U.S. 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 March 31, 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 June 23, 2003: 30,791,911 shares of common stock, $0.00067 par value per
share.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (unaudited) 3
Consolidated Balance Sheets - as of March 31, 2003 and
December 31, 2002 3
Consolidated Statements of Operations - for the Three Months Ended
March 31, 2003 and March 31, 2002 4
Consolidated Statements of Cash Flows - for the Three Months Ended
March 31, 2003 and March 31, 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 17
Item 3. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 24
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 27
Certifications 28
2
NUWAY MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2003 AND DECEMBER 31, 2002
ASSETS
------
March 31, December 31,
2003 2002
(unaudited)
------------ ------------
CURRENT ASSETS
Cash and Cash Equivalents $ 6,713 $ 521
Accounts Receivable 29,665 --
------------ ------------
Total Current Assets 36,378 521
------------ ------------
PROPERTY AND EQUIPMENT - NET 26,706 28,844
------------ ------------
OTHER ASSETS
Marketing Database, net 242,250 255,000
Med Wireless License, net 3,885,500 4,090,000
------------ ------------
Total Other Assets 4,127,750 4,345,000
------------ ------------
TOTAL ASSETS $ 4,190,834 $ 4,374,365
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 598,672 $ 1,131,579
Note Payable 1,120,000 1,120,000
Debentures Payable, net 150,000 150,000
------------ ------------
Total Current Liabilities 1,868,672 2,401,579
------------ ------------
COMMITMENTS AND CONTINGENCIES AND
SUBSEQUENT EVENTS (Notes 9, 10 and 11)
STOCKHOLDERS' EQUITY
Preferred Stock, $.00067 Par Value, 25,000,000
Shares Authorized, 338,022 and No Shares Issued
and Outstanding at March 31, 2003 and
December 31, 2002, respectively 226 --
Common Stock, $.00067 Par Value, 100,000,000
Shares Authorized, 28,498,646 and 17,137,727 Shares
Issued and Outstanding at March 31, 2003 and
December 31, 2002, respectively 19,095 11,483
Additional Paid-In Capital 21,939,916 20,289,936
Retained Earnings (Deficit) (19,510,071) (18,201,629)
Treasury Stock at cost, 44,900 shares as of
March 31, 2003 and December 31, 2002 (127,004) (127,004)
------------ ------------
Total Stockholders' Equity 2,322,162 1,972,786
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,190,834 $ 4,374,365
============ ============
3
NUWAY MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 and 2002
Three Months Ended March 31,
---------------------------------
2003 2002
------------ ------------
(unaudited) (unaudited)
Sales
License of Software $ 34,665 $ --
------------ ------------
Total Sales 34,665 --
------------ ------------
Costs and Expenses
Selling, General and Administration 1,088,637 618,246
Depreciation, Depletion and Amortization 219,388 2,600
Cancellation of Stock Warrants Previously Expensed -- (1,659,750)
------------ ------------
Total Costs and Expenses 1,308,025 (1,038,904)
------------ ------------
Operating (Loss) Income (1,273,360) 1,038,904
------------ ------------
Other Income (Expenses)
Interest Income -- 6,079
Interest Expense (35,082) --
------------ ------------
Net Other Income (Expenses) (35,082) 6,079
------------ ------------
(Loss) Income Before Income Taxes (1,308,442) 1,044,983
Income Taxes (Provision) Benefit -- --
------------ ------------
Net (Loss) Income from Continuing Operations (1,308,442) 1,044,983
------------ ------------
Discontinued Operations (Note 2) -- (33,020)
------------ ------------
Net (Loss) Income $ (1,308,442) $ 1,011,963
============ ============
(Loss) Earnings Per Common Share and Common Share $ (1,308,442) $ 1,011,963
Equivalents Basic and Fully Diluted
Common Share Equivalents Outstanding 21,013,109 5,407,502
============ ============
Net (Loss) Income Per Share $ (0.06) $ 0.19
============ ============
4
NUWAY MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(unaudited)
Three Months Ended March 31,
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) Income $(1,308,442) $ 1,011,963
Adjustments to Reconcile Net (Loss) Income to Cash Used in Operating
Activities:
Depreciation, Depletion and Amortization 219,388 2,600
Issuance of Stock for Services and Interest 1,488,807 423,000
Cash Used in Discontinued Operations -- 329,066
Cancellation of Prior Year Warrant Compensation -- (1,659,750)
Increase in Accounts Receivable (29,665) --
Increase in Prepaid Expenses and Other Current Assets -- (5,500)
Decrease in Accounts Payable and Accrued Expenses (532,907) (109,531)
Net Cash Used in Operating Activities -- --
(162,819) (8,152)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Used in Discontinued Operations -- (65,168)
Increase in Other Assets -- (18,400)
----------- -----------
Net Cash Used in Investing Activities -- (83,568)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Convertible Debentures -- (50,000)
Proceeds from the Sale of Preferred Stock 169,011 --
----------- -----------
Net Cash Provided by (Used in) Financing Activities 169,011 (50,000)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,192 (141,720)
CASH AND CASH EQUIVALENTS - BEGINNING 521 244,344
----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 6,713 $ 102,624
=========== ===========
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 $ -- $ 2,050,000
=========== ===========
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
accompanying unaudited consolidated financial statements contain all
adjustments (which are normal recurring accruals) necessary to
present fairly the consolidated financial position as of March 31,
2003 and 2002; the consolidated results of operations for the three
months ended March 31, 2003 and 2002; and the consolidated statements
of cash flows for the three months ended March 31, 2003 and 2002.
Interim results for the three months ended March 31, 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 in May 2003.
The consolidated balance sheets at March 31, 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.
Operations for NuWay Sports commenced in January 2003. NuWay Medical,
Inc. has significant influence on the business operations of NuWay
Sports and operations are consolidated. As there is no equity in
NuWay Sports, 100% of this entity is absorbed by NuWay Medical. All
significant inter-company balances have been eliminated in
consolidation.
b) Management's Plan
The Company had approximately $6,700 of cash on hand at March 31,
2003. On June 13, 2003, the Company received the first installment
($250,000) of a total loan commitment of $420,000 as described in
Note 11 below. 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 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. Promptly following the filing of this Form
10-QSB with the SEC, the Company expects that its market makers will
make application for quotation of the Company's shares on the
Over-the-Counter Bulletin Board, although there can be no assurance
that these applications will
6
be accepted and the Company will be cleared to trade on the Bulletin
Board in light of the public interest concerns raised by Nasdaq in
connection with the delisting of the Company's shares. This Nasdaq
delisting will make it more difficult to effect trades and is
expected to lead to a significant decline in the frequency of trades
and trading volume. The delisting will likely adversely affect the
Company's ability to obtain financing in the future due to the
decreased liquidity of the Company's shares. The Company has not yet
determined what impact, if any, that the delisting will have on the
proposals from private investors referred to above.
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 may 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 third
quarter of 2003. The Company's PRLS was introduced by the Company to
the marketplace in January 2003 and generated a total of
approximately $35,000 in gross revenues during the first quarter of
2003 through the sale of a scaled down version of the product to 18
NFL teams at the 2003 NFL Combine. Pursuant to this transaction, the
Company digitized over 60,000 medical images for use by 18 NFL teams
in their evaluation of potential draft picks. Management believes
that it 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.
7
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.
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 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 months ended March 31,
2003, 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.
For the comparable quarter in 2002, an additional 186,502 equivalent
shares were added for the effect of dilutive shares.
8
For the three months ended March 31, 2003 and March 31, 2002, the
computation of basic EPS was as follows:
Three Months Three Months
Ended Ended
March 31, 2003 March 31, 2002
-------------- --------------
Basic EPS:
----------
Numerator - Net (Loss) Income from Continuing Operations $ (1,308,442) $ 1,044,983
Denominator - Weighted average shares outstanding 21,013,109 5,407,502
------------ ------------
(Loss) Income per Share $ (0.06) $ 0.19
------------ ------------
Numerator - Net (Loss) Income from Discontinued Operations $ -- $ (33,020)
Denominator - Weighted average shares outstanding -- 5,407,502
------------ ------------
(Loss) Income per Share $ -- $ (0.01)
------------ ------------
Numerator - Net (Loss) Income $ (1,308,442) $ 1,011,963
Denominator - Weighted average shares outstanding $ 21,013,109 5,407,502
------------ ------------
(Loss) Income per Share $ (0.06) $ 0.19
------------ ------------
Diluted EPS:
------------
Numerator - Net (Loss) Income from Continuing Operations $ (1,308,442) $ 1,044,983
Denominator - Weighted average shares outstanding 21,013,109 5,594,004
------------ ------------
(Loss) Income per Share $ (0.06) $ 0.19
------------ ------------
Numerator - Net (Loss) Income from Discontinued Operations $ -- $ (33,020)
Denominator - Weighted average shares outstanding -- 5,594,004
------------ ------------
(Loss) Income per Share $ -- $ (0.01)
------------ ------------
Numerator - Net (Loss) Income $ (1,308,442) $ 1,011,963
Denominator - Weighted average shares outstanding $ 21,013,109 5,594,004
------------ ------------
(Loss) Income per share $ (0.06) $ 0.18
------------ ------------
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.
9
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.
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 and net loss per share
would have been reduced to the pro forma amounts indicated below:
Three Months Ended March 31,
2003 2002
------------------ ----------------
Net (Loss) Income - as reported $ (1,308,442) $ 1,011,963
Deduct: stock based employee compensation
expenses determined under fair value
based method - -
------------------ ----------------
Net (Loss) Income - pro forma $ (1,308,442) $ 1,011,963
================== ================
Loss per share - as reported
Basic $ (0.06) $ 0.19
================== ================
Diluted $ (0.06) $ 0.18
================== ================
Loss per share - pro forma
Basic $ (0.06) $ 0.19
================== ================
Diluted $ (0.06) $ 0.18
================== ================
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 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
10
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.
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
March 31, 2002
-------------------
Revenues $ 260,255
Operating Expenses 294,443
-------------------
Loss from discontinued operations $ (33,020)
===================
NOTE 3. PROPERTY AND EQUIPMENT
Property and Equipment are summarized as follows:
March 31, December 31,
2003 2002
------- -------
Furniture, Fixtures & Office Equipment $42,753 $42,753
Less: Accumulated Depreciation 16,047 13,909
------- -------
Property and Equipment, net $26,706 $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 March 31, 2003: a marketing
database purchased from Genesis Health Tech, Inc. on June 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 new Player Record Library System ("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. During
the first quarter of 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 in amortization expense was recorded for the three month period.
11
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).
NOTE 5. STOCK, STOCK OPTIONS AND WARRANTS
During the first quarter of 2003, the Company issued a total of 11,360,919
shares of its common stock for services performed during 2002 and 2003. Expenses
totaling $645,648 for 2,633,590 shares issued in January 2003 were accrued in
the financial statements for the year ended December 31, 2002. Expenses
aggregating $843,000 relating to the balance of the shares issued in the first
quarter (8,727,329 shares) were recorded in the three months ended March 31,
2003. Of this first quarter amount, approximately $548,000 represents consulting
expense, $259,000 represents legal expenses, and the balance of $36,000
represents compensation, advisory board, and board of director expenses.
The Company had the following outstanding convertible securities at March 31,
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; (d) warrants to purchase up
to 225,000 shares of common stock at an exercise price of $1.06, exercisable
through June 5, 2003, issued in 1998 to an investment banker who provided
services to the Company; and (e) warrants to purchase up to 338,022 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 338,022 shares of
Convertible Preferred Stock during the first quarter of 2003, and which are not
convertible until six months from the date of issuance (Note 9).
At March 31, 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. The expiration date of these warrants was extended by the
Company to December 11, 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.
12
At March 31, 2003 and December 31, 2002, the Company had options outstanding and
exercisable as follows:
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 March 31, 2003 65,000 $ 1.00 - $1.75
================== ======================
All outstanding stock options were fully exercisable at March 31, 2003.
NOTE 7. NOTE 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. 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 strike 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 90 days, from June 15, 2003 to
September 15, 2003.
13
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
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 Mr. Anderson.
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 he now believes that
conversion of the note is no longer required.
As a result of the elimination of the conversion feature of the note, the
shareholders of the Company will not be asked to approve the conversion terms as
was previously contemplated by the Company.
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 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 holders prior to the end of
2002. Pursuant to the request, and to complete the conversion, the Company
issued to the holders 96,006 shares of common stock. The actual certificates
representing the shares, however, were not delivered to the holders until the
first quarter of 2003. These holders 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. These holders have now demanded full payment on
their $150,000 of debentures (plus accrued interest). Although the Company's
financial statements reflect the $150,000 of debentures as still being
outstanding, the Company disputes the individuals' claim that the conversion was
invalid and intends to vigorously defend against any action that might be
brought by the debenture holders to collect thereon.
NOTE 9. CONVERTIBLE PREFERRED STOCK
During the first quarter of 2003, the Company entered into two Convertible
Preferred Stock and Warrant Purchase Agreements whereby the Company sold an
aggregate of 338,022 shares of a newly created series of Preferred Stock, Series
A Convertible Preferred Stock, par value $.00067, for a total consideration of
$169,011. Each share of the Series A Preferred Stock is convertible into one
14
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 March 31, 2003
consolidated balance sheet. 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. Pursuant to the
two agreements executed in the first quarter 2003, the Company received an
additional $110,650 from the sale of 221,300 additional shares of Series A
Preferred Stock in April 2003.
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-Date 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 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, 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 income 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.
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.
15
Lease Commitment
The Company is obligated on a month-to-month office lease at its California
facility. This lease requires monthly rentals of $7,850. All other leases are of
short duration or are on a month-to-month arrangement. Rent expense for the
three months ended March 31, 2003 and the year ended December 31, 2002 was
approximately $23,550 and $192,500, 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
ISSUANCE OF S-8 SHARES: Between April 1 and June 2, 2003, the Company issued a
total of 5,820,000 shares of common stock pursuant to a registration statement
on Form S-8, to consultants for services performed, which included 600,000
shares issued to Mr. Harrison, a member of the board of directors, for his
services as a director. In addition to these shares, 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. In addition, the Board
recently agreed to issue Gary Cox 200,000 shares of common stock as
consideration for his agreeing to serve as a director of the Company.
NASDAQ DELISTING: 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. Promptly following the filing of this Form 10-QSB with the
SEC, the Company expects that its market makers will make application for
quotation of the Company's shares on the Over-the-Counter Bulletin Board,
although there can be no assurance that these applications will be accepted and
the Company will be cleared to trade on the Bulletin Board in light of the
public interest concerns raised by Nasdaq in connection with the delisting of
the Company's shares. This Nasdaq delisting will make it more difficult to
effect trades and is expected to lead to a significant decline in the frequency
of trades and trading volume. The delisting will likely adversely affect the
Company's ability to obtain financing in the future due to the decreased
liquidity of the Company's shares. The Company has not yet determined what
impact, if any, that the delisting will have on the proposals from private
investors referred to above.
RECENT FINANCING:
Pursuant to a Term Loan Agreement ("Loan Agreement") dated as of June 10, 2003
between the Company and Augustine II, LLC ("Augustine"), Augustine agreed to
loan the Company $420,000, payable in installments of $250,000, $100,000, and
$70,000 (the "Loan"). The Company received the first installment of $250,000 on
June 13, 2003. The second installment of $100,000 is scheduled to be paid to the
Company on July 1, 2003, with the balance payable to the Company on August 1,
2003.
16
Principal and interest (at an annual rate of 10%) are due in full on February
29, 2004, 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 will be used by the
Company for working capital, including the costs associated with registering
with the SEC, on behalf of Augustine, the resale of the shares of the Company's
common stock underlying the warrants described below (the "Augustine
Registration Statement").
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 $.16 per share. The Company can require that the warrants be
exercised if the Company's shares trade at or above $.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 Augustine Registration Statement has been 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.
As security for the Loan, New Millennium (an affiliate of Mr. Calvert) has
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.
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-Q, 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
17
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 equity 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. 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 several
former National Football League (NFL) players. NuWay Sports recently sold the
scaled down version of its PRLS to several NFL teams and is promoting its
service to other NFL teams, the NFLitself, the NFL Trainers Association, the NFL
Players Association and the NFL Player Safety Council. NuWay Sports also plans
to market its PRLS to teams, leagues, and 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 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 quarters ended March 31, 2003 and March
31, 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 first half of 2002.
ANALYSIS OF FINANCIAL CONDITION
The Company had approximately $6,700 of cash on hand at March 31, 2003, which is
insufficient to meet the Company's operating expenses. As of the date of this
filing, the Company had received a loan commitment of $420,000 (with actual
receipt of $250,000) as described in the "Recent Financing" section below. The
Company needs 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 report, the Company was not a party to any
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
18
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.
Promptly following the filing of this Form 10-QSB with the SEC, the Company
expects that its market makers will make application for quotation of the
Company's shares on the Over-the-Counter Bulletin Board, although there can be
no assurance that these applications will be accepted and the Company will be
cleared to trade on the Bulletin Board in light of the public interest concerns
raised by Nasdaq in connection with the delisting of the Company's sha. This
Nasdaq delisting will make it more difficult to effect trades and is expected to
lead to a significant decline in the frequency of trades and trading volume. The
delisting will likely adversely affect the Company's ability to obtain financing
in the future due to the decreased liquidity of the Company's shares. The
Company has not yet determined what impact, if any, that the delisting will have
on the proposals from private investors referred to above.
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 may be unable to accomplish the foregoing on a long term
basis, however, unless and until the 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 third quarter of 2003. The Company's PRLS was
introduced by the Company to the marketplace in January 2003 and generated a
total of approximately $35,000 in gross revenues during the first quarter of
2003 through the sale of a scaled down version of the product to 18 NFL teams at
the 2003 NFL Combine. Pursuant to this transaction, the Company digitized over
60,000 medical images for use by 18 NFL teams in their evaluation of potential
draft picks. Management believes that it 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 June 23, 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
2003.
19
During the latter half of 2002, the Company was focused on implementing its new
business, generated no revenues, and thus received no cash from operations and
had negative working capital. The Company's PRLS generated approximately $35,000
in gross revenues during the first 60 days of its introduction to the
marketplace in the first quarter of 2003, through the sale of a scaled down
version of the product to the 2003 NFL Combine. Consequently, current assets
increased from $521 at December 31, 2002 to $36,378 at March 31, 2003.
Other Assets declined from $4,345,000 at December 31, 2002 to $4,127,750 at
March 31, 2003. The decrease of $217,250 or 5 percent, related to amortization
of our intangible assets.
Current liabilities declined from $2,401,579 at December 31, 2002 to $1,868,672
at March 31, 2003. The decrease of $532,907 or 22 percent all related to a
reduction in accounts payable and accrued expenses. Such obligations were
satisfied by cash payments and the issuance of the Company's common stock.
Total stockholders' equity grew by 18 percent to $2,322,162 at March 31, 2003.
This increase was due to the sale of Series A Preferred Stock, which generated
net proceeds to the Company of $169,011, and the issuance of the Company's
common stock to compensate consultants and others, net of the effect of the
quarter ended March 31, 2003 net loss of $1,308,442.
STATUS OF $1,120,000 NOTE IN FAVOR OF NEW MILLENNIUM
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. 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 strike 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
20
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 90 days, from June 15, 2003 to
September 15, 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
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 Mr. Anderson.
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 he now believes that
conversion of the note is no longer required.
As a result of the elimination of the conversion feature of the note, the
shareholders of the Company will not be asked to approve the conversion terms as
was previously contemplated by the Company.
RECENT FINANCING
Pursuant to a Term Loan Agreement ("Loan Agreement") dated as of June 10, 2003
between the Company and Augustine II, LLC ("Augustine"), Augustine agreed to
loan the Company $420,000, payable in installments of $250,000, $100,000, and
$70,000 (the "Loan"). The Company received the first installment of $250,000 on
June 13, 2003. The second installment of $100,000 is scheduled to be paid to the
Company on July 1, 2003, with the balance payable to the Company on August 1,
2003. Principal and interest (at an annual rate of 10%) are due in full on
February 29, 2004, 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 will be
used by the Company for working capital, including the costs associated with
registering with the SEC, on behalf of Augustine, the resale of the shares of
the Company's common stock underlying the warrants described below (the
"Augustine Registration Statement").
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 $.16 per share. The Company can require that the warrants be
exercised if the Company's shares trade at or above $.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 Augustine Registration Statement has been 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
21
any portion of the warrants pursuant to the "cashless exercise" provisions of
the warrants.
As security for the Loan, New Millennium (an affiliate of Mr. Calvert) has
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 QUARTERS ENDED MARCH 31, 2003 AND 2002
Revenues
During the three months ended March 31, 2002, there were no revenues from
continuing operations compared to $35,000 of revenue in the three months ended
March 31, 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. During the last half of
2002, the Company changed its business to addressing the 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 March 31, 2003, SG&A increased by 76 percent to
$1,088,637 from $618,246 for the three months ended March 31, 2002. The largest
components of these expenses were:
a. Salaries and Payroll-Related Expenses: These expenses were $54,000 for
the three months ended March 31, 2003 versus $75,000 in the first
quarter of 2002, a decrease of $21,000. This decrease reflects the
Company's reduced headcount and its reliance on agreements with
outside consultants to serve as additional staff in a variety of
areas.
b. Consulting Expense increased significantly for the three months ended
March 31, 2003, to $548,000 from $300,000 for the three months ended
March 31, 2002, an increase of 83 percent. This increase is 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 staff 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 increased from $50,000 for the three months ended March
31, 2002 to $259,000 for the three months ended March 31, 2003, an
increase of 418 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, and (iii) numerous stock issuances.
During the three months ended March 31, 2003, the Company issued an aggregate of
11,360,919 shares of its common stock. Of these shares, 2,633,590 shares were
issued as consideration for $645,648 of obligations previously incurred and
8,727,329 shares were issued as consideration for $843,159 of services provided
to the Company during the quarter.
22
Discontinued Operations
As discussed above and in the notes to our consolidated financial statements,
the Company disposed of several operations through the sale of two foreign
subsidiaries, Latin American Casinos and NuWay Resources effective October 1,
2002, and the cessation of the operations of our World's Best Rated Cigar
Company subsidiary in November 2002. Due to the discontinuance of these
operations, the Company has reclassified the historical operating results from
these ventures for the three months ended March 31, 2002 and disclosed such
results below the results from continuing operations in our consolidated
statements of operations. These businesses generated losses from operations of
$33,020 for the three months ended March 31, 2002.
Net Loss
Net loss for the three months ended March 31, 2003 was $1,308,442 or $.06 per
share compared to a Net income $1,011,963 or $.19 per share for the three months
ended March 31, 2002. Besides the significant growth in total costs and
expenses, the net loss per share was affected by the larger number of weighted
average common share equivalents outstanding at March 31, 2003 vs. 2002
(21,013,109 at March 2003 vs. 5,407,502 at March 2002).
ITEM 3. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures.
Within the 90 days prior to March 31, 2003, the Company carried out an
evaluation of the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Rule 13a-14 under the Securities and
Exchange Act of 1934 ("Exchange Act"). This evaluation was done under the
supervision and with the participation of the Company's president and CEO. Based
upon that evaluation, it was concluded that the Company's disclosure controls
and procedures are effective in gathering, analyzing and disclosing information
needed to satisfy the Company's disclosure obligations under the Exchange Act.
b) Changes in internal controls.
There were no significant changes in the Company's internal controls or in its
factors that could significantly affect those controls since the most recent
evaluation of such controls.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Sale of Preferred Stock and Warrants: On March 7, 2003, the Company entered into
two Convertible Preferred Stock and Warrant Purchase Agreements whereby the
Company sold an aggregate of 338,022 shares of a newly created series of
Preferred Stock, Series A Convertible Preferred Stock, par value $.00067, to
accredited private investors, for a total consideration of $169,011. Each share
of the Preferred Series A stock is convertible into one share of NuWay common
stock. In addition, each share of preferred sold entitles the purchaser to a
warrant to
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purchase one share of common stock at a price of $.20 per share. The Preferred
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. The Company received an additional $110,650 from the sale of an
additional 221,300 shares of Series A Preferred Stock in April 2003 from the
same investors pursuant to the same purchase agreements.
The above offerings were exempt from registration pursuant to Rule 506 of
Regulation D by the fact that:
a). The sales were made to sophisticated or accredited investors, as defined in
Rule 502;
b). The Company gave each purchaser the opportunity to ask questions and receive
answers concerning the terms and conditions of the offering and to obtain any
additional information which the Company possessed or could acquire without
unreasonable effort or expense that was necessary to verify the accuracy of
information furnished;
c). At a reasonable time prior to the sale of securities, the Company advised
the purchasers of the limitations on resale in the manner contained in paragraph
Rule 502(d)2 of Regulation D;
d). Neither the Company nor any person acting on its behalf sold the securities
by any form of general solicitation or general advertising; and
e). The Company exercised reasonable care to assure that the purchasers of the
securities were not underwriters within the meaning of Section 2(11) of the Act
in compliance with Rule 502(d).
ISSUANCE OF S-8 SHARES: Between April 1 and June 2, 2003, the Company issued a
total of 5,820,000 shares of common stock pursuant to a registration statement
on Form S-8, to consultants for services performed, which included 600,000
shares issued to Mr. Harrison, a member of the board of directors, for his
services as a director. In addition to these shares, 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
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
24
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 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 holders prior to the end of 2002. Pursuant to
the request, and to complete the conversion, the Company issued to the holders
96,006 shares of common stock. The actual certificates representing the shares,
however, were not delivered to the holders until the first quarter of 2003.
These holders 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. These holders have now demanded full payment on their $150,000 of
debentures (plus accrued interest). Although the Company's financial statements
reflect the $150,000 of debentures as still being outstanding, the Company
disputes the individuals' claim that the conversion was invalid and intends to
vigorously defend against any action that might be brought by the debenture
holders to collect thereon.
ITEM 5. OTHER INFORMATION
The Company was recently informed that a former significant shareholder,
consultant, and creditor of the Company is the target of a criminal
investigation (the "Investigation") pertaining to the sale of securities by Med
Wireless, Inc. (from which the Company licensed certain assets in 2002), and had
been convicted of multiple felonies unrelated to Med Wireless in the 1990's.
This individual, Mr. Mark Anderson, was the founder, promoter and president of
Med Wireless, and first introduced the concept of licensing the Med Wireless
software application and contracts to the Company in May 2002. In June 2002,
Dennis Calvert agreed to become president of Med Wireless and as consideration
for his agreeing to so act received the right to receive shares of Med Wireless
(which shares were subsequently converted into 600,000 shares of the Company's
common stock pursuant to the terms of the license to the Company of the Med
Wireless technology). On June 28, 2002, Mr. Calvert was appointed president of
the Company. Joseph Provenzano, an employee of Camden Holdings (an
Anderson-controlled entity), joined the Company's board of directors at that
time. In addition to the Med Wireless transaction, and as disclosed in the
Company's Form 10-KSB filed on May 23, 2003, entities that Mr. Anderson controls
(including Camden Holdings, Genesis Health Tech, Summit Oil & Gas, and Casino
Venture Partners) invested $250,000 in the Company, sold the Company additional
assets, and purchased the Company's two failing operating divisions. Although he
never served as an officer or director of the Company, Mr. Anderson served as a
consultant and received a total of 1,241,884 shares of the Company's common
stock in the form of consulting fees. As previously disclosed by the Company,
Mr. Anderson is no longer a consultant, or, to the Company's knowledge, a
shareholder of the Company; he is in no way involved in the Company's
operations, and currently exerts no influence over any of the Company's affairs.
In the future, however, it is possible that Mr. Anderson could reacquire the
shares of the Company's common stock sold to New Millennium Capital Partners LLC
(an entity controlled and owned in part by Dennis Calvert), should New
Millennium default on the note held by Mr. Anderson (through his controlled
entities). For a description of the terms of this note, please see the
discussion in Part I, Item 2, under the heading "Status of $1,120,000 Note in
favor of New Millennium" above.
The Company was recently served by a subpoena issued by the grand jury impaneled
to investigate Mr. Anderson, requesting documents relating to Mr. Anderson and
his affiliated companies (including Med Wireless, Camden Holdings, Summit Oil
and Gas, and Summit
25
Health Care). Additionally, the subpoena requested information relating to the
identity of the Company's officers, directors, shareholders and consultants
(legal, accounting and otherwise), and that the Company provide copies of its
filings and correspondence with the SEC, the NASD and Nasdaq. The Company
intends to fully cooperate with the investigation and has provided the requested
documentation.
The Company was also informed by the Assistant United States Attorney handling
the Investigation that although Dennis Calvert (a significant shareholder and
Chairman of the Board and CEO of the Company) and Joseph Provenzano (a director
and officer of the Company) are not currently considered "targets" of the
Investigation, that, until their respective roles, if any, in the specific
events being investigated are determined, they will be considered to be
"subjects" of the Investigation, meaning that their conduct is believed by the
U.S. attorney's office to be "within the scope" of the grand jury's
investigation. The Company has learned that private placement memorandums
distributed to Med Wireless investors indicated that Dennis Calvert was the
president of Med Wireless as early as 2001. Mr. Calvert has informed the Company
that he was not engaged to act as the president of Med Wireless until June 2002
(primarily for the purpose of completing the Med Wireless transaction with the
Company) and not any earlier, and that any representation to the contrary is
untrue. Mr. Provenzano joined Camden Holdings in 2001 to assist in its mergers
and acquisitions department, working there until March 2003. Both Mr. Calvert
and Mr. Provenzano have informed the Company and, through legal counsel, the
Assistant U.S. Attorney, that they intend to fully cooperate with law
enforcement officials in the Investigation.
Although neither the Company nor any of its officers or directors are currently
the target of any criminal investigation, there can be no assurance that such an
investigation will not be undertaken. The fact of such an investigation, or the
results thereof, could have a material adverse effect on the Company. The
Company intends to continue to fully cooperate with all law enforcement agencies
as they move forward in the Investigation.
On June 3, 2003, the Company was served with a request for documentation by the
civil enforcement division of the SEC in connection with a non-public inquiry
into possible violations by the Company of the federal securities laws. Although
the request provides that the inquiry should not be construed as an indication
by the SEC that the law has been violated, there can be no assurance that the
Company will not, as a result of the inquiry, become the target of a formal SEC
investigation. The Company cannot predict the amount of time and resources that
management will need to devote to the inquiry, or the results thereof. In the
event the inquiry results in a formal investigation, such expenditures of time
and resources will likely be material. In addition, there can be no assurance
that stockholders or regulatory authorities will not initiate proceedings
against the Company and/or its officers and directors as a result of past
securities law violations, if any, which could have a material adverse effect on
the Company. The Company intends to fully cooperate with the SEC in all aspects
of its inquiry.
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
EXHIBIT. DESCRIPTION OF EXHIBIT
-------- ----------------------
4.1 Form of Convertible Preferred Stock and Warrant Purchase
Agreement
10.1 Term Loan Agreement dated as of June 10, 2003 between NuWay
Medical, Inc. and Augustine II, LLC
10.2 Warrant No. AG-1 to purchase up to 6,158,381 shares of NuWay
Medical, Inc. common stock held by Augustine II, LLC
10.3 Stock Pledge Agreement dated as of June 10, 2003, between New
Millennium and Augustine II, LLC
10.4 Stock Pledge Agreement dated as of June 10, 2003, between NuWay
Medical and Augustine II, LLC
10.5 Promissory Note by NuWay Medical, Inc. in favor of Augustine II,
LLC
20.1 Definitive Information Statement on Form 14c filed February 5,
2003 regarding the shareholder meeting
99.1 Certification pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the three months ended March 31,
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: June 23, 2003 NUWAY MEDICAL, INC.
By: /s/ Dennis Calvert, President,
----------------------------------
Chief Executive Officer, and
Interim Chief Financial Officer
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CERTIFICATIONS
I, Dennis Calvert, certify that:
1 I have reviewed this quarterly report on Form 10-QSB of NuWay Medical, Inc.;
2 Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report.
3 Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4 The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date");
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5 The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6 The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 23, 2003
/s/
-------------------------
Dennis Calvert, President,
Chief Executive Officer
Interim Chief Financial Officer
28