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 June 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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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 incorporation or (IRS Employer Identification No.)
organization)
23461 SOUTH POINTE DRIVE, SUITE 200 LAGUNA HILLS, CALIFORNIA 92653
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(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 August 12, 2003: 33,403,646 shares of common stock, $0.00067 par value per
share.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements 3
Consolidated Balance Sheets - as of June 30, 2003 (unaudited)
and December 31, 2002 3
Consolidated Statements of Operations - for the Three and Six
Months Ended June 30, 2003 and June 30, 2002 (unaudited) 4
Consolidated Statements of Cash Flows - for the Six Months Ended
June 30, 2003 and June 30, 2002 (unaudited) 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 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 24
Certifications 25
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NUWAY MEDICAL, INC. AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF JUNE 30, 2003 AND DECEMBER 31, 2002
-----------------------------------------
ASSETS
------
June 30, 2003 December 31, 2002
(unaudited)
-------------- -----------------
CURRENT ASSETS
Cash and Cash Equivalents $ 162,663 $ 521
Accounts Receivable 10,000 -
-------------- -----------------
Total Current Assets 172,663 521
-------------- -----------------
PROPERTY AND EQUIPMENT, net 24,568 28,844
-------------- -----------------
OTHER ASSETS
Marketing Database, net 229,500 255,000
Med Wireless License, net 3,681,000 4,090,000
-------------- -----------------
Total Other Assets 3,910,500 4,345,000
-------------- -----------------
TOTAL ASSETS $ 4,107,731 $ 4,374,365
============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 922,129 $ 1,131,579
Notes Payable, net 1,279,656 1,120,000
Debentures Payable, net 150,000 150,000
-------------- -----------------
Total Current Liabilities 2,351,785 2,401,579
-------------- -----------------
COMMITMENTS AND CONTINGENCIES AND
SUBSEQUENT EVENTS (Notes 8, 9, 10 and 11)
STOCKHOLDERS' EQUITY
Preferred Stock, $.00067 Par Value, 25,000,000
Shares Authorized, 559,322 and No Shares Issued
and Outstanding at June 30, 2003 and
December 31, 2002, respectively 375 -
Common Stock, $.00067 Par Value, 100,000,000
Shares Authorized, 30,828,646 and 17,137,727 Shares
Issued and Outstanding at June 30, 2003 and
December 31, 2002, respectively 20,654 11,483
Additional Paid-In Capital 22,490,249 20,289,936
Accumulated Deficit (20,628,328) (18,201,629)
Treasury Stock at cost, 44,900 shares as of
June 30, 2003 and December 31, 2002 (127,004) (127,004)
-------------- -----------------
Total Stockholders' Equity 1,755,946 1,972,786
-------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,107,731 $ 4,374,365
============== =================
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NUWAY MEDICAL, INC. AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 and 2002
---------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -------------------------
2003 2002 2003 2002
-------------- ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Sales
License of Software $ 5,500 $ - $ 40,165 $ -
-------------- ------------ ------------ ------------
Total Sales 5,500 - 40,165 -
-------------- ------------ ------------ ------------
Costs and Expenses
Selling, General and Administration 824,407 469,462 1,953,133 1,087,888
Depreciation and Amortization 219,388 2,600 438,776 5,200
Cancellation of Stock Warrants Previously Expensed - - - (1,659,750)
-------------- ------------ ------------ ------------
Total Costs and Expenses 1,043,795 472,062 2,391,909 (566,662)
-------------- ------------ ------------ ------------
Operating (Loss) Income (1,038,295) (472,062) (2,351,744) 566,662
-------------- ------------ ------------ ------------
Other (Expenses) Income
Interest (Expense) Income (81,304) 550 (74,955) 6,629
-------------- ------------ ------------ ------------
Net Other (Expenses) Income (81,304) 550 (74,955) 6,629
-------------- ------------ ------------ ------------
(Loss) Income Before Income Taxes (1,119,599) (471,512) (2,426,699) 573,291
Income Taxes (Provision) Benefit - - - -
-------------- ------------ ------------ ------------
Net (Loss) Income from Continuing Operations (1,119,599) (471,512) (2,426,699) 573,291
-------------- ------------ ------------ ------------
Discontinued Operations (Note 2) - (261,173) - (228,153)
-------------- ------------ ------------ ------------
Net (Loss) Income $(1,119,599) $ (732,685) $(2,426,699) $ 345,138
============== ============ ============ ============
(Loss) Earnings Per Common Share and Common Share
Equivalents Basic and Fully Diluted
Common Share Equivalents Outstanding 30,775,820 6,904,644 25,982,882 6,156,073
============== ============ ============ ============
Net (Loss) Income Per Share $ (0.04) $ (0.11) $ (0.09) $ 0.06
============== ============ ============ ============
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NUWAY MEDICAL, INC. AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
-----------------------------------------------
(UNAUDITED)
Six Months Ended June 30,
2003 2002
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) Income $ (2,426,699) $ 345,138
Adjustments to Reconcile Net (Loss) Income to Cash Used in Operating
Activities:
Depreciationand Amortization 438,776 5,200
Amortization of Discount on Note 8,348 -
Issuance of Stock for Services and Interest 1,731,506 432,094
Cash Used in Discontinued Operations - 536,907
Cancellation of Warrants Previously Recorded as Expense - (1,659,750)
Increase in Accounts Receivable (10,000) -
Increase in Prepaid Expenses and Other Current Assets - 5,400
Decrease in Accounts Payable and Accrued Expenses (209,450) (14,334)
Net Cash Used in Operating Activities ---------------- --------------
(467,519) (349,345)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Used in Discontinued Operations - (161,251)
Increase in Other Assets - (18,400)
Net Cash Used in Operating Activities ---------------- --------------
Net Cash Used in Investing Activities - (179,651)
Net Cash Used in Operating Activities ---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Convertible Debentures - (50,000)
Reduction of Loan from Officers & Affiliates - 344,377
Proceeds from the Sale of Preferred Stock 279,661 -
Proceeds from Term Loan 350,000 -
Net Cash Used in Operating Activities ---------------- --------------
Net Cash Provided by Financing Activities 629,661 294,377
Net Cash Used in Operating Activities ---------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 162,142 (234,619)
CASH AND CASH EQUIVALENTS - BEGINNING 521 244,344
-----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - ENDING $ 162,663 $ 9,725
Net Cash Used in Operating Activities ================ ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
Interest $ - $ -
Income Taxes $ - $ -
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING TRANSACTIONS
Conversion of Debentures $ - $ 2,200,000
Effective Discount on Note Payable $ 198,692 $ -
-5-
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
a) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
In the opinion of the management of NuWay Medical, Inc., (the
"Company") the accompanying unaudited consolidated financial
statements contain all adjustments (which are normal recurring
accruals) necessary to present fairly the consolidated financial
position as of June 30, 2003 and 2002; the consolidated results of
operations for the three and six months ended June 30, 2003 and 2002;
and the consolidated cash flows for the six months ended June 30, 2003
and 2002. Interim results for the three and six months ended June 30,
2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. The interim
consolidated financial statements should be read in conjunction with
the Company's consolidated financial statements for the year ended
December 31, 2002 included in the Company's Form 10-KSB, filed May 23,
2003.
The consolidated balance sheets at June 30, 2003 and December 31, 2002
include the accounts of NuWay Medical, Inc. and its joint venture
subsidiary, NuWay Sports, LLC ("NuWay Sports") (collectively referred
to as the "Company"). NuWay Medical, Inc. owns 51% of NuWay Sports and
the remaining 49% is owned by Rasheed & Associates. 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, Inc. All significant
inter-company balances have been eliminated in consolidation.
b) MANAGEMENT'S PLANS
The Company had approximately $25,000 of cash on hand at July 31,
2003. In June 2003, the Company received the first and second
installment ($250,000 and $100,000) of a total loan commitment of
$420,000 as described in Note 7 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. Although market makers have indicated to
management that they are in the process of submitting an application
for quotation of the Company's shares on the Over-the-Counter Bulletin
Board, there can be no assurance that any of these applications will
in fact be filed, such
-6-
applications (or any other applications that may in the future be
filed) will be accepted, or the Company will be cleared to trade on
the Bulletin Board, in particular in light of the public interest
concerns raised by Nasdaq in connection with the delisting of the
Company's shares. This Nasdaq delisting has made it more difficult to
effect trades and has led to a significant decline in the frequency of
trades and trading volume. The delisting could also adversely affect
the Company's ability to obtain financing due to the decreased
liquidity of the Company's shares.
Although the primary development of the Player Record Library System
("PRLS") has been completed, management plans on periodically
upgrading its PRLS software application through additional research
and development, including tailoring its application to the specific
needs of its clients as those needs are brought to the Company's
attention. The Company will be unable to accomplish the foregoing on a
long-term basis, however, unless and until the additional financing
referred to above is secured.
Based on its current business plan, and assuming sufficient financing
is obtained, management believes it will be able to generate
meaningful sales of its PRLS software application and that it may be
able to secure sales or license agreements as early as the 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
$40,000 in revenues during the first and second quarters of 2003
through the sale of a scaled-down version of the product to 18
National Football League ("NFL") teams at the 2003 NFL Combine.
Pursuant to these transactions, the Company digitized over 60,000
medical images for use by NFL teams in their evaluation of potential
draft picks. Management believes that its PRLS is already being
referred by its customers and prospects as the best of brand for its
sports industry focus. The Company is marketing the PRLS to multiple
sports leagues and is actively seeking additional vertical market
opportunities. There can be no assurance, however, that the Company
will be able to secure any further agreements for its product, that
such agreements will ever generate meaningful revenue for the Company,
or that the Company will be able to successfully capture any such
vertical market opportunities.
Ultimately, the Company's ability to continue as a going concern is
dependent upon its ability to establish and grow a revenue stream,
attain a reasonable threshold of operating efficiencies, achieve
profitable operations and attract new sources of capital. The
consolidated financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
c) PROPERTY AND EQUIPMENT
Property and Equipment are stated at cost. Depreciation is provided on
a straight-line basis over the estimated useful life of the respective
asset. Maintenance and repairs are charged to expense as incurred;
major renewals and betterments are capitalized. When items of property
or equipment are sold or retired the related cost and accumulated
depreciation are removed from the accounts and any gain or loss is
included in the results of operations.
d) IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically reviews its long-lived assets for potential
impairment as required by Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", which
-7-
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 maintenance revenue has been received
by the Company.
f) EARNINGS (LOSS) PER SHARE
The Company reports basic and diluted earnings per share ("EPS") for
common and common share equivalents. Basic EPS is computed by dividing
reported earnings by the weighted average shares outstanding. Diluted
EPS is computed by dividing reported earnings by the weighted average
shares outstanding adjusted for all potentially dilutive shares, which
include shares issuable upon the exercise of outstanding stock
options, warrants and convertible preferred stock using the
"if-converted" method. For the three and six months ended June 30,
2003 and 2002, the denominator in the diluted EPS computation was the
same as the denominator for basic EPS computation due to the
antidilutive effect of the warrants and stock options on the Company's
net loss.
-8-
For the three and six months ended June 30, 2003 and June 30, 2002,
the computation of basic and diluted EPS was as follows:
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
-------------- ------------- -------------- ---------------
BASIC AND DILUTED EPS:
Numerator - Net (Loss) Income from
Continuing Operations $ (1,119,599) $ (471,512) $ (2,426,699) $ 573,291
Denominator - Weighted Average
Shares Outstanding 30,775,820 6,904,644 25,982,882 6,156,073
-------------- ------------- -------------- ---------------
(Loss) Income per Share $ (0.04) $ (0.07) $ (0.09) $ 0.09 09)
-------------- ------------- -------------- ---------------
Numerator - Net (Loss) Income from
Discontinued Operations $ - $ (261,173) $ - $ (228,153)
Denominator - Weighted Average
Shares Outstanding - 6,904,644 - 6,156,073
-------------- ------------- -------------- ---------------
(Loss) Income per Share $ - $ (0.04) $ - $ (0.04)
-------------- ------------- -------------- ---------------
Numerator - Net (Loss) Income $ (1,119,599) $ (732,685) $ (2,426,699) $ 345,138
Denominator - Weighted Average
Shares Outstanding 30,775,820 6,904,644 25,982,882 6,156,073
-------------- ------------- -------------- ---------------
(Loss) Income per Share $ (0.04) $ (0.11) $ (0.09) $ 0.06
-------------- ------------- -------------- ---------------
g) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and revenues
and expenses during the periods reported. Actual results could differ
from those estimates. Estimates are used when accounting for
stock-based transactions, uncollectable accounts receivable, asset
impairment, depreciation and amortization, and taxes, among others.
h) STOCK OPTIONS AND WARRANTS ISSUED FOR SERVICES
As permitted under the Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," the
Company accounts for its stock-based compensation to employees in
accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. The Company provides the pro forma net
earnings, pro forma earnings per share, and stock-based compensation
plan disclosure requirements set forth in SFAS No. 123.
-9-
Had compensation cost for options issued under the 1994 Stock Option
Plan, as described more fully in Note 6, been determined based upon
fair value at the grant date for options granted, consistent with the
provision of SFAS 123, the Company's net (loss) income and net (loss)
income per share would have been reduced to the pro forma amounts
indicated below:
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
--------------- -------------- ------------- -------------
Net (Loss) Income - as reported $ (1,119,599) $ (732,685) $ (2,426,699) $ 345,138
Deduct: stock based employee
compensation expenses determined
under fair value based method - - - -
--------------- -------------- ------------- -------------
Net (Loss) Income - pro forma $ (1,119,599) $ (732,685) $ (2,426,699) $ 345,138
=============== ============== ============= =============
Net (Loss) Income per share - as reported
Basic $ (0.04) $ (0.11) $ (0.09) $ 0.06
=============== ============== ============= =============
Diluted $ (0.04) $ (0.11) $ (0.09) $ 0.06
=============== ============== ============= =============
Net (Loss) Income per share - pro forma
Basic $ (0.04) $ (0.11) $ (0.09) $ 0.06
=============== ============== ============= =============
Diluted $ (0.04) $ (0.11) $ (0.09) $ 0.06
=============== ============== ============= =============
For stock issued to consultants and other non-employees for services,
the Company records the expense based on the fair market value of the
securities as of the date of stock issuance or agreement for such
services.
i) RECLASSIFICATIONS
Certain amounts in the accompanying 2002 consolidated financial
statements have been reclassified to conform to 2003 presentation,
primarily those items having to do with discontinued operations. (See
Note 2)
NOTE 2. DISCONTINUED OPERATIONS
Effective October 1, 2002, the Company sold its oil and gas operations, namely
the stock of NuWay Resources Ltd., to Summit Oil and Gas, Inc. The purchase
price for the stock was $100,000 less all outstanding liabilities of NuWay
Resources, Ltd. As the offsetting liabilities exceeded the purchase price, the
Company received no funds. The Company recorded a loss from these operations
through September 30, 2002 of $68,650 and a loss of $1,290,948 on disposal.
Effective October 1, 2002, the Company sold the stock of its wholly owned casino
rental subsidiaries (Latin American Casinos del Peru S.A., and Latin American
Casinos of Colombia, LTDA) to Casino Venture Partners, a Nevada partnership. The
purchase price for the stock was $300,000 less all outstanding liabilities of
the two subsidiaries. As the offsetting liabilities exceeded the purchase price,
the Company received no funds. The Company recorded a loss from these operations
through September 30, 2002 of $147,247 and a loss of $1,376,733 on disposal.
The Company discontinued the operations of World's Best Rated Cigar Company on
October 1, 2002 by donating any remaining inventory and terminating all
outstanding warehouse lease
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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 Six Months Ended
June 30, 2002 June 30, 2002
--------------------- --------------------
Revenues $ 183,555 $ 443,810
Operating Expenses 444,728 671,963
--------------------- --------------------
Loss from Discontinued Operations $ (261,173) $ (228,153)
===================== ====================
NOTE 3. PROPERTY AND EQUIPMENT
Property and Equipment are summarized as follows:
June 30, 2003 December 31, 2002
------------------ --------------------
Furniture, Fixtures & Office Equipment $ 42,753 $ 42,753
Less: Accumulated Depreciation 18,184 13,909
------------------ --------------------
Property and Equipment, net $ 24,568 $ 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 June 30, 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 PRLS product as well as potential future
products. No amortization was recorded for these intangible assets in 2002 as
the Company did not begin to utilize the database nor generate sales of products
derived from this technology until 2003. In January 2003, the Company began to
amortize both assets on a straight-line basis over estimated five year useful
lives and a total of $217,250 and $434,500 in amortization expense was recorded
for the three and six month periods, respectively.
In Note 5 to the Company's audited financial statements for the year ended
December 31, 2002 appearing in the Company's Form 10-KSB filed May 23, 2003, the
Company disclosed the fact that the value of the database was discounted and the
discount in the Med Wireless license was increased after discussions with
"valuation experts" and the Company's accountants. To clarify this disclosure,
it is noted that the discussions with the valuation experts were conducted by
the Company's accountants in the course of their audit, and not by the Company,
and that these experts did not evaluate or otherwise pass upon the value of the
Company's assets (nor has the Company at any time had such an evaluation from a
third party expert).
-11-
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.
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.
During the second quarter of 2003, the Company issued a total of 2,330,000
shares of its common stock for services performed during the three-month period
ended June 30, 2003. Expenses aggregating $242,700 relating to the balance of
shares issued in the second quarter were recorded as consulting expense in the
three months ended June 30, 2003.
At June 30, 2003 there were 2,575,000 shares scheduled to be issued in July 2003
for services performed during the three months ended June 30, 2003. Expenses
aggregating $231,750 equal to the market value of the stock at the date of
issuance was accrued at June 30, 2003. Of this accrued amount, approximately
$115,750 represents consulting expense and the balance, $116,000 represents
legal expenses.
The Company had the following outstanding convertible securities at June 30,
2003: (a) stock options issued under the 1994 Stock Option Plan to purchase up
to 65,000 shares of the Company's common stock (see Note 6); (b) five-year
warrants to acquire up to 300,000 shares of common stock at an exercise price of
$1.75 per share; (c) a warrant to purchase up to 100,000 shares of common stock
at an exercise price of $0.30 per share exercisable through February 23, 2004,
issued in 2002 to a former executive of the Company; and (d) warrants to
purchase up to 559,322 shares of common stock at an exercise price of $.20 per
share, exercisable for a period of three years, issued in conjunction with the
Company's sale of 559,322 shares of Convertible Preferred Stock during the first
quarter of 2003, and which are not convertible until six months from the date of
issuance (Note 9).
At June 30, 2003, the Company also had outstanding 1,725,000 publicly traded
warrants (NMEDW) to purchase the Company's common stock at an exercise price of
$3.00 per share. The expiration date of these warrants was extended by the
Company to December 11, 2003.
See Note 7 for discussion of warrants issued in conjunction with debt entered
into in June 2003.
-12-
NOTE 6. INCENTIVE STOCK OPTION PLAN
On June 13, 1994, the Company adopted the 1994 Stock Option Plan providing for
the issuance of options to purchase up to 1,000,000 shares of the Company's
common stock. The term of each option may not exceed ten years from the date of
grant (five years for options granted to employees owning more than 10 percent
of the outstanding shares of the voting stock of the Company). The 1994 Plan
will terminate in June 2004, unless terminated earlier by action of the board of
directors. In June 1999, the Company increased the shares allocated under the
plan to 1,500,000.
At June 30, 2003 and December 31, 2002, the Company had options outstanding and
exercisable as follows:
Number of Price Per
Shares Share
----------- -----------------
Options Outstanding at December 31, 2002 65,000 $1.00 - $1.75
Options Issued -
Options Expired -
Options Exercised -
----------- -----------------
Options Outstanding at June 30, 2003 65,000 $1.00 - $1.75
===========
All outstanding stock options were fully exercisable at June 30, 2003.
NOTE 7. NOTES PAYABLE
In conjunction with the acquisition of the technology license from Med Wireless,
Inc. on August 21, 2002, the Company assumed a $1,120,000 note with interest at
10% per annum payable by Med Wireless to Summitt Ventures, Inc., a company
controlled by Mark Anderson. The note is secured by the Company's assets and was
originally due on June 15, 2003. On March 26, 2003, Summitt Ventures sold the
note, together with 4,182,107 shares of the Company's common stock, to New
Millennium Capital Partners LLC ("New Millennium"), a limited liability company
controlled and owned in part by the Company's CEO and president, Dennis Calvert,
in exchange for a $900,000 promissory note issued by New Millennium in favor of
Summitt Ventures. This note is secured by all of the stock of the Company owned
by New Millennium and Mr. Calvert. On March 26, 2003, the Company's board of
directors voted to convert the $1,120,000 note held by New Millennium into
22,400,000 shares of restricted common stock of the Company (at a conversion
price discounted 37.5% to the then market price of $0.08). New Millennium agreed
to this conversion. Subsequent to the vote by the board to convert the note, the
Company received notification from Nasdaq's Listing Qualifications Department
that converting the note without shareholder approval violated certain Nasdaq
Marketplace Rules. In response to this notification, the board, with the
concurrence of New Millennium, voted to amend its resolution and withhold
issuance of the shares to New Millennium until the Company's shareholders
approved the conversion. This shareholder vote has not taken place as of the
filing of this report, and the shares have not been issued to New Millennium.
The business purpose of the original decision to convert the note into equity
was to retire $1,120,000 in debt owed by the Company thereby increasing
shareholder equity by that amount and avoiding a default on the note and the
insolvency and possible liquidation of the Company. In arriving at a conversion
price, the board of directors determined that a 37.5% discount to market price
was appropriate based on a number of factors, including that (i) with the
quantity of the shares that would be issued, a block of shares that size could
not be liquidated without affecting the market price of the
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shares, and (ii) the shares would be "restricted shares" and could therefore not
be sold by New Millennium (an affiliate of the Company) in the public markets
prior to two years from the date of the conversion, and thereafter would be
subject to the volume and manner of sale limitations of Rule 144 under the
Securities Act of 1933.
To allow time for a shareholder vote with respect to the conversion, New
Millennium agreed to extend the terms of the note, from June 15, 2003 to October
1, 2003.
At the Company's June 6, 2003 board meeting, Mr. Calvert, on behalf of New
Millennium, and the Company, through the unanimous action of the Board (with Mr.
Calvert abstaining), agreed that, in light of current market conditions (namely
the significant increase in the trading price of the Company's common stock
since March 26, 2003, the date on which the conversion of the note to equity was
originally approved by the Board, from $0.08 to $0.28 as of June 6, 2003), it
would be inequitable for New Millennium to convert the note at the originally
agreed to $0.05 per share price. In this regard, Mr. Calvert, on behalf of New
Millennium, and the Company orally agreed to rescind the agreement to convert
the note. In addition, New Millennium orally agreed with the Company to extend
the maturity date of the note to a first payment due October 1, 2003 in the
amount of $100,000 and the balance of the principal due on April 1, 2004, with
interest due according to the original terms of the note (to correspond to the
payment terms of the note made by New Millennium in favor of Summitt), and
furthermore to reduce the Company's obligation on the note to the extent that
New Millennium is able to reduce its obligation on its note with Summitt
Ventures. While the prior holder of the note, Summitt Ventures, purported to
condition New Millennium's purchase on the conversion of the note, Mr. Calvert
has represented to the Company that due to Mr. Anderson's actions (as previously
described by the Company in its Form 10-QSB for the quarter ended March 31,
2003), Mr. Calvert now believes that conversion of the note is no longer
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.
On June 10, 2003 the Company entered into a Term Loan Agreement ("Loan
Agreement") with Augustine II, LLC ("Augustine"), pursuant to which Augustine
agreed to loan the Company $420,000, payable in installments of $250,000,
$100,000, and $70,000 (the "Loan"). The Company received the first installment
of $250,000 on June 13, 2003. The second installment of $100,000 was paid to the
Company on June 30, 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. The Company recorded $1,347 of interest expense as of June
30, 2003. The Loan Agreement is subject to certain requirements that the Company
make mandatory prepayments of the Loan from the proceeds of any asset sales
outside of the ordinary course of business, and, on a quarterly basis, from
positive cash flow. In addition, all or any portion of the Loan may be prepaid
by the Company at any time without premium or penalty. The proceeds of the Loan
are being used by the Company for working capital.
As additional consideration for making the Loan, Augustine received five year
warrants to purchase up to 6,158,381 shares of the Company's common stock at an
exercise price of $0.16 per share. The Company can require that the warrants be
exercised if the Company's shares trade at or above $0.60 per share for each
trading day within the 30 calendar days prior to the maturity date of the Loan,
trading volume of the shares equals or exceeds 100,000 shares per day during
such period, and the shares of the Company's common stock underlying the
warrants have been included on a registration statement filed with and declared
effective by the SEC prior to the maturity date. If these conditions are not
fully satisfied by the maturity date, then Augustine may, at any time following
the maturity date and so long as the warrants remain exercisable, elect to
exercise all or any portion of the
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warrants pursuant to the "cashless exercise" provisions of the warrants. Using
the Black-Scholes pricing model, the Company allocated approximately $199,000 of
the Loan proceeds to the warrants and $151,000 to the note payable, which
allocations were made on a pro rata basis based on the fair value of the
warrants. The Black Scholes calculation assumed a discount rate of approximately
four percent, volatility of 257 percent and no dividends. Given that the
warrants were issued in conjunction with Loan Agreement, such fair value
represents an effective discount on the debt and will be amortized over the term
of the loan. Amortization of this discount for the quarter ended June 30, 2003
is approximately $8,000 and is recorded as effective interest expense in the
accompanying consolidated statement of operations.
As security for the Loan, New Millennium (an affiliate of Mr. Calvert) pledged
2.5 million shares of the Company's common stock owned by New Millennium, and
the Company has granted Augustine a security interest in its ownership interest
in the Company's subsidiary, NuWay Sports, LLC.
NOTE 8. CONVERTIBLE DEBENTURES
In December 2000, the Company, through a private placement, issued $3,500,000
principal amount of 6 percent Convertible Debentures to several investors. These
debentures were originally due June 13, 2001 and their maturity date was
subsequently extended to December 13, 2001. They are convertible into common
stock at a price of $1.75 per share. The interest on the debentures is payable
either in cash or shares of common stock, at the discretion of the Company.
During 2001, $1,100,000 of the debentures plus accrued interest were converted
into 666,283 shares of the Company's common stock. During 2002, $2,250,000 of
the remaining debentures plus accrued interest were converted into 1,332,570
shares of common stock. In December 2002 the Company received a notice from the
remaining two debenture holders (the "Remaining Debenture Holders") requesting
conversion of the remaining outstanding $150,000 of debentures. The notice
provided that, as a condition to conversion, the certificates representing the
shares issuable upon conversion of the debentures would need to be delivered to
the Remaining Debenture Holders prior to the end of 2002. Pursuant to the
request, and to complete the conversion, the Company issued to the Remaining
Debenture Holders 96,006 shares of common stock and promptly notified the
Remaining Debenture Holders' counsel and the Company's transfer agent of the
approval and ratification of the issuance. However, the actual certificates
representing the shares were not delivered to the Remaining Debenture Holders
until the first quarter of 2003. The Remaining Debenture Holders then refused
acceptance of the shares, claiming that because the actual certificates
representing the shares were not delivered in 2002 as specified in the
conversion notice, the conversion was invalid and the debentures would therefore
remaining outstanding and continue to accrue interest until repaid in full. The
Remaining Debenture Holders have since demanded full payment on their $150,000
of debentures (plus accrued interest). In June 2003, the Remaining Debenture
Holders filed suit in the Orange County Superior Court against the Company
claiming it breached the debenture agreement by failing to honor the terms of
the notice of conversion. Although the Company's financial statements reflect
the $150,000 of debentures as still being outstanding, the Company disputes the
Remaining Debenture Holders' claims that the conversions were invalid and
intends to vigorously defend against this action.
NOTE 9. CONVERTIBLE PREFERRED STOCK
During the six month period ended June 30, 2003, the Company entered into two
Convertible Preferred Stock and Warrant Purchase Agreements whereby the Company
sold an aggregate of 559,322 shares of a newly created series of Preferred
Stock, Series A Convertible Preferred Stock, par value $.00067, for a total
consideration of $279,661. Each share of the Series A Preferred Stock
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is convertible into one share of the Company's common stock. In addition, each
share of preferred sold entitles the purchaser to one warrant to purchase one
share of common stock at a price of $0.20 per share. Using the Black-Scholes
pricing model, the Company estimated the fair value of these warrants to be
approximately $35,000, and such amount has been netted in additional paid in
capital on the June 30, 2003 consolidated balance sheet. The Black Scholes
caculation assumed a discount rate of approximately five percent, volatility of
180 percent and no dividends. The Series A Preferred Stock may be converted by
the holder at any time after six months from the purchase date and the warrant
is exercisable for a period of three years from the purchase date.
NOTE 10. COMMITMENTS AND CONTINGENCIES
LITIGATION
During 2002, Ms. Geraldine Lyons, the Company's former Chief Financial Officer,
sued the Company for breach of her employment contract. The lawsuit is venued in
the Circuit Court of the 11th Judicial Circuit in Miami-Dade County in the State
of Florida and was initiated by the filing of a complaint in June 2002. The
principal parties in the case are Ms. Lyons, the Company, and the Company's
former president Todd Sanders. Ms. Lyons alleges that $25,000 is due to her
under her employment contract; that the contract requires the Company to
guarantee that she can sell for $300,000 the 100,000 shares of stock the Company
is required to issue her; and, that Mr. Sanders promised to purchase from her
for $4.00 per share 100,000 shares of stock held by her. The Company has
counter-sued Ms. Lyons for breach of fiduciary duty, fraud, violation of section
12(a)(2) of the 1933 Securities Act of 1933, violation of section 517.301 of the
Florida Statutes, negligent misrepresentation, conversion, and unjust enrichment
resulting from the restatement of the Company's financial statements for the
years ended December 31, 2000 and December 31, 1999 that the Company believes
was required as a result of her activities. The restatements corrected the
previous omission of certain material expenses related primarily to compensation
expense arising from warrants issued and repriced stock options, as well as
other errors. The case is ongoing at this time. The Company intends to
vigorously defend its actions and pursue its affirmative claims to the fullest
extent possible. Management does not expect that this case will have a material
adverse effect on the Company's financial position.
See Note 8 for a discussion of a claim relating to the conversion of the
Company's 6% Convertible Debentures.
EMPLOYMENT AGREEMENTS
In December 2002, the Company entered into a five-year employment agreement with
the Company's current President, Dennis Calvert. His agreement calls for a base
monthly salary of $14,000 plus performance bonuses and employee related
benefits. Mr. Calvert serves as President, Chief Executive Officer, Interim CFO
and Chairman of the Board.
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.
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LEASE COMMITMENT
The Company is obligated on a month-to-month office lease at its California
facility. This lease required monthly rentals of $7,850 through May 2003 and was
increased to $8,750 at June 2003. All other leases are of short duration or are
on a month-to-month arrangement. Rent expense for the six months ended June 30,
2003 and the year ended December 31, 2002 was approximately $48,250 and $96,500,
respectively.
STOCK-BASED COMMITMENTS
The Company currently utilizes the services of a number of consultants who are
compensated with shares of common stock. While each agreement can generally be
terminated with a 15 day notice, the Company may be obligated to issue
additional shares to the consultants.
NOTE 11. SUBSEQUENT EVENTS
ISSUANCE OF S-8 SHARES: Between July 1 and August 12, 2003, the Company issued a
total of 2,575,000 shares of common stock pursuant to a registration statement
on Form S-8 to consultants for services performed, which included 200,000 shares
issued to Mr. Cox, a member of the board of directors, for his services as a
director.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION AND FORWARD LOOKING STATEMENTS
The following discussion and analyses should be read in conjunction with our
consolidated financial statements and the related notes to the consolidated
financial statements included elsewhere in this report.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations, as well as other sections of this Form 10-QSB, contain
"forward looking statements" within the meaning of Rule 175 under the Securities
Act of 1933, as amended, and Rule 3b-6 under the Securities Act of 1934, as
amended, including statements regarding, among other items, the Company's
business strategies, continued growth in the Company's markets, projections, and
anticipated trends in the Company's business and the industry in which it
operates. The words "believe," "expect," "anticipate," "intends," "forecast,"
"project," and similar expressions identify forward-looking statements. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, certain of which are beyond
the Company's control. The Company cautions that these statements are further
qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements, including, among
others, the following: the Company's ability to raise additional financing or
generate revenue sufficient to sustain the Company's operations, demand for the
Company's products, competitive pricing pressures, changes in the market price
of technologies used in the Company's products, the level of expenses incurred
in the Company's operations, the scope, duration and results of the SEC's
inquiry into the Company, the possibility that such inquiry will result in a
formal investigation of the Company by the SEC, the possibility that the Company
or its officers and directors will become the subject of criminal proceedings,
the possibility that stockholders or regulatory authorities may initiate
proceedings against the Company and/or its officers and directors as a result of
any past securities law violations, the possibility that the
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Company's securities will not become eligible for quotation on the OTC Bulletin
Board, and the effect of the Company's recent Nasdaq delisting on the liquidity
of the Company's stock and its ability to raise capital. In light of these risks
and uncertainties, there can be no assurance that the forward-looking
information contained herein will in fact transpire or prove to be accurate. The
Company disclaims any intent or obligation to update "forward looking
statements."
OVERVIEW
NuWay Medical, Inc. (the "Company") recently began to offer medical and health
related technology products and services with an initial focus on the health and
information software technology needs of the sports industry. The Company's
primary product is its Player Record Library System ("PRLS"), a highly
specialized electronic medical record and workflow process software application
designed to address the information technology needs of the sports industry
relating to player health including the need for technology that facilitates
compliance with the Health Insurance Portability and Accountability Act
("HIPAA").
The Company markets its PRLS through its subsidiary NuWay Sports, LLC, a joint
venture formed in December 2002 and owned 51% by the Company and 49% by Rasheed
& Associates. NuWay Sports recently sold the scaled down version of its PRLS to
several NFL teams and is promoting its service to other NFL teams, the NFL
itself, the NFL Trainers Association, the NFL Players Association and the NFL
Player Safety Council. NuWay Sports also 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 that its PRLS would
benefit not only professional sports leagues and participants, but also
collegiate programs and in some cases, high school athletic programs.
The following discussion compares the three and six month periods ended June 30,
2003 and June 30, 2002. Due to the recent complete material change in the
Company's business focus and operations, this discussion will not address the
discontinued operations in the areas of oil and gas exploration, cigar
distribution, and gaming equipment rentals which constituted the majority of the
Company's operations during the first half of 2002.
ANALYSIS OF FINANCIAL CONDITION
The Company had approximately $25,000 of cash on hand at July 31, 2003. In June
2003, the Company received the first and second installments ($250,000 and
$100,000) of a total loan commitment of $420,000 as described in Note 7 to the
financial statements appearing elsewhere in this report. 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.
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The Company's shares were delisted effective as of June 10, 2003 from trading on
the Nasdaq SmallCap Market. The shares are currently quoted on the pink sheets.
Although market makers have indicated to management that they are in the process
of submitting an application for quotation of the Company's shares on the
Over-the-Counter Bulletin Board, there can be no assurance that any of these
applications will in fact be filed, such applications (or any other applications
that may in the future be filed) will be accepted, or the Company will be
cleared to trade on the Bulletin Board, in particular in light of the public
interest concerns raised by Nasdaq in connection with the delisting of the
Company's shares. This Nasdaq delisting has made it more difficult to effect
trades and has led to a significant decline in the frequency of trades and
trading volume. The delisting could also adversely affect the Company's ability
to obtain financing due to the decreased liquidity of the Company's shares.
Although the primary development of the PRLS system has been completed,
management plans on periodically upgrading its PRLS software application through
additional research and development, including tailoring its application to the
specific needs of its clients as those needs are brought to the Company's
attention. The Company will be unable to accomplish the foregoing on a long-term
basis, however, unless and until the additional financing referred to above is
secured.
Based on its current business plan, and assuming sufficient financing is
obtained, management believes it will be able to generate meaningful sales of
its PRLS software application and that it may be able to secure sales or license
agreements as early as the 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 $40,000 in revenues during the first and second quarters
of 2003 through the sale of a scaled-down version of the product to 18 NFL teams
at the 2003 NFL Combine. Pursuant to these transactions, the Company digitized
over 60,000 medical images for use by NFL teams in their evaluation of potential
draft picks. Management believes that its PRLS is already being referred by its
customers and prospects as the best of brand for its sports industry focus. The
Company is marketing the PRLS to multiple sports leagues and is actively seeking
additional vertical market opportunities. There can be no assurance, however,
that the Company will be able to secure any further agreements for its product,
that such agreements will ever generate meaningful revenue for the Company, or
that the Company will be able to successfully capture any such vertical market
opportunities.
Based on its current business plan, management anticipates that the Company will
need to add additional staff over the next 12 months. Although it only had three
full time employees as of July 31, 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.
During the latter half of 2002, because the Company was focused on implementing
its new business, it generated no revenues, and thus received no cash from
operations, resulting in negative working capital. Current assets increased from
$521 at December 31, 2002 to $172,663 at June 30, 2003. The increase was due to
the sale of $279,661 of the Company's Preferred Series A shares, $350,000 of
proceeds from the Term Loan Agreement, and $40,000 in revenues generated by the
sale of the Company's PRLS since its introduction to the marketplace in the
first quarter of 2003.
Other assets declined from $4,345,000 at December 31, 2002 to $3,910,500 at June
30, 2003. The decrease of $434,500 was primarily related to amortization of our
intangible assets.
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Current liabilities decreased from $2,401,579 at December 31, 2002 to $2,351,785
at June 30, 2003. The decrease was due to an increase in Notes Payable of
$350,000 offset by the net effective discount on note of approximately $190,000
related to the warrants attached to the Augustine II, LLC note payable and a
reduction in accounts payable and accrued expenses of $209,000. Accounts payable
and accrued expense obligations were satisfied by cash payments and the issuance
of the Company's common stock.
Total stockholders' equity decreased by 11 percent to $1,755,946 at June 30,
2003. This decrease was due to the net loss of $2,426,699 for the six month
period ended June 30, 2003, net of the effect of the issuance of the Company's
common stock to compensate consultants and others, approximately $199,000
recorded as Additional Paid in Capital related to the effective discount on note
and the sale of shares of Series A Preferred Stock, which generated net proceeds
to the Company of $279,661.
RECENT FINANCING
On June 10, 2003 the Company entered into a Term Loan Agreement ("Loan
Agreement") with Augustine II, LLC ("Augustine"), pursuant to which Augustine
agreed to loan the Company $420,000, payable in installments of $250,000,
$100,000, and $70,000 (the "Loan"). The Company received the first installment
of $250,000 on June 13, 2003. The second installment of $100,000 was paid to the
Company on June 30, 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. The Company recorded $1,347 of interest expense as of June
30, 2003. The Loan Agreement is subject to certain requirements that the Company
make mandatory prepayments of the Loan from the proceeds of any asset sales
outside of the ordinary course of business, and, on a quarterly basis, from
positive cash flow. In addition, all or any portion of the Loan may be prepaid
by the Company at any time without premium or penalty. The proceeds of the Loan
are being used by the Company for working capital.
As additional consideration for making the Loan, Augustine received five year
warrants to purchase up to 6,158,381 shares of the Company's common stock at an
exercise price of $0.16 per share. The Company can require that the warrants be
exercised if the Company's shares trade at or above $0.60 per share for each
trading day within the 30 calendar days prior to the maturity date of the Loan,
trading volume of the shares equals or exceeds 100,000 shares per day during
such period, and the shares of the Company's common stock underlying the
warrants have been included on a registration statement filed with and declared
effective by the SEC prior to the maturity date. If these conditions are not
fully satisfied by the maturity date, then Augustine may, at any time following
the maturity date and so long as the warrants remain exercisable, elect to
exercise all or any portion of the warrants pursuant to the "cashless exercise"
provisions of the warrants. Using the Black-Scholes pricing model, the Company
allocated approximately $199,000 of the proceeds of the Loan to the warrants and
$151,000 to the note payable, which allocations were made on a pro rata basis
based on the fair value of the warrants. The Black Scholes calculation assumed a
discount rate of approximately four percent, volatility of 257 percent and no
dividends. Given that the warrants were issued in conjunction with Loan
Agreement, such fair value represents an effective discount on the debt and will
be amortized over the term of the loan. Amortization of this discount for the
quarter ended June 30, 2003 was approximately $8,000 and was recorded as
effective interest expense in the accompanying consolidated statement of
operations.
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As security for the Loan, New Millennium (an affiliate of Mr. Calvert) pledged
2.5 million shares of the Company's common stock owned by New Millennium, and
the Company has granted Augustine a security interest in its ownership interest
in the Company's subsidiary, NuWay Sports, LLC.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
Revenues
During the three months ended June 30, 2002, there were no revenues from
continuing operations, compared to $5,500 of revenue in the three months ended
June 30, 2003 as a result of the sale of a scaled down version of the Company's
PRLS product to customers at the Texas High School Combine. During the last half
of 2002, the Company changed its business to focus on fulfilling information
technology needs of the sports industry. This change led to the development of
the Company's PRLS. Consequently, the results of our prior business line
operations in gaming machine rental, oil and gas development and distribution of
cigars were reclassified in our consolidated statements of operations as
"discontinued operations."
Selling, General and Administration Expense ("SG&A")
During the three months ended June 30, 2003, SG&A increased by 76 percent to
$824,407 from $469,642 for the three months ended June 30, 2002. The largest
components of these expenses were:
a. Salaries and Payroll-Related Expenses: These expenses were $79,000 for
the three months ended June 30, 2003 as compared to $75,000 in the
same period in 2002. These expenses remained flat as the Company
continued its strategy of operating with a reduced headcount and
relying on outside consultants to provide necessary services in a
variety of areas.
b. Consulting Expenses: These expenses increased significantly for the
three months ended June 30, 2003, to $452,000 from $300,000 for the
three months ended June 30, 2002, an increase of 51 percent. This
increase was directly related to new management's strategy of
maintaining a very low permanent staffing level and supplementing that
with consultants on a project-by-project basis. Further, the
development of new products and technology related to the Company's
change of business required additional consulting assistance in the
areas of applications development, sales, marketing and
administration. These positions were primarily staffed by independent
contractors who were compensated with shares of the Company's common
stock.
c. Legal Expenses: These expenses increased from $75,000 for the three
months ended June 30, 2002 to $175,000 for the three months ended June
30, 2003, an increase of 133 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 (iv)
addressing subpoenas and interview requests by the grand jury
investigating Mark Anderson, and (v) addressing the SEC's request for
documents as part of its informal investigation.
During the three months ended June 30, 2003, the Company issued an aggregate of
2,330,000 shares of its common stock as consideration for $242,700 of services
provided to the Company during the quarter.
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Discontinued Operations
As discussed above and in the notes to our consolidated financial statements,
effective October 1, 2002, the Company disposed of several operations through
the sale of two foreign subsidiaries, Latin American Casinos and NuWay
Resources, and, effective November 2002, ceased operations of its World's Best
Rated Cigar Company subsidiary. Due to the discontinuance of these operations,
the Company has reclassified the historical operating results from these
ventures for the three months ended June 30, 2002 and disclosed such results
below the results from continuing operations in the consolidated statements of
operations. These businesses generated losses from operations of $261,173 for
the three months ended June 30, 2002.
Net (Loss) Income
Net loss for the three months ended June 30, 2003 was $1,119,599, or $(0.04) per
share compared to a net loss of $732,685, or $(0.11) per share, for the three
months ended June 30, 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 June 30, 2003 as compared to
2002 (30,775,820 at June 30, 2003 as compared to 6,904,644 at June 30, 2002).
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
Revenues
During the six months ended June 30, 2002, there were no revenues from
continuing operations compared to approximately $40,000 of revenue in the six
month period ended June 30, 2003 as a result of the sale of a scaled down
version of the Company's PRLS product to 18 NFL teams at the 2003 NFL Combine
and to customers at the Texas High School Combine. During the last half of 2002,
the Company changed its business to focus on fulfilling information technology
needs of the sports industry. This change led to the development of the
Company's PRLS. Consequently, the results of our prior business line operations
in gaming machine rental, oil and gas development and distribution of cigars
were reclassified in our consolidated statements of operations as "discontinued
operations."
Selling, General and Administration Expense ("SG&A")
During the six months ended June 30, 2003, SG&A increased by 80 percent to
$1,953,133 from $1,087,888 for the six months ended June 30, 2002. The largest
components of these expenses were:
a. Salaries and Payroll-Related Expenses: These expenses were $133,000
for the six months ended June 30, 2003 versus $150,000 in the same
period in 2002, a decrease of $17,000. This decrease reflects the
Company's reduced headcount and it reliance on outside consultants to
provide necessary services in a variety of areas.
b. Consulting Expense: These expenses increased significantly for the six
months ended June 30, 2003 to $1,176,000 from $932,000 for the six
months ended June 30, 2002, an increase of 26 percent. This increase
was directly related to new management's strategy of maintaining a
very low permanent staffing level and supplementing that with
consultants on a project-by-project basis. Further, the development of
new products and technology related to the Company's change of
business required additional consulting assistance in the areas of
applications development, sales, marketing and administration. These
positions were
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primarily staffed by independent contractors who were compensated with
shares of the Company's common stock.
c. Legal Expenses: These expenses increased from $150,000 for the six
months ended June 30, 2002 to $528,000 for the six months ended June
30, 2003, an increase of 252 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 (iv)
addressing subpoenas and interview requests by the grand jury
investigating Mark Anderson, and (v) addressing the SEC's request for
documents as part of its informal investigation.
During the six months ended June 30, 2003, the Company issued an aggregate of
13,690,919 shares of its common stock. Of these shares, 2,633,590 were issued in
consideration for $645,648 of obligations previously incurred and 11,217,329
were issued as consideration for $1,257,472 of services provided to the Company
during the six month period ended June 30, 2003.
Net (Loss) Income
Net loss for the six months ended June 30, 2003 was $2,426,699, or $(0.09) per
share, compared to a net income $345,138, or $0.06 per share, for the six month
period ending June 30, 2002. In addition to the significant growth in total
costs and expenses, the net loss per share was affected by the cancellation of
stock warrants previously expensed of $1,659,750, and the larger number of
weighted average common share equivalents outstanding for the six month period
ending June 30, 2003 as compared to 2002 (25,982,882 at June 30, 2003 as
compared to 6,156,073 at June 30, 2002).
ITEM 3. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures.
Pursuant to Rule 13a-15(b) under the Exchange Act, the Company's management,
with the participation of the President, Chief Executive Officer and Interim
Chief Financial Officer, evaluated the effectiveness of the Company's disclosure
controls and procedures as of the end of the period covered by this report.
Based on that evaluation, the President, Chief Executive Officer and Interim
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that information required to be disclosed
in reports that the Company files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
b) Changes in internal controls.
No change in the Company's internal control over financial reporting occurred
during the Company's most recent fiscal quarter that materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
ISSUANCE OF S-8 SHARES: Between July1 and August 12, 2003, the Company issued a
total of 2,575,000 shares of common stock pursuant to a registration statement
on Form S-8, to consultants for services performed, which included 200,000
shares issued to Mr. Cox, a member of the board of directors, for his services
as a director.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
EXHIBITS DESCRIPTION OF EXHIBIT
31.1 Certification of President, Chief Executive Officer and Interim Chief
Financial Officer pursuant to 15 U.S.C. section 7241, as adopted
pursuant to section 302 of the Sarbanes- Oxley Act of 2002
32.1 Certification of President, Chief Executive Officer and Interim Chief
Financial Officer pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the three months ended June 30,
2003.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DATED: August 12, 2003 NUWAY MEDICAL, INC.
By: /s/ Dennis Calvert
-----------------------------
Dennis Calvert, President,
Chief Executive Officer, and
Interim Chief Financial Officer
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