back
- 8 -
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
the shares of Series A Preferred Stock for 110% of the principal amount of the
Note (the "Buy Back Provision"). If the Company is unable to do so, the
Company's president, Dennis Calvert, has agreed to buy back the shares on the
same terms. If shares of Series A Preferred Stock are converted into common
stock, the holder has the right to include (piggyback) the shares of common
stock in a registration of securities filed by the Company (other than on Form
S-4 or Form S-8).
The Company's payment obligations under the Note may be accelerated upon
the following events: (i) the sale of the Company's assets outside the ordinary
course of business; (ii) a breach of the representations and warranties
contained within the agreement evidencing the loan; (iii) the failure to timely
pay the Note; (iv) the Company's default in any other loan obligation greater
than $100,000; (v) the Company's dissolution, liquidation, merger,
consolidation, bankruptcy, or future insolvency; and (vi) the commencement of
any suit that threatens to have a material adverse effect on the Company,
including the entry of a final judgment or settlement in excess of $100,000.
In January, 2005, the Company received gross and net proceeds of $75,000
from two outside investors and issued convertible promissory notes on
substantially the same terms as the previously described Note, except the notes
do not include Buy Back Provisions, and allow conversion into a total of
18,000,000 shares of common stock (at $0.0042 per common share, rather than
$0.005 per Series A Preferred share).
On February 10, 2005, the Company amended its obligations to Dr. James
Seay (the "noteholder") under its promissory note dated November 20, 2003 in the
principal amount of $50,000 and which matured on February 18, 2004. On the
maturity date of the note the Company was obligated to pay the noteholder
$65,000. The Company has paid the noteholder $30,000 and the balance of $35,000
remains outstanding. The amendment to the note entered into on February 10,
2005, (i) extends the maturity date of the note to February 3, 2006, (ii)
provides for interest to accrue at a rate of 10% per annum (15% upon default),
and (iii) allows for the conversion of the note into 7,000,000 shares of the
Company's common stock, or $.005 per share.
In February, 2005, the Company received gross proceeds of $51,000 and net
proceeds of $47,000 from four outside investors and issued convertible
promissory notes on substantially the same terms as the previously described
Note, except the notes do not include Buy Back Provisions, and allow conversion
into a total of 5,558,036 shares of common stock (at an average of $0.009 per
common share, ranging from $0.007 to $0.01 per common share, rather than $0.005
per Series A Preferred share).
On April 18, 2005, the Company received gross and net proceeds of $25,000
and $23,750, respectively, from an outside investor and issued a convertible
promissory note on substantially the same terms as the previously described
Note, except the note does not include Buy Back Provisions, and allows
conversion into a total of 2,500,000 shares of common stock (at $0.01 per common
share, rather than $0.005 per Series A Preferred share).
- 9 -
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
On April 26, 2005, the Company received gross and net proceeds of $4,000
from an outside investor and issued a convertible promissory note on
substantially the same terms as the previously described Note, except the note
does not include Buy Back Provisions, and allows conversion into a total of
500,000 shares of common stock (at $0.007 per common share, rather than $0.005
per Series A Preferred share).
On May 2, 2005, the Company received gross and net proceeds of $50,000 and
$47,500, respectively, from an outside investor and issued a convertible
promissory note on substantially the same terms as the previously described
Note, except the note does not include Buy Back Provisions, and allows
conversion into a total of 7,142,857 shares of common stock (at $0.007 per
common share, rather than $0.005 per Series A Preferred share).
On June 7, 2005, the Company received gross and net proceeds of $5,000
from an outside investor and issued a convertible promissory note on
substantially the same terms as the previously described Note, except the note
does not include Buy Back Provisions, and allows conversion into a total of
500,000 shares of common stock (at $0.01 per common share, rather than $0.005
per Series A Preferred share).
On June 9, 2005, the Company received gross and net proceeds of $100,000
from two outside investors and issued convertible promissory notes on
substantially the same terms as the previously described Note, except the notes
do not include Buy Back Provisions, and allow conversion into a total of
13,000,000 shares of common stock (at approximately $0.008 per common share,
rather than $0.005 per Series A Preferred share).
On June 21, 2005, the Company received gross and net proceeds of $20,120
from three outside investors and issued convertible promissory notes on
substantially the same terms as the previously described Note, except the notes
do not include Buy Back Provisions, and allow conversion into a total of
2,120,000 shares of common stock (at approximately $0.01 per common share,
rather than $0.005 per Series A Preferred share).
On June 22, 2005, the Company received gross and net proceeds of $21,000
from two individual investors and issued convertible promissory notes on
substantially the same terms as the previously described Note, except the notes
do not include Buy Back Provisions, and allow conversion into a total of
2,200,000 shares of common stock (at approximately $0.01 per common share,
rather than $0.005 per Series A Preferred share).
On June 29, 2005, the Company received gross and net proceeds of $110,000
from three individual investors and issued convertible promissory notes on
substantially the same terms as the previously described Note, except the notes
do not include Buy Back Provisions, and allow conversion into a total of
11,000,000 shares of common stock (at approximately $0.01 per common share,
rather than $0.005 per Series A Preferred share).
- 10 -
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
On July 15, 2005, the Company's board of directors approved the issuance
of 6,000,000 shares of the Company's common stock to two directors and one
officer. An aggregate $20,000 owed by the Company to two independent directors
for unpaid compensation for serving on the board of directors was paid by the
issuance of an aggregate 2,000,000 shares of the Company's common stock, at a
share price of $0.01 per share; and $40,000 owed by the Company to an officer of
the Company for accrued and unpaid compensation, was paid by the issuance of an
aggregate 4,000,000 shares of the Company's common stock, at a share price of
$0.01 per share.
On July 21, 2005, the Company received gross proceeds of $10,000 and net
proceeds of $9,500 from an outside investor and issued convertible promissory
note on substantially the same terms as the previously described Note, except
the note does not include Buy Back Provisions, and allow conversion into a total
of 625,000 shares of common stock (at approximately $0.016 per common share,
rather than $0.005 per Series A Preferred share).
On July 28, 2005, the Company's board of directors approved the issuance
of an aggregate of 4,390,000 shares of the Company's common stock to two
consultants, at a share price of $0.01 per share. This issuance was in
satisfaction of an aggregate of $43,900 owed by the Company for services
previously performed by these individuals.
On August 1, 2005, the Company received gross proceeds of $50,000 and net
proceeds of $47,500 from an individual investor and issued convertible
promissory note on substantially the same terms as the previously described
Note, except the note does not include Buy Back Provisions, and allow conversion
into a total of 3,125,000 shares of common stock (at approximately $0.016 per
common share, rather than $0.005 per Series A Preferred share).
On August 2, 2005, the Company received gross proceeds of $100,000 and net
proceeds of $95,000 from an individual investor and issued convertible
promissory note on substantially the same terms as the previously described
Note, except the note does not include Buy Back Provisions, and allow conversion
into a total of 6,250,000 shares of common stock (at approximately $0.016 per
common share, rather than $0.005 per Series A Preferred share).
On August 3, 2005, the Company received gross and net proceeds of $105,000
from two individual investors and issued convertible promissory notes on
substantially the same terms as the previously described Note, except the notes
do not include Buy Back Provisions, and allow conversion into a total of
6,562,500 shares of common stock (at approximately $0.016 per common share,
rather than $0.005 per Series A Preferred share).
On August 8, 2005, the Company received gross proceeds of $5,000 and net
proceeds of $4,500 from an individual investor and issued convertible promissory
note on substantially the same terms as the previously described Note, except
the note does not include Buy Back Provisions, and allow conversion into a total
of 6,250,000 shares of common stock (at approximately $0.016 per common share,
rather than $0.005 per Series A Preferred share).
- 11 -
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
All of these offerings and sales were made in reliance on the exemption
from registration contained in Section 4(2) of the Securities Exchange Act
and/or Regulation D promulgated thereunder as not involving a public offering of
securities.
Until the Company's stockholders approve an amendment to the Company's
charter to increase the number of authorized shares of common stock, the Company
will be unable to fulfill its obligations to all convertible noteholders to
permit the conversion into common stock of amounts due pursuant to the terms of
the convertible notes. In the event that the Company has not raised further
capital prior to the maturity dates of the convertible notes, the Company would
be in default of those notes if its stockholders have not formally approved an
increase in the number of authorized common shares. The Company is not, at this
time, in default on any of the convertible notes.
Note 5. Execution of Letter of Intent
On July 25, 2005, the Company and IOWC Technologies, Inc. ("IOWC") signed
a binding letter of intent pursuant to which the Company will acquire certain
assets, including intellectual property, from IOWC, and IOWC will receive
approximately 51% of the issued and outstanding stock of the Company on an
after-issued basis. Given the numerous significant conditions which must be
satisfied prior to the closing of the transactions, there can be no assurance
that the transactions will be consummated as presently envisioned.
Note 6. Extension of Augustine Loan
On July 29, 2005, the Company and the Augustine Fund finalized the terms
of an amendment to the Augustine Loan and executed formal documentation, in
which the parties agreed to further extend the maturity date to May 2006. In
exchange, the Company issued a warrant that gives the Augustine Fund the right
to purchase 8,000,000 shares of the Company's common stock at $0.005 per share
for a period of five years.
- 12 -
Item 2. Management's Discussion and Analysis
This Quarterly Report on Form 10-QSB of NuWay Medical, Inc. (the
"Company") contains forward-looking statements. These forward-looking statements
include predictions regarding, among other things, our:
o general and administrative expenses;
o liquidity and sufficiency of existing cash;
o purchase or other acquisition of new businesses; and
o the outcome of pending or threatened litigation.
You can identify these and other forward-looking statements by the use of
words such as "may," "will," "expects," "anticipates," "believes," "estimates,"
"continues," or the negative of such terms, or other comparable terminology.
Forward-looking statements also include the assumptions underlying or relating
to any of the foregoing statements.
Such statements, which include statements concerning future revenue
sources and concentrations, selling, general and administrative expenses,
research and development expenses, capital resources, additional financings and
additional losses, are subject to risks and uncertainties, including, but not
limited to, those discussed elsewhere in this Form 10-QSB, that could actual
results to differ materially from those projected.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth below under the heading "Risk Factors" in our Annual Report on Form 10-KSB
for the year ended December 31, 2004. All forward-looking statements included in
this document are based on information available to us on the date hereof. We
assume no obligation to update any forward-looking statements.
Unless otherwise expressly stated herein, all statements, including
forward-looking statements, set forth in this Form 10-QSB are as of September
30, 2005, and we undertake no duty to update this information.
Plan of Operations
Overview
The Company had no continuing business operations as of September 30,
2005. The Company operated as a shell company during the three- and nine-month
periods ended September 30, 2005, and operations primarily consisted of the
Company seeking funding, maintaining the corporate entity, complying with the
reporting and other requirements of the Securities Exchange Commission (the
"SEC") and seeking merger and acquisition candidates or new business
opportunities.
On July 25, 2005, the Company executed a binding letter of intent ("LOI")
with IOWC Technologies, Inc., a federally registered Canadian corporation
("IOWC"), pursuant to which the Company will acquire certain of IOWC's assets
(the "Purchased Assets"), consisting of certain intellectual property, including
- 13 -
two United States patents (collectively, the "BioLargo Technology"), and two
license and/or distributor agreements pursuant to which IOWC has licensed the
BioLargo Technology for use in products designed for distribution in the food,
medical and biohazardous material transportation industries. All assets not
constituting the Purchased Assets will remain the property of IOWC following the
closing (the "Closing"). The Company will not assume any liabilities of IOWC.
In exchange for the Purchased Assets, the Company will issue shares of its
common stock to IOWC equal to 51% of the Company's post-transaction issued and
outstanding shares of common stock.
The parties have agreed to enter into a definitive asset purchase
agreement, and other agreements, including a research and development agreement
(the "R&D Agreement"), to effect the transactions (the "Transactions") on or
prior to the Closing.
Additionally, prior to the Closing, the Company must raise sufficient
funds to cover the costs of the Transactions, and three months post-Closing
operating expenses, the latter of which is estimated at approximately $300,000.
See "Liquidity and Capital Resources" below.
Prior to the Closing, the Company is required to provide interim funding
to IOWC on a best efforts basis and in amounts agreed between the parties in an
aggregate amount not to exceed $1,000,000 (the "Advance"). Upon Closing, the
aggregate amount of the Advance shall be forgiven by the Company. In the event
the Transactions do not close, the aggregate amount of the Advance shall be
converted into stock of IOWC at a conversion price of $1.00 per share. As of the
date of the filing of this report, the Company has provided $87,500 of such
interim funding to IOWC.
At the Closing, the Company and IOWC will execute the R&D Agreement. It is
contemplated that pursuant to the R&D Agreement the Company will pay IOWC a
monthly fee to conduct research to further develop the existing BioLargo
Technology and products based on the existing and new technologies.
Also at the Closing, the Company and Dennis Calvert, the Company's
President and Chief Executive Officer, will enter into an employment agreement
for a term of five years, providing Mr. Calvert with a monthly salary of $14,000
for the remainder of 2005, and a 10% increase in his monthly salary for each
calendar year beginning January 2006. The employment agreement will contain a
guaranteed stock bonus and other provisions.
The Transactions are subject to approval by IOWC's board of directors and
stockholders, approval by the Company's board of directors, and approval by the
Company's stockholders of the following matters:
o an amendment to the Company's Certificate of Incorporation
increasing the number of authorized shares of its common
stock;
- 14 -
o the issuance of the number of shares of common stock to IOWC
required pursuant to the Transactions;
o a reverse split of the Company's common stock; and
o the election of Kenneth R. Code ("Code"), IOWC's principal
shareholder, to the Company's board of directors.
The Closing of the Transactions is subject to various conditions,
including those described hereinabove and conditions customary for transactions
of this nature.
It is anticipated that the present management of the Company will remain
in place after the Closing and that Code will become Chairman of the Company's
Board of Directors and Chief Technology Officer. Code will enter into an
employment agreement with the Company on terms to be agreed.
While the parties currently anticipate the transactions to close during
the first quarter of 2006, given the numerous significant conditions which must
be satisfied prior to the closing of the transactions, there can be no assurance
that the transactions will be consummated as presently envisioned or at all.
The Company will need working capital resources to maintain the Company's
status and to fund other anticipated costs and expenses during the year ending
December 31, 2005 and beyond, including its obligations to IOWC. The Company's
ability to continue as a going concern and to consummate the transactions with
IOWC is dependent on the Company's ability to raise capital. If the Company is
able to acquire IOWC, it will need additional capital until and unless that
prospective operation is able to generate positive working capital sufficient to
fund the Company's cash flow requirements from operations. The Company has
commenced an offering of its convertible notes and warrants to provide such
interim funding. See "Liquidity and Capital Resources" below.
Results of Operations
The Company had no revenues from continuing operations during the three-
and nine-month periods ended September 30, 2005 and 2004.
Selling, General and Administrative Expense
Selling, general and administrative expenses were $349,000 and $716,000
for the three- and nine-month periods ended September 30, 2005, respectively,
compared to $120,000 and $771,000 for the three- and nine-month periods ended
September 30, 2004, respectively, an increase of $229,000 in the three-month
period ended September 30, 2005 and a decrease of $55,000 in the nine-month
period ended September 30, 2005. The increase in the three-month period ended
September 30, 2005 is primarily attributable to an increase in consulting
expenses, legal expenses, and independent director compensation, partially
offset by a decrease in salaries and payroll-related expenses, and reversal of a
prior period accrued liability. The decrease in the nine-month period ended
September 30, 2005 is primarily attributable to a decrease in salaries and
payroll expenses, legal expenses, a settlement charge and reversal of a prior
period accrued liability, partially offset by an increase in consulting
expenses, independent director compensation and travel.
- 15 -
The largest components of these expenses were:
a. Salaries and Payroll-Related Expenses: These expenses were
$42,000 and $173,000 for the three- and nine-month periods ended September
30, 2005, respectively, compared to $52,000 and $282,000 for the three-
and nine-month periods ended September 30, 2004, respectively, a decrease
of $10,000 and $109,000, respectively. The decrease in the three- and
nine- month period ended September 30, 2005 is primarily attributable to
an expense recorded by the Company in the prior year for the issuance of
3,000,000 shares of the Company's common stock to an officer of the
Company in lieu of cash compensation in the amount of $118,000.
b. Consulting Expenses: These expenses were $103,000 and $205,000
for the three- and nine-month periods ended September 30, 2005,
respectively, compared to $5,000 and ($62,000) for the three- and
nine-month periods ended September 30, 2004, respectively, an increase of
$98,000 and $267,000 respectively. The increase in the three-month period
ended September 30, 2005 is attributable to the increase in the Company's
need for outside consultants during that time. The increase in the
nine-month period ended September 30, 2005 is attributable to a reversal
of accrued consulting expense relating to the issuance (and subsequent
return to treasury) of the Company's common stock in the prior year.
c. Legal Expenses: These expenses were $74,000 and $146,000 for the
three- and nine-month periods ended September 30, 2005, respectively,
compared to $44,000 and $250,000 for the three- and nine-month periods
ended September 30, 2004, respectively, an increase of $30,000 and
decrease of $104,000, respectively. The increase in the three-month period
ended September 30, 2005 is primarily attributable to legal work during
that period associated with the Company's financing efforts and the IOWC
Transactions. The decrease in the nine-month period ended September 30,
2005 is primarily attributable to the high level of legal services
required during the nine-month period ended September 30, 2004 with
respect to the Premium Medical Group, Inc. ("PMG") acquisition and
operations, which acquisition was later rescinded.
d. Independent Director Compensation: These expenses were $120,000
for the three- and nine-month periods ended September 30, 2005, compared
to $0 for the three- and nine-month periods ended September 30, 2004, an
increase of $120,000 and $120,000 respectively. The Company accrued an
expense of $120,000 in the third quarter 2005 to reflect an arrangement
made with the Company's independent directors on November 14, 2005 for
their 2005 compensation. In 2004, annual independent director compensation
in the aggregate amount of $120,000 was accrued in the three-month period
ended December 31, 2004.
- 16 -
e. Settlement Charge: These expenses were $0 for the three- and
nine-month periods ended September 30, 2005, compared to $0 and $163,000
for the three- and nine-month periods ended September 30, 2004, a decrease
of $0 and $163,000, respectively. This decrease is attributable to the
settlement reached in the Flight Options, Inc. litigation, in which the
Company may be obligated to pay up to approximately $163,000 to Flight
Options, Inc. (See Part II, Item 1 "Legal Proceedings" below.)
f. Reversal of Accrued Liability. During the three-month period
ended September 30, 2005, management reviewed the Company's accrued
liabilities and reversed an accrual for rental expense of $55,000, which
it currently believes that the Company will no longer have to pay.
Net Loss
Net loss for the three- and nine-month periods ended September 30, 2005
was $415,246 and $887,745, respectively, or $(0.01) and $(0.01) per share.
Comparatively, for the three- and nine-month periods ended September 30, 2004,
net loss was $168,216, and $967,295, respectively, or $(0.01) and $(0.02) per
share.
Liquidity and Capital Resources
General
Cash and cash equivalents totaled $144,997 at September 30, 2005. The
Company had no revenues in the three- and nine-month periods ended September 30,
2005 and were forced to consume cash on hand to fund operations. The Company's
cash position is insufficient to meet its expenses or its obligations under the
LOI with IOWC to acquired the BioLargo Technology. The Company will be required
to raise additional capital to sustain basic operations through the remainder of
2005 and to consummate the transactions with IOWC.
The financial statements accompanying this Report have been prepared on a
going concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of our business.
The Company had a net loss of $870,784 for the nine-month period ended September
30, 2005, respectively; a negative cash flow from operating activities of
$613,973 for the nine-month period ended September 30, 2005; and a stockholders'
deficiency of $27,041,886 as of December 31, 2004, and $27,912,670 as of
September 30, 2005.
As of September 30, 2005, the Company has limited liquid and capital
resources although it is seeking acquisition opportunities. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Ultimately, the Company's ability to continue as a going concern is dependent
upon its ability to attract new sources of capital, establish an acquisition or
reverse merger candidate with continuing operations, such as IOWC, attain a
reasonable threshold of operating efficiencies and achieve profitable
operations. The financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern.
- 17 -
For the three-month period ended September 30, 2005, the Company raised an
aggregate of $270,000 gross proceeds and $261,500 net proceeds) from five
individual investors and issued convertible promissory notes due and payable one
year from the date of issuance (the "Notes"). The Notes bear interest at a rate
of 10% per annum, payable on the maturity date, and can be converted, in whole
or in part, into shares of the Company's common stock, on a basis ranging from
$.005 to $0.01 per share, at any time prior to maturity by either the Company or
the holder. The holder has "piggyback" registration rights to include the shares
of common stock in one or more registration statements filed by the Company
(other than registration statements on Forms S-4 or S-8). Please see Part II,
Item 2, "Changes in Securities".
On September 23, 2005, the Company commenced a private offering (the
"Interim Finance Offering") of up to $1 million of its 10% convertible notes due
October 31, 2006 (the "Convertible Notes") and warrants (the "Warrants") to
purchase up to 40,000,000 shares of the Company's common stock. The Convertible
Notes are convertible into shares of common stock at $.05 per share. The
Warrants are exercisable at a price of $.05 per share and expire on October 31,
2007. The Interim Finance Offering is being made to a limited number of
individuals who are "accredited investors" as that term is defined by Rule
501(a) of Regulation D promulgated under the Securities Act of 1933, as amended
(the "Securities Act"). As of the date of the filing of this Report, no funds
have been received by the Company in connection with the Interim Finance
Offering.
Even if the Interim Finance Offering is successful, the Company will be
required to raise additional capital to sustain its operations and meet its
liabilities as they become due for the next twelve months, as well as to
consummate the transactions with IOWC and fund the operations of the Company
after the transactions are consummated. While the Company is actively
considering investment alternatives for the Company's longer-term financial
requirements, there is no assurance that the Company will be able to raise any
additional capital. It is unlikely that the Company will be able to qualify for
bank debt until such time as the Company is able to demonstrate the financial
strength to provide confidence for a lender.
Significant debt obligations of the Company at September 30, 2005
included:
(i) $420,000 due to Augustine II, LLC (the "Augustine Fund"),
together with accrued but unpaid interest, described in more detail below;
(ii) a $1,120,000 note payable which was purchased in March 2003 by
New Millennium Capital Partners, LLC ("New Millennium"), an entity owned
and controlled by the Company's president, Dennis Calvert, and certain
members of his family, together with accrued but unpaid interest,
described in more detail below;
- 18 -
(iii) amounts owed to Mr. Calvert personally in the aggregate amount
of approximately $335,000, as described below;
(iv) convertible promissory notes to various investors in the
aggregate principal amount of $816,000, plus accrued interest;
(v) approximately $21,000 outstanding remaining on a settlement
agreement with former convertible debenture holders; and
(vi) $35,000 in remaining balance due to a former advisory board
member, from a promissory note dated November 20, 2003 in the original
principal amount of $65,000.
For the three- and nine-month periods ended September 30, 2005, there was
$66,500 and $171,000, respectively, of accrued interest recorded related to
these obligations.
Augustine Fund Note
On June 10, 2003 the Company entered into a Term Loan Agreement ("Loan
Agreement") with the Augustine Fund, pursuant to which the Augustine Fund agreed
to lend the Company $420,000, payable in installments of $250,000, $100,000, and
$70,000 (the "Augustine Loan"). The proceeds of the Augustine Loan were used by
the Company for working capital.
Principal and interest, at an annual rate of 10%, of the Augustine Loan,
was originally due on February 29, 2004. In addition, the Loan Agreement
contains certain requirements that the Company make mandatory prepayments of the
Augustine Loan from the proceeds of any asset sales outside of the ordinary
course of business, and, on a quarterly basis, from positive cash flow. In
addition, all or any portion of the Augustine Loan may be prepaid by the Company
may prepay all or any portion of the Augustine Loan at any time without premium
or penalty.
As additional consideration for making the Augustine Loan, the Augustine
Fund received five-year warrants to purchase up to 6,158,381 shares of the
Company's common stock at an exercise price of $0.16 per share. The Company
could require that the warrants be exercised if certain conditions were
satisfied. Since these conditions were not fully satisfied by the maturity date,
the Loan Agreement provides that the Augustine Fund may, at any time following
the maturity date and so long as the warrants remain exercisable, elect to
exercise all or any portion of the warrants pursuant to a "cashless exercise",
whereby the Augustine Fund would be issued the net amount of shares of our
common stock, taking into consideration the difference between the exercise
price of the warrants and the fair market value of our common stock at the time
of exercise, without having to pay anything to the Company for such exercise.
As security for the Augustine Loan, New Millennium Capital Partners LLC
("New Millennium"), a company controlled and owned by the Company's president,
Dennis Calvert, and members of his family, pledged 2.5 million shares of the
Company's common stock owned by New Millennium, and, in addition, the Company
has granted the Augustine Fund a security interest in its 51% membership
ownership interest in NuWay Sports. As a result, the Company will need to
consent of the Augustine Fund to release its security interest in NuWay Sports
if the Company is able to sell NuWay Sports.
- 19 -
Prior to the original maturity date of the Augustine Loan, the Company
spoke with representatives of the Augustine Fund and advised them that the
Company was unable to pay the amount due under the Augustine Loan by the
February 29, 2004 maturity date. On March 30, 2004, the Augustine Fund agreed to
extend the maturity date of the Loan Agreement to August 2004. In addition to
the extension of the maturity date, the Augustine Fund was given the option of
having the Augustine Loan satisfied in cash or by the conversion of any
remaining principal balance and any accrued interest on the Augustine Loan to
shares of the Company's common stock at a 15% discount to market, so long as
Augustine Fund's holdings do not exceed 4.9% of the total issued and outstanding
shares of the Company's common stock at any time. In addition, the warrants held
by the Augustine Fund to purchase 6,158,381 shares of the Company's common stock
were re-priced to an exercise price of $.035 per share. Exercise of the warrants
is also subject to the limit that the Augustine Fund does not hold more than
4.9% of the issued and outstanding shares of the Company's common stock.
On July 29, 2005, the Company and the Augustine Fund finalized the terms
of an amendment to the Augustine Loan and executed formal documentation, in
which the parties agreed to further extend the maturity date to May 2006. In
exchange, the Company issued a warrant that gives the Augustine Fund the right
to purchase 8,000,000 shares of the Company's common stock at $0.005 per share
for a period of five years. Accordingly, as of September 30, 2005, the principal
amount of the loan, together with approximately $541,336 in accrued but unpaid
interest, had not been repaid.
Obligation to New Millennium
In conjunction with the acquisition from Med Wireless of the license for
the its technology in 2002, the Company assumed a $1,120,000 note (the "Note")
with interest at 10% per annum payable by Med Wireless to Summitt Ventures, Inc.
("Summitt Ventures"). The Note is secured by the Company's assets and was
originally due on June 15, 2003. It was sold, as part of a series of
transactions with Mark Anderson, a former consultant and former principle
stockholder of the Company, and his affiliated entities, to New Millennium, an
entity owned and controlled by the Company's president, Dennis Calvert, and
certain members of his family, in March 2003.
Since New Millennium purchased the Note, the Company has attempted
multiple times to convert the Note, but has been unable to obtain the required
stockholder vote, due to a lack of quorum, to do so. 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. The Company was unable to make the $100,000
payment on the Note on the extended due date of October 1, 2003.
- 20 -
In October 2004, New Millennium agreed to extend the maturity of the Note
indefinitely until the Company acquired assets or an operating business that
would allow it to meet its obligations on the note. Accordingly, as of September
30, 2005, the principal amount of the loan, together with approximately $289,704
in accrued but unpaid interest, had not been repaid.
Under the terms of the New Millennium Note, it is possible that Summitt
Ventures, and Mr. Anderson's affiliated entities may have a claim to reacquire
the shares of the Company's common stock that were sold to New Millennium. The
New Millennium Note is purportedly secured by the purchased shares of the
Company's common stock; however, New Millennium and Mr. Calvert believe that Mr.
Anderson and his affiliates have not perfected their security interest in those
shares. In addition, the Augustine Fund is the pledgee of 2,500,000 of those
shares and has physical possession of those shares.
New Millennium has informed the Company's board of directors that New
Millennium intends to fully convert the Note to stock as soon as it is
practical, following stockholder approval. As of the date of the filing of this
report, the stockholder vote has not taken place and the Note has not been
converted into shares of the Company's common stock.
Obligations to Dennis Calvert
In 2003 and 2004 the Company's President, Dennis Calvert, loaned money to
the Company by paying from his personal funds certain of the Company's expenses.
A significant portion of these personal funds was obtained by Mr. Calvert by
refinancing his primary residence and cashing out equity thereon. On March 7,
2005, the Company and Mr. Calvert agreed such that the $101,770 still
outstanding and owed by the Company to Mr. Calvert will be repaid under the
terms of a promissory note bearing interest of 10% per annum, requiring monthly
payments and maturing on January 15, 2006.
As of September 30, 2005, the Company had repaid approximately $63,000 of
this loan; approximately $38,000 principle remains outstanding. As of September
30, 2005, the Company had accrued an expense related to the unpaid accrued
compensation due Mr. Calvert in the amount of $296,821.
Critical Accounting Policies
The SEC recently issued Financial Reporting release No. 60, "Cautionary
Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"),
suggesting companies provide additional disclosure and commentary on their most
critical accounting policies. In FRR 60, the SEC defined the most critical
accounting policies as the ones that are most important to the portrayal of a
company's financial condition and operating results, and require management to
make its most difficult and subjective judgments, often as a result of the need
to make estimates of matters that are inherently uncertain. Based on this
definition, the Company's most critical accounting policies include: non-cash
transactions and compensation valuations that affect the total expenses reported
in the current period and/or values of assets received in exchange.
- 21 -
The Company has established a policy relative to the methodology to
determine the value assigned to each intangible acquired with or licensed by the
Company and/or services or products received for non-cash consideration of the
Company's common stock. The value is based on the market price of the Company's
common stock issued as consideration, at the date of the agreement of each
transaction or when the service is rendered or product is received, as adjusted
for applicable discounts.
The methods, estimates and judgments the Company uses in applying these
most critical accounting policies have a significant impact on the results of
the Company reports in its financial statements.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures: Our management
evaluated, with the participation of our Chief Executive Officer and Chief
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-QSB.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.
(b) Changes in internal control over financial reporting: There was no
change in our internal control over financial reporting that occurred during the
period covered by this Quarterly Report on Form 10-QSB that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
- 22 -
PART II
Item 1. Legal Proceedings
In June 2002, Geraldine Lyons, the Company's former Chief Financial
Officer, sued the Company and the Company's former president Todd Sanders, for
breach of her employment contract. The lawsuit was brought in the Circuit Court
of the 11th Judicial Circuit in Miami-Dade County in Florida. Ms. Lyons seeks
approximately $25,000 due under the contract and the issuance of 100,000 shares
of common stock, with a guarantee that the stock could be sold by Ms. Lyons for
$300,000. Ms. Lyons alleges that additional funds are due under her employment
contract; that the contract requires the Company guarantee that she can sell for
$300,000 the 100,000 shares of stock the Company is required to issue her; and,
that Mr. Sanders promised to purchase from her 100,000 shares of Company common
stock held by her at the price of $4.00 per share.
The Company has counter-sued Ms. Lyons for breach of fiduciary duty,
fraud, violation of Section 12(a)(2) of the Securities Act of 1933, violation of
Section 517.301 of the Florida Statutes, negligent misrepresentation, conversion
and unjust enrichment resulting from the required restatement of the Company's
financial statements for the years ended December 31, 2000 and December 31,
1999. The restatements corrected the previous omission of certain material
expenses related primarily to compensation expense arising from warrants issued
and repriced stock options, as well as other errors.
The case is ongoing at this time, although it has not been vigorously
prosecuted by Ms. Lyons or the Company, in the Company's case primarily because
the Company had lacked the resources to do so. The Company entered into an
agreement ("Legal Defense Agreement") in December 2004 such that Augustine II,
LLC ("Augustine Fund") would pay for the legal expenses associated with the
Company's defense and affirmative claims in this lawsuit (with the right to
withdraw funding at any time), and in exchange would share any net proceeds
awarded to the Company pursuant to a settlement or judgment. The sharing
arrangement provides that Augustine Fund will recover first, out of any money
available from recovery, its legal and out of pocket expenses related to the
lawsuit; second, 85% of any additional amounts recovered up to $500,000; and
third, 50% of amounts recovered beyond $500,000. While the Company believes that
it has meritorious positions in this litigation, given the inherent nature of
litigation, it is not possible to predict the outcome of this litigation or the
impact it would have on the Company.
In May 2004, the Company was sued by Flight Options, Inc. ("Flight
Options"), a jet plane leasing company, in the Superior Court of Orange County
California. The lawsuit alleges that the Company owes Flight Options
approximately $418,300, pursuant to a five-year lease assigned to the Company by
the Company's former president Todd Sanders, from his corporation, Devenshire
Management Corporation ("Devenshire"). Management of the Company believes that
the assignment of the lease was not properly authorized or approved by the
Company, and that by Mr. Sander's failure to identify the lease in a December
- 23 -
2002 settlement agreement with the Company, he breached the terms of that
settlement agreement and, pursuant to the settlement agreement, must indemnify
the Company for any losses owed to Flight Options. The Company has
cross-complained against Mr. Sanders for indemnity, and has added the
affirmative claim of breach of fiduciary duty.
On March 17, 2005, the Company settled the lawsuit with the plaintiff
pursuant to a stipulation that allows the Company to either pay Flight Options
$100,000 on or before August 5, 2005, or allows Flight Options to file a
judgment against the Company for $163,310 after such date. Flight Options agreed
to extend the August 5, 2005 deadline to December 23, 2005, in exchange for (i)
an increase of the settlement amount from $100,000 to $110,000, and (i) a
payment of $20,000 which is credited to the total amount due. The Company's
claims against Devenshire and Mr. Sanders are being litigated through binding
arbitration. The Company's Legal Defense Agreement with the Augustine Fund
applies also to the Flight Options litigation. While the Company believes that
it has meritorious positions against Devenshire and Mr. Sanders, given the
inherent nature of litigation, it is not possible to predict the outcome of this
litigation or the impact it would have on the Company.
On December 4, 2004, the Company was sued by the law firm of Enenstein
Russell and Saltz, LLP to collect fees that had been billed to the Company in
the amount of $15,233, which had been disputed by the Company. The Company
agreed to settle the lawsuit for $9,000. The Company paid the settlement and the
law firm dismissed the lawsuit.
The Company is party to various other claims, legal actions and complaints
arising periodically in the ordinary course of business. In the opinion of
management, no such matters will have a material adverse effect on the Company's
financial position or results of operations.
Item 2. Changes in Securities
On July 15, 2005, the Company's board of directors approved the issuance
of 6,000,000 shares of the Company's common stock to two directors and one
officer. An aggregate $20,000 owed by the Company to two independent directors
for unpaid compensation for serving on the board of directors was paid by the
issuance of an aggregate 2,000,000 shares of the Company's common stock, at a
share price of $0.01 per share; and $40,000 owed by the Company to an officer of
the Company for accrued and unpaid compensation, was paid by the issuance of an
aggregate 4,000,000 shares of the Company's common stock, at a share price of
$0.01 per share.
On July 21, 2005, the Company received gross proceeds of $10,000 and net
proceeds of $9,500 from an outside investor and issued its convertible
promissory note ("Note") due and payable one year from the date of issuance. The
Note bears interest at a rate of 10% per annum, payable one year from the date
of issuance. The Note can be converted, in whole or in part, into shares of the
Company's common stock, at the rate of $.016 per share, at any time prior to
maturity by either the Company or the lender.
- 24 -
The Company's payment obligations under the Note may be accelerated upon
the following events of default: (i) the Company's dissolution, liquidation,
merger, consolidation, bankruptcy, or future insolvency; and (ii) the
commencement of any suit that threatens to have a material adverse effect on the
Company, including the entry of a final judgment or settlement in excess of
$100,000.
On July 28, 2005, the Company's board of directors approved the issuance
of an aggregate of 4,390,000 shares of the Company's common stock to two
consultants, at a share price of $0.01 per share. This issuance was in
satisfaction of an aggregate of $43,900 owed by the Company for services
previously performed by these individuals.
On August 1, 2005, the Company received gross proceeds of $50,000 and net
proceeds of $47,500 from an outside investor and issued convertible promissory
note on substantially the same terms as the previously described Note.
On August 2, 2005, the Company received gross proceeds of $100,000 and net
proceeds of $95,000 from an individual investor and issued a convertible
promissory note on substantially the same terms as the previously described
Note.
On August 3, 2005, the Company received gross and net proceeds of $105,000
from two individual investors and issued convertible promissory notes on
substantially the same terms as the previously described Note.
On August 8, 2005, the Company received gross proceeds of $5,000 and net
proceeds of $4,500 from an individual investor and issued convertible promissory
note on substantially the same terms as the previously described Note.
All of these offerings and sales were made in reliance on the exemption
from registration contained in Section 4(2) of the Securities Exchange Act
and/or Regulation D promulgated thereunder as not involving a public offering of
securities.
Until the Company's stockholders approve an amendment to the Company's
charter to increase the number of authorized shares of common stock, the Company
will be unable to fulfill its obligations to all convertible noteholders to
permit the conversion into common stock of amounts due pursuant to the terms of
the convertible notes. In the event that the Company has not raised further
capital prior to the maturity dates of the convertible notes, the Company would
be in default of those notes if its stockholders have not formally approved an
increase in the number of authorized common shares. The Company is not, at this
time, in default of the convertible notes.
Item 6. Exhibits
The exhibits listed below are attached hereto and filed herewith:
- 25 -
Exhibit No. Description
----------- -----------
31.1 Certification of Chief Executive Officer of Quarterly Report
Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e).
31.2 Certification of Chief Financial Officer of Quarterly Report
Pursuant to 18 U.S.C. Section 1350
32 Certification of Chief Executive Officer and Chief Financial Officer
of Quarterly Report pursuant to Rule 13(a)-15(e) or Rule
15(d)-15(e).
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, hereunto
duly authorized.
NUWAY MEDICAL, INC.
Date: November 16, 2005 By: /s/ Dennis Calvert
------------------------------------
Dennis Calvert
President, Chief Executive Officer
and Interim Chief Financial Officer
- 26 -
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
31.1 Certification of Chief Executive Officer of Quarterly Report
Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e).
31.2 Certification of Chief Financial Officer of Quarterly Report
Pursuant to 18 U.S.C. Section 1350
32 Certification of Chief Executive Officer and Chief Financial Officer
of Quarterly Report pursuant to Rule 13(a)-15(e) or Rule
15(d)-15(e).
- 27 -