UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
|_| 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.
(Name of Small Business Issuer in its Charter)
Delaware 65-0159115
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2603 Main Street, Suite 1155, Irvine, CA 92614
(Address of principal executive offices, Zip Code)
Issuer's telephone number, including area code: (949) 235-8062
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.00067 par value
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) been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB |_|.
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Issuer's revenue for its most recent fiscal year: $ -0-
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of March 30,
2006 was $903,590
1
The number of shares outstanding of the issuer's class of common equity as of
March 30, 2006 was 62,453,501.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
2
TABLE OF CONTENTS
PART I
Item 1. Description of Business 4
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Item 2. Description of Property 12
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Item 3. Legal Proceedings 12
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Item 4. Submission of Matters to a Vote of Security Holders 13
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PART II
Item 5. Market for Common Equity and Related Stockholders Matters 14
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Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
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Item 7. Financial Statements 26
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Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 26
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Item 8A. Controls and Procedures 26
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Item 8B. Other Information 27
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PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act 28
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Item 10. Executive Compensation 29
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Item 11. Security Ownership of Certain Beneficial Owners and Management 31
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Item 12. Certain Relationships and Related Transactions 32
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Item 13. Exhibits 33
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Item 14. Principal Accountant Fees and Services 36
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Signatures 37
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Index to Financial Statements F-1
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Report of Independent Registered Public Accounting Firm F-2
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Consolidated Financial Statements for the Years Ended
December 31, 2004 and 2003 F-3
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Exhibits Filed With This Report
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3
GENERAL NOTE
THIS AMENDMENT NO.1 TO THE ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED
DECEMBER 31, 2005, OF NUWAY MEDICAL, INC. (THE "COMPANY") IS BEING FILED FOR THE
SOLE PURPOSE OF PROVIDING THE INFORMATION IN RESPONSE TO PART III OF SUCH FORM.
THE COMPANY HAD ORIGINALLY INTENDED TO PROVIDE THIS INFORMATION IN ITS PROXY
STATEMENT FOR USE IN CONNECTION WITH THE 2006 ANNUAL MEETING OF STOCKHOLDERS.
HOWEVER, THE ANNUAL MEETING HAS BEEN POSTPONED DUE TO THE COMPLEXITY OF
STRUCTURING CERTAIN PREVIOUSLY-ANNOUNCED TRANSACTIONS FOR WHICH STOCKHOLDER
APPROVAL WILL BE SOUGHT, AND THE FILING OF THE PROXY MATERIAL HAS BEEN DELAYED.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
USE OF FORWARD LOOKING STATEMENTS IN THIS REPORT
This Annual Report on Form 10-KSB (the "Annual Report") contains forward-looking
statements. These forward-looking statements include predictions regarding our
future:
o business and acquisition plans;
o financing plans;
o general and administrative expenses;
o liquidity and sufficiency of existing cash;
o the outcome of pending or threatened litigation; and
o the effect of recent accounting pronouncements on our financial condition
and results of operations.
You can identify these and other forward-looking statements by the use of words
such as "may," "will," "expects," "anticipates," "believes," "estimates,"
"continues," or the negative of such terms, or other comparable terminology.
Forward-looking statements also include the assumptions underlying or relating
to any of the foregoing statements.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth below under the heading "Risk Factors." All forward-looking statements
included in this document are based on information available to us on the date
hereof. We assume no obligation to update any forward-looking statements.
The information contained in this Annual Report is as of December 31, 2005,
unless expressly stated otherwise.
OVERVIEW
NuWay Medical, Inc., a Delaware corporation (the "Company"), had no continuing
business operations as of December 31, 2005. At this time, the Company is
operating as a public shell and management is actively seeking merger and
acquisition candidates with ongoing operations. Over the course of the last
several years, the Company had attempted to enter various businesses through the
acquisitions of entities operating ongoing businesses or technology that needed
to be developed and marketed. However, as a result of various factors, primarily
inadequate capital and the inability to raise sufficient financing successfully,
these acquisitions could not be properly exploited and integrated to produce
profitable operations by the Company and management disposed of, or abandoned,
these other acquisitions.
The Company has identified an acquisition candidate, IOWC Technologies, Inc.
("IOWC"), the owner, along with Kenneth Reay Code (Mr. Code and IOWC are
collectively referred to herein as "BioLargo"), of certain technology referred
to herein as the "BioLargo Technology". As described below, the Company and
BioLargo have entered into a Marketing and Licensing Agreement (the "M&L
Agreement") and the Company intends to acquire substantially all of the assets
of IOWC, subject to various conditions, including approval of the Company's
stockholders.
4
Recently, the Company has struggled to deal with the following issues, often
simultaneously:
o Limited capital resources in a prolonged period of difficulty in the
capital markets, especially for small public companies, creating severe
limitations on the Company's ability to maintain its reporting obligations
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and its business operations
o Trying to acquire or develop new businesses
o Because of the scarcity of cash on hand, using common stock and securities
convertible into common stock to bring on board employees, directors,
consultants, professional service provides and advisors
o Because of the scarcity of cash on hand, using common stock and securities
convertible into common stock to acquire businesses
o Dealing with inquiries from the Securities and Exchange Commission (the
"SEC") regarding certain practices and transactions in the Company's past,
including questions raised about any continued involvement of Mark Roy
Anderson in the ongoing business of the Company
o Dealing with inquiries from the Federal Bureau of Investigation ("FBI")
related to any past dealings with Mr. Anderson or his affiliates
o Dealing with litigation with former officers of the Company and related
litigation stemming from their leadership of the Company
These issues continue to present extraordinary challenges to management as it
tries slowly to turn the situation around. The Company is presently focused
primarily on maintaining the corporate entity, complying with its reporting
obligations under the Exchange Act and actively seeking new business
opportunities. The Company will need working capital resources to maintain the
Company's status and satisfy its reporting obligations, and to fund other
anticipated costs and expenses during the year ending December 31, 2006 and
beyond, especially if the transactions with BioLargo are consummated. The
Company's ability to continue as a going concern is dependent on the Company's
ability to raise capital to, at a minimum, meet its corporate maintenance
requirements and reporting obligations. If the Company is able to acquire
BioLargo or another ongoing business and/or technology that must be exploited,
the Company would need additional capital until and unless that prospective
operation is able to generate positive working capital sufficient to fund the
Company's cash flow requirements form operations.
The Company was initially organized as Repossession Auction, Inc. under the laws
of the State of Florida in 1989. In 1991, the Company merged into a Delaware
corporation bearing the same name. In 1994, the Company's name was changed to
Latin American Casinos, Inc. to reflect its focus on the gaming and casino
business in South and Central America, and in 2001 the Company changed its name
to NuWay Energy, Inc. to reflect its new emphasis on the oil and gas development
industry. During October 2002, the Company's name was changed to NuWay Medical,
Inc. coincident with the divestiture of its non-medical assets and the retention
of new management.
PROPOSED ACQUISITION OF IOWC
On July 25, 2005, the Company executed a letter of intent ("LOI") with IOWC,
pursuant to which the Company will acquire certain of BioLargo's assets (the
"Purchased Assets"), consisting of certain intellectual property, including two
United States patents (collectively, the "BioLargo Technology"), and two license
and/or distributor agreements pursuant to which IOWC has licensed the BioLargo
Technology for use in products designed for distribution in the food, medical
and biohazardous material transportation industries. All assets not constituting
the Purchased Assets will remain the property of BioLargo following the closing.
The Company will not assume any liabilities of BioLargo.
5
The parties also agreed that on or prior to the closing, they would enter into a
definitive asset purchase agreement (the "Asset Purchase Agreement"), and other
agreements, including a research and development agreement (the "R&D
Agreement"), to effect the transactions (the "Transactions") on or prior to the
closing. Pursuant to the R&D Agreement, the Company will pay BioLargo a monthly
fee to conduct research to further develop the existing BioLargo Technology and
products based on the existing and new technologies.
The LOI also requires the Company to raise sufficient funds to (i) cover the
costs of the transactions, (ii) three months post-closing operating expenses,
the latter of which is estimated at approximately $300,000 and (iii) provide
interim funding to BioLargo on a best efforts basis and in amounts agreed
between the parties in an aggregate amount not to exceed $1,000,000.
The LOI further provides that, at the Closing, the Company and Dennis Calvert
will enter into an employment agreement for a term of five years, providing Mr.
Calvert with a monthly salary of $15,400 for 2006, and a 10% increase in his
monthly salary for each calendar year thereafter.
It is anticipated that the present management of the Company will remain in
place after the closing and that Mr. Code will become the Company's Chief
Technology Officer. In connection therewith, Mr. Code will enter into an
employment agreement with the Company (the "Code Employment Agreement").
In connection with the previously described transactions and in partial
implementation thereof, on December 31, 2005, the Company executed the M&L
Agreement with BioLargo. Pursuant to the M&L Agreement, the Company, through its
wholly-owned subsidiary BioLargo Life Technologies, Inc., a California
corporation ("BLTI"), has the right ("Rights") to develop, market, sell and
distribute products that were developed, and are in development, by BioLargo
using the BioLargo Technology.
BioLargo also assigned to BLTI its rights and obligations under two license
agreements, including BioLargo, LLC, in which BioLargo has a 20% interest, as
well as its rights set forth in a LOI with another entity (collectively, the
"Assigned Agreements"). The M&L Agreement provides that the Company is to
receive any and all royalties, payments, license fees, and other consideration
generated by the Assigned Agreements. As part of the M&L Agreement, IOWC has
agreed to transfer its 20% interest in BioLargo, LLC to the Company. In
consideration of the Rights and the Assigned Agreements, the Company has agreed
to issue IOWC a total of 38% of its common stock.
The parties further agreed to enter into additional agreements in furtherance of
the July 2005 LOI between the Company and IOWC, including (i) the Asset Purchase
Agreement, whereby the Company would acquire the two U.S. patents held by IOWC;
(ii) the R&D Agreement, with a company to be managed and controlled by Mr. Code;
and (iii) the Code Employment Agreement. In consideration of the Asset Purchase
Agreement, the Company has agreed to issue IOWC an additional one percent of its
common stock. In consideration of the R&D Agreement and Code Employment
Agreement, the Company has agreed to issue to Code individually 17.6% of its
common stock. As a result of the foregoing transactions, the Company will issue
a total of 56.6% of its common stock to BioLargo, calculated on January 1, 2006.
The parties further agreed that to the extent that the Company issues additional
equity in connection with one or more financing transactions after January 1,
2006, then the percentage of equity to be issued to BioLargo would be diluted
pro rata.
The Code Employment Agreement is anticipated to provide that Mr. Code will be
appointed Chief Technology Officer of BLTI, and receive a monthly salary of
$15,400. As explained below, the Company is required to obtain the approval of
its stockholders prior to the issuance of the common stock to IOWC required
pursuant to the M&L Agreement.
The foregoing transactions are subject to approval by IOWC's board of directors
and stockholders, approval by the Company's board of directors, and approval by
the Company's stockholders of the following matters:
6
o an amendment to the Company's Certificate of Incorporation increasing the
number of authorized shares of its common stock;
o the issuance of the number of shares of common stock to IOWC required
pursuant to the Transactions;
o a reverse split of the Company's common stock; and
o theelection of Mr. Code to the Company's board of directors.
In the event that the Company's stockholders do not approve the issuance of
stock, the M&L Agreement shall terminate, and all rights granted to the Company
shall revert to BioLargo.
The closing of the transactions is subject to various conditions, including
those described hereinabove, and conditions customary for transactions of this
nature.
EMPLOYEES
At December 31, 2005, the Company employed one full-time employee, reflecting
the reduced operations of the Company at that time.
RISK FACTORS
The Company faces a number of significant risks associated with its current plan
of operations. These include the following:
WE HAVE A LIMITED OPERATING HISTORY AND A HISTORY OF LOSSES.
The Company has no current operations and, as such, may not be able to overcome
unanticipated difficulties that may be encountered related to the implementation
of its business plan. The Company has a limited operating history, limited
revenue from operations and a history of losses. In addition, because the
Company currently has no operations, the Company faces all of the risks inherent
with a start-up business, including the possibility that the Company cannot
acquire or develop a business that is viable. There is no assurance that, if the
Company does find or develop a business, to acquire, whether such business will
ever be profitable. The Company may also face unforeseen problems, difficulties,
expenses or delays in implementing its business plan.
WE NEED ADDITIONAL FUNDS TO MAINTAIN AND DEVELOP OUR BUSINESS.
If it necessary for the Company to seek to secure additional funds for any new
business, general and administrative expenses and period reporting requirements,
there can be no assurance that such funds will be available, or will be
available on favorable terms. Failure to secure needed funds will directly
impact the Company's ability to maintain its publicly-traded status and,
potentially, the corporate entity itself. While management has dedicated itself
to the efforts to secure needed funds, the outcome and ultimate success of those
efforts is uncertain.
THE COST OF MAINTAINING OUR REPORTING OBLIGATIONS IS HIGH.
The Company is obligated to maintain its periodic public filings and public
reporting requirements, on a timely basis, under the Rules and Regulations of
the SEC. In order to meet these obligations, the Company will need to continue
to raise capital. If adequate funds are not available to the Company, it will be
unable to comply with those requirements and could cease to be qualified to have
its stock traded in the public market.
7
WE HAVE SUBSTANTIAL DEBT OBLIGATIONS MATURING DURING 2006.
We have approximately $2,740,570 aggregate principal amount of our promissory
notes that mature at various times during 2006. We do not presently have funds
sufficient to repay these obligations as they mature. Even though the terms of
all of these notes permit the noteholder to convert the notes into shares of our
common stock, until our stockholders approve an amendment to the Company's
charter to increase the number of authorized shares of common stock, the Company
will be unable to fulfill its obligations to all noteholders to permit the
conversion into common stock of amounts due pursuant to the terms of the notes.
In the event that the Company has not raised further capital prior to the
maturity dates of the convertible notes, the Company would be in default of
those notes if its stockholders have not formally approved an increase in the
number of authorized common shares, or unless the Company is able to refinance
or renegotiate the terms of these notes. No financing is in place at present,
and it is unknown if any financing will be in place in the future, which would
permit the Company to repay these notes in full as they mature.
OUR STOCKHOLDERS FACE POTENTIAL DILUTION IN ANY NEW FINANCING.
Any additional equity that the Company raises would dilute the interest of the
current stockholders and any persons who may become stockholders before such
financing. Given the low price of the Company's common stock, such dilution in
any financing of a meaningful amount, could be substantial.
OUR STOCKHOLDERS FACE POTENTIAL ADVERSE EFFECT FROM THE TERMS OF ANY NEWLY
ISSUED PREFERRED STOCK.
In order to raise capital to meet expenses or to acquire a business, the Board
of Directors of the Company may issue additional stock, including preferred
stock. Any preferred stock which the Company may issue may have voting rights,
liquidation preferences, redemption rights and other rights, preferences and
privileges. The rights of the holder's of the Company's Common Stock will be
subject to, and in many respect subordinate to, the rights of the holders of any
such preferred stock. Furthermore, such Preferred Stock may have other rights,
including economic rights, senior to the Company's Common Stock that could have
a material adverse effect on the value of the Company's Common Stock. Preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, can also have the effect of making it
more difficult for a third party to acquire a majority of outstanding voting
stock of the Company, thereby delaying, deferring or preventing a change in
control of the Company.
THE TRANSACTIONS WITH IOWC REQUIRE STOCKHOLDER APPROVAL. WE HAVE BEEN UNABLE TO
OBTAIN A QUORUM AND SCHEDULE A VOTE OF STOCKHOLDERS TO APPROVE CERTAIN MATERIAL
TRANSACTIONS IN THE PAST.
The Company will be required to obtain stockholder approval to approve the
transactions with BioLargo; and amend its charter to increase the authorized
number of shares to approve a transaction with New Millennium Capital Partners,
LLC ("New Millennium"), which is controlled by our CEO and President Dennis
Calvert; raise funds; or effect a conversion of the convertible notes beyond the
number of shares of common stock currently authorized but unissued. Obtaining
stockholder approval is both costly and uncertain as to its success. The Company
has attempted to secure stockholder votes for certain corporate actions in the
past and has been unable to secure a quorum. As a result, the Company has been
unable to effect certain material transactions, and this inability to act could
threaten the viability of the Company. If the Company is unable to obtain the
necessary stockholder approval of the transactions with BioLargo, the M&L
Agreement will terminate and all rights granted by BioLargo to the Company will
revert to BioLargo. In addition, the inability of the Company to obtain
stockholder approval of various additional contemplated transactions, could have
an adverse affect on the Company's ability to recapitalize, restructure its
debts, obtain funding and execute its business plan, among other things.
IF WE ACQUIRE A BUSINESS, WE WILL BE DEPENDENT UPON MARKET ACCEPTANCE AND
COMPETITIVE FACTORS.
The success of any business, such as IOWC, which the Company acquires, or
develops, will be highly dependent upon, among other things, gaining market
acceptance from customers that will use the company's products and services.
More specifically, these factors include, among other things, how well its
products or services perform (ease of implementation, ease of use by customers,
reliability, and scope of products and services), competitive forces, the level
of consumer demand for products and services offered, the selling prices of its
products and services, and the effectiveness of the Company's marketing
activities.
8
IF WE CONSUMMATE THE TRANSACTIONS WITH BIOLARGO, THERE WILL BE A CHANGE OF
CONTROL OF THE COMPANY.
If our stockholders approve the transactions with BioLargo and the transactions
are subsequently consummated, the Company will issue an aggregate of 56.6% of
its common stock to BioLargo, which amount is subject to adjustment downward
under certain circumstances. This change of control could have certain
consequences for the Company, including, without limitation, a change in control
of the Company's Board of Directors and the ability of BioLargo to direct the
outcome of many matters on which the Company's stockholders are entitled to vote
in the future.
OUR COMMON STOCK IS THINLY TRADED AND LARGELY ILLIQUID.
In June 2003, our common stock was delisted from the NASDAQ SmallCap Market. Our
stock currently trades on the Pink Sheets. The delisting has made it more
difficult to buy or sell our stock and has 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. There can be no assurance when or
if the Company's common stock will be quoted on the OTC Bulletin Board, in light
of the public interest concerns previously raised by NASDAQ in connection with
the delisting of the Company's shares.
OUR COMMON STOCK IS SUBJECT TO "PENNY STOCK" REGULATIONS THAT MAY AFFECT
THE LIQUIDITY FOR OUR COMMON STOCK.
Our common stock is subject to the rules adopted by the SEC that regulate
broker-dealer practices in connection with transactions in "penny stocks." Penny
stocks are generally equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
the NASDAQ Stock Market, provided that current price and volume information with
respect to transactions in such securities is provided by the exchange or
system). The penny stock rules require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from those rules, deliver a standardized
risk disclosure document prepared by the SEC, which contains the following:
o a description of the nature and level of risk in the market for penny
stocks in both public offerings and secondary trading
o a description of the broker's or dealer's duties to the customer and of
the rights and remedies available to the customer with respect to
violation to such duties or other requirements of Securities' laws
o a brief, clear, narrative description of a dealer market, including "bid"
and "ask" prices for penny stocks and significance of the spread between
the "bid" and "ask" price
o a toll-free telephone number for inquiries on disciplinary actions;
definitions of significant terms in the disclosure document or in the
conduct of trading in penny stocks, and
o such other information and is in such form (including language, type, size
and format), as the SEC shall require by rule or regulation.
Prior to effecting any transaction in penny stock, the broker-dealer also must
provide the customer the following:
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o the bid and offer quotations for the penny stock
o the compensation of the broker-dealer and its salesperson in the
transaction
o the number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the market
for such stock
o the depth and liquidity of the market for such stock, and
o monthly account statements showing the market value of each penny stock
held in the customer's account.
In addition, the penny stock rules require that prior to a transaction in a
penny stock not otherwise exempt from those rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written acknowledgment of the receipt
of a risk disclosure statement, a written agreement to transactions involving
penny stocks, and a signed and dated copy of a written suitably statement. These
disclosure requirements may have the effect of reducing the trading activity in
the secondary market for a stock such as our common stock if it is subject to
the penny stock rules.
THE COMPANY, SOME OF ITS DIRECTORS AND ITS OFFICERS FACE RISKS IN CONNECTION
WITH THE CRIMINAL INVESTIGATION OF A FORMER CONSULTANT AND PRINCIPAL STOCKHOLDER
OF THE COMPANY.
In or about May 2003, the Company learned through verbal discussions with
representatives of NASDAQ, in preparation for the Company's pending NASDAQ
qualifications hearing, that Mark Roy Anderson had a criminal background. In or
about May and June 2003, the Company was informed in writing by the United
States Attorney's office in Los Angeles, that Mr. Anderson (i) was the target of
a criminal investigation (the "Investigation") pertaining to the sale of
securities by Med Wireless, Inc. ("Med Wireless"), a which Mr. Anderson founded
and was a principal stockholder and from which the Company licensed certain
assets in 2002, and (ii) had been convicted of multiple felonies unrelated to
Med Wireless in the 1990s. Mr. Anderson was the founder and principal
stockholder of Med Wireless, and first introduced the concept of licensing the
Med Wireless software application and contracts to the Company in May 2002.
Dennis Calvert had been approached initially by Mr. Anderson some time in 1996
to consider entering into a business consulting relationship with
Anderson-controlled entities. Over the period from 1996 to 2001, Mr. Calvert
worked as a consultant periodically with Anderson-related entities for the
purpose of evaluating potential new businesses and potential investment
opportunities being considered by Mr. Anderson and these entities. In June 2002,
Mr. Calvert agreed to become president of Med Wireless, primarily for the
purpose of completing the Med Wireless transaction with the Company. As
consideration for his agreeing to become President of Med Wireless, Mr. Calvert
received 1,327,700 shares of Med Wireless stock from Mr. Anderson's holdings.
These shares were subsequently converted into 600,000 shares of the Company's
common stock pursuant to the terms of the transaction between Med Wireless and
the Company.
On June 28, 2002, Mr. Calvert was appointed president of the Company. At the
same time, Joseph Provenzano, who at that time was an employee of Camden
Holdings, Inc. ("Camden Holdings"), another affiliate of Mr. Anderson, joined
the Company's board of directors. In addition to the Med Wireless transaction,
entities that Mr. Anderson controls, including Camden Holdings, Genesis Health
Tech, Inc. ("Genesis"), Summit Oil & Gas, Inc. ("Summit Oil") and Casino Venture
Partners ("CVP"), invested $250,000 in the Company, sold the Company additional
assets and purchased the Company's previous operating businesses. Although Mr.
Anderson never served as an officer or director of the Company, he served as a
consultant to the Company and received consulting fees in the form of an
aggregate 1,241,884 shares of the Company's common stock. Since December 2002
Mr. Anderson has not been a consultant to the Company and since March 2003 has
not been involved in any way in the Company's operations.
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Mr. Anderson, his affiliates and New Millennium entered into a stock purchase
agreement in March 2003 (the "New Millennium Agreement"). Mr. Calvert is the
Manager and, together with his wife, the sole members of New Millennium.
In the New Millennium Agreement, Mr. Anderson represented that he was selling
100% of his stock to New Millennium and would no longer own any of the Company's
stock. Mr. Anderson delivered to New Millennium certificates representing
4,182,107 shares. Subsequent to the closing of that transaction, management
learned through the Company's transfer agent that Camden Holdings still owns
340,894 shares of the Company's common stock. The Company and New Millennium
believe that the existence of these 340,894 shares of the Company's common stock
owned by Camden Holdings is a material breach of the New Millennium Agreement.
Technically, under the terms of the New Millennium Agreement, it is possible
that Camden Holdings or Mr. Anderson has the right to reacquire the shares of
the Company's common stock that were sold to New Millennium, if New Millennium
defaults on the promissory note issued by New Millennium to Camden Holdings to
purchase the shares (the "New Millennium Note"). The New Millennium Note is
purportedly secured by the purchased shares of the Company's common stock;
however, New Millennium and Mr. Calvert believe that Camden Holdings and Mr.
Anderson have not perfected their security interest in those shares. New
Millennium has defaulted on the New Millennium Note. However, New Millennium
believes that Camden Holdings failed to deliver all the shares of the Company
held by Camden Holdings, and thus breached the terms of their purchase
agreement, making the New Millennium Note void by its terms. In addition,
Augustine II, LLC (the "Augustine Fund") is the pledgee of 2,500,000 of these
shares and holds those shares as pledgee.
On or about May 17, 2003, the Company was served by a subpoena issued by the
grand jury impaneled to investigate Mr. Anderson, requesting documents relating
to Mr. Anderson and his affiliates, including Med Wireless, Camden Holdings,
Summit Oil and Summit Healthcare, Inc. ("Summit Healthcare"). Additionally, the
subpoena requested information relating to the identity of the Company's
officers, directors, stockholders and consultants (legal, accounting and
otherwise), and that the Company provide copies of its filings and
correspondence with the SEC, the National Association of Securities Dealers and
the NASDAQ Stock Market. The Company cooperated fully with that request by
providing the requested information and intends to continue to fully cooperate
with any future investigative requests.
The Company has learned that private placement memoranda distributed to Med
Wireless investors stated that Dennis Calvert was the president of Med Wireless
as early as 2001, and additionally believes that Mr. Anderson apparently made a
number of similar false representations throughout 2001 and 2002. Mr. Calvert
did not approve this disclosure contained in those private placement memoranda
nor in any other form, and has informed the Company that he was not engaged as
the president of Med Wireless until June 2002 and not any earlier, and that any
statements to the contrary are untrue.
Mr. Provenzano joined Camden Holdings in 2001 to assist in its mergers and
acquisitions department, and he worked at Camden Holdings until March 2003. Both
Mr. Calvert and Mr. Provenzano have informed both the Company and, through their
own legal counsel, the Assistant U.S. Attorney, that they intend to cooperate
fully with law enforcement officials in the Investigation.
In mid-2003, the Company was informed by the Assistant United States Attorney
handling the Investigation that Dennis Calvert and Joseph Provenzano were not
considered "targets" of the Investigation; however, 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.
11
Although neither the Company nor any of its officers or directors is currently
the target of any criminal investigation, including the one described in the
previous paragraph, there can be no assurance that such an investigation will
not be undertaken. Additionally, although neither the Company nor its officers
or directors have been contacted by either the U.S. Attorney's Office, or the
FBI regarding the Investigation since mid-2003, neither the Company nor its
officers and directors can be certain that such requests will not be made in the
future. Furthermore, the ongoing Investigation has in the past occupied, and may
in the future occupy, a significant amount of time of the Company and Messrs.
Calvert and Provenzano personally, creating a distraction from the Company's
business. The mere existence of the Investigation, not to mention the outcome
thereof, depending upon such outcome, could have a material adverse effect on
the Company, its ability to obtain financings to execute its business plan and
its eventual results of operations.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's offices are located at 2603 Main Street, Suite 1155, Irvine,
California 92614. The Company currently occupies space from a consultant at no
cost to the Company.
ITEM 3. LEGAL PROCEEDINGS
In June 2002, Geraldine Lyons, the Company's former Chief Financial Officer,
sued the Company and the Company's former president Todd Sanders, for breach of
her employment contract. The lawsuit was brought in the Circuit Court of the
11th Judicial Circuit in Miami-Dade County in Florida. Ms. Lyons seeks
approximately $25,000 due under the contract and the issuance of 100,000 shares
of common stock, with a guarantee that the stock could be sold by Ms. Lyons for
$300,000. Ms. Lyons alleges that additional funds are due under her employment
contract; that the contract requires the Company guarantee that she can sell for
$300,000 the 100,000 shares of stock the Company is required to issue her; and,
that Mr. Sanders promised to purchase from her 100,000 shares of Company common
stock held by her at the price of $4.00 per share.
The Company has counter-sued Ms. Lyons for breach of fiduciary duty, fraud,
violation of Section 12(a)(2) of the Securities Act of 1933, violation of
Section 517.301 of the Florida Statutes, negligent misrepresentation, conversion
and unjust enrichment resulting from the required restatement of the Company's
financial statements for the years ended December 31, 2000 and December 31,
1999. The restatements corrected the previous omission of certain material
expenses related primarily to compensation expense arising from warrants issued
and repriced stock options, as well as other errors.
The case is ongoing at this time, although it has not been vigorously prosecuted
by Ms. Lyons or the Company, in the Company's case primarily because the Company
had lacked the resources to do so. The Company entered into an agreement ("Legal
Defense Agreement") in December 2004 such that Augustine Fund would pay for the
legal expenses associated with the Company's defense and affirmative claims in
this lawsuit (with the right to withdraw funding at any time), and in exchange
would share any net proceeds awarded to the Company pursuant to a settlement or
judgment. The sharing arrangement provides that Augustine Fund will recover
first, out of any money available from recovery, its legal and out of pocket
expenses related to the lawsuit; second, 85% of any additional amounts recovered
up to $500,000; and third, 50% of amounts recovered beyond $500,000. While the
Company believes that it has meritorious positions in this litigation, given the
inherent nature of litigation, it is not possible to predict the outcome of this
litigation or the impact it would have on the Company.
In May 2004, the Company was sued by Flight Options, Inc. ("Flight Options"), a
jet plane leasing company, in the Superior Court of Orange County California.
The lawsuit alleges that the Company owes Flight Options approximately $418,300,
pursuant to a five-year lease assigned to the Company by the Company's former
president Todd Sanders, from his corporation, Devenshire Management Corporation
("Devenshire"). Management of the Company believes that the assignment of the
lease was not properly authorized or approved by the Company, and that by Mr.
Sander's failure to identify the lease in a December 2002 settlement agreement
with the Company, he breached the terms of that settlement agreement and,
pursuant to the settlement agreement, must indemnify the Company for any losses
owed to Flight Options. The Company filed a cross-complaint against Mr. Sanders
and Devenshire seeking indemnity and alleging Mr. Sander's breached his
fiduciary duties in connection with the assignment of the lease. The Company's
Legal Defense Agreement with the Augustine Fund applies also to the Flight
Options litigation.
12
On March 17, 2005, the Company settled with Flight Options pursuant to a
stipulation that would have allowed the Company to pay Flight Options $100,000
on or before August 5, 2005; if $100,000 was not paid by August 5, 2005, Flight
Options could file a judgment against the Company for $163,310. The Company did
not make a payment on or before August 5, 2005. Subsequently, the parties agreed
that the Company would pay Flight Options a total of $116,000, which amount was
paid. In exchange, Flight Options dismissed the case.
At about the time of the settlement with Flight Options, the Company, Mr.
Sanders and Devenshire agreed to submit the matters in the cross-complaint,
including the indemnity claim, to binding arbitration. On March 7, 2006, an
arbitrator issued a binding award in favor of the Company and against Mr.
Sanders for $120,000.
Legal Fees in the matter have been paid by Augustine, pursuant to the Legal
Defense Agreement between Augustine and the Company. In January 2006, Augustine
and the Company agreed to modify the terms of the Legal Defense Agreement to
allow for both parties to share in any amounts which might be recovered from
Sanders, on a percentage basis equal to the respective costs incurred by each
party. Legal Fees incurred by Augustine are estimated to be approximately
$81,000 as of February 2006, but will likely increase.
On December 4, 2004, the Company was sued by the law firm of Enenstein Russell
and Saltz, LLP to collect fees that had been billed to the Company in the amount
of $15,233, which had been disputed by the Company. In August of 2005, the
Company settled the lawsuit for $9,000. The Company paid the settlement and the
law firm dismissed the lawsuit.
The Company is party to various other claims, legal actions and complaints
arising periodically in the ordinary course of business. In the opinion of
management, no such matters will have a material adverse effect on the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
From October 31, 1998 until June 10, 2003, the Company's common stock was listed
on the NASDAQ Small Cap Market. Since such date, the Company's common stock has
been quoted on the National Quotation Service Bureau, commonly known as the
"pink sheets", under the symbol "NMED".
The table below represents the quarterly high and low bid prices for the
Company's Common Stock for the last two fiscal years as reported by Historical
Stock Price Reports available at www.yahoo.com.
2004 2005
------------------- ------------------
HIGH LOW HIGH LOW
-------- -------- ------- --------
First Quarter $ 0.01 $ 0.01 $ 0.02 $ 0.01
Second Quarter $ 0.01 $ 0.01 $ 0.02 $ 0.01
Third Quarter $ 0.01 $ 0.01 $ 0.04 $ 0.01
Fourth Quarter $ 0.01 $ 0.01 $ 0.02 $ 0.01
The closing price for the Company's common stock on December 29, 2005, the last
day on which the Company's stock traded in 2005, was $.01 per share. As of
December 30, 2005, there were approximately 280 registered owners and of the
Company's common stock. The Company believes that the number of beneficial
owners is substantially higher than this amount.
At December 31, 2005, the Company also had the following warrants outstanding:
o stock purchase warrants to purchase an aggregate 519,322 shares of the
Company's common stock, which warrants had been issued in private
offerings. These warrants allow for the holder to purchase shares of
common stock at an exercise price of $0.20 per share through March 7, 2006
(120,000 shares) and April 15, 2006 (399,322 shares).
o stock purchase warrants to purchase an aggregate 6,158,381 shares of the
Company's common stock, which warrants had been issued in a private
offering to the Augustine Fund. These warrants initially allowed for the
holder to purchase shares of common stock at an exercise price of $0.16
per share through August 10, 2008, but were re-priced in 2004 (in
conjunction with an extension of the financing provided by Augustine Fund)
to $0.035 per share.
o stock purchase warrants to purchase an aggregate 333,333 shares of the
Company's common stock, which warrants had been issued to a consultant
that provided services to the Company. These warrants allow for the holder
to purchase shares of common stock at an exercise price of $0.06 per share
through August 29, 2008.
o Stock purchase warrants to purchase an aggregate of 8,000,000 shares of
the Company's common stock, which warrants had been issued to the
Augustine fund as consideration for the extension of the maturity date of
the Augustine Loan. These warrants allow for the holder to purchase shares
of common stock at an exercise price of $0.005 per share through July 29,
2010.
o Stock purchase warrants to purchase an aggregate of 11,980,000 shares of
the Company's common stock, which warrants had been issued in a private
offering to twelve investors. These warrants allow for the holder to
purchase shares of common stock at an exercise price of $0.05 per share
through January 31, 2008.
14
DIVIDENDS
The Company has never declared or paid a cash dividend to stockholders. The
board of directors presently intends to retain any earnings which may be
generated in the future to finance Company operations.
SALES OF UNREGISTERED SECURITIES
FIRST OFFERING
In January 2005, pursuant to a private offering that commenced in October 2004
and terminated in January 2005 (the "First Offering"), the Company received
gross and net proceeds of $25,000 from an outside investor and issued its
convertible promissory note (the "First Offering Note") due and payable one year
from the date of issuance. The First Offering Note bears interest at a rate of
10% per annum, payable on the maturity date. The First Offering Note can be
converted, in whole or in part, into shares of the Company's Series A Preferred
stock, on the basis of $.005 per share, at any time prior to maturity by either
the Company or the lender. Each share of Series A Preferred Stock may be
converted by the holder into one share of the Company's common stock. If the
noteholder converts the First Offering Note into Series A Preferred Stock, on or
after the note's original maturity date the noteholder may require the Company
to buy back the shares of Series A Preferred Stock for 110% of the principal
amount of the note. If the Company is unable to do so, the Company's president,
Dennis Calvert, has agreed to buy back the shares on the same terms. If shares
of Series A Preferred Stock are converted into common stock, the holder has the
right to include (piggyback) the shares of common stock in a registration of
securities filed by the Company, other than on Form S-4 or Form S-8.
The Company's payment obligations under the First Offering Note may be
accelerated upon the following events: (i) the sale of the Company's assets
outside the ordinary course of business; (ii) a breach of the representations
and warranties contained within the evidencing the loan; (iii) the failure to
timely pay the note; (iv) the Company's default in any other loan obligation
greater than $100,000; (v) the Company's dissolution, liquidation, merger,
consolidation, bankruptcy, or future insolvency; and (vi) the commencement of
any suit that threatens to have a material adverse effect on the Company,
including the entry of a final judgment or settlement in excess of $100,000.
SECOND OFFERING
In January 2005, pursuant to a private offering that commenced in that month and
terminated in August 2005 (the "Second Offering"), the Company received gross
and net proceeds of $75,000 from two outside investors and issued its
convertible promissory note (the "Second Offering Note") due and payable one
year from the date of issuance. The Second Offering Note bears interest at a
rate of 10% per annum, payable on the maturity date. The Second Offering Note
can be converted, in whole or in part, into shares of the Company's common
stock, on the basis ranging from $.005 to $0.016 per share, at any time prior to
maturity by either the Company or the holder. The holder has the right to
include (piggyback) the shares of common stock in a registration of securities
filed by the Company, other than on Form S-4 or Form S-8.
The Company's payment obligations under the Second Offering Note may be
accelerated upon the following events: (i) the sale of the Company's assets
outside the ordinary course of business; (ii) a breach of the representations
and warranties contained within the evidencing the loan; (iii) the failure to
timely pay the note; (iv) the Company's default in any other loan obligation
greater than $100,000; (v) the Company's dissolution, liquidation, merger,
consolidation, bankruptcy, or future insolvency; and (vi) the commencement of
any suit that threatens to have a material adverse effect on the Company,
including the entry of a final judgment or settlement in excess of $100,000.
15
In February 2005, the Company received gross proceeds of $51,000 and net
proceeds of $47,000 from four outside investors and issued Second Offering Notes
which allow conversion into an aggregate total of 5,558,036 shares of common
stock (at a conversion price of approximately $0.009 per common share).
In April 2005, the Company received gross proceeds of $29,000 and net proceeds
of $23,750 from two outside investors and issued Second Offering Notes which
allow conversion into an aggregate total of 2,500,000 shares of common stock (at
a conversion price of approximately $0.009 per common share).
In May 2005, the Company received gross and net proceeds of $50,000 and $47,500
from an outside investor and issued a Second Offering Note which allows
conversion into a total of 7,142,857 shares of common stock (at a conversion
price of $0.007 per common share).
In June 2005, the Company received gross and net proceeds of $256,120 from
eleven outside investors and issued Second Offering Notes which allow conversion
into an aggregate total of 28,612,000 shares of common stock (at a weighted
average conversion price of approximately $0.009 per common share).
Also in July 2005, the Company received gross proceeds of $10,000 and net
proceeds of $9,500 from an outside investor and issued a Second Offering Note
which allows conversion into an aggregate total of 625,000 shares of common
stock (at a conversion price of $0.016 per common share).
In August 2005, the Company received gross proceeds of $260,000 and net proceeds
of $252,000 from five outside investors and issued Second Offering Notes which
allow conversion into an aggregate total of 16,250,000 shares of common stock
(at a conversion price of $0.016 per common share).
THIRD OFFERING
Pursuant to another private offering that commenced in September 2005 and
terminated in February 2006, on December 31, 2005, the Company sold an aggregate
amount of $299,500 of its promissory notes (the "Third Offering Notes") due and
payable January 31, 2007 to twelve individual investors. Each Third Offering
Note bears interest at a rate of 10% per annum, and can be converted, in whole
or in part, into shares of the common stock of the Company at an initial
conversion price of $0.025 per share.
The Third Offering Notes may not be converted by either the Company or the
holder unless and until each of the following events has first occurred: (i) the
Company's stockholders have approved an increase in the number of shares of
common stock authorized by the Company's Certificate of Incorporation in an
amount not less than the amount required to permit all notes and warrants issued
in this series to be converted into shares of the Company's Common Stock as
provided herein, at a validly held meeting of stockholders at which a quorum is
present and acting throughout; and (ii) the Company has filed with the Secretary
of State of State of Delaware a Certificate of Amendment to the Company's
Certificate of Incorporation to amend its Certificate of Incorporation to
increase the number of shares of common stock authorized by the Company's
Certificate of Incorporation.
Purchasers of the Third Offering Notes received, for no additional
consideration, a stock purchase warrant (the "Third Offering Warrant") entitling
the holder to purchase a number of Shares of Common Stock equal to the number of
Shares of Common Stock into which the Third Offering Note is convertible. The
Third Offering Warrant is exercisable at an initial price of $0.05 per Share and
will expire on January 31, 2008.
16
OTHER ISSUANCES
In July 2005, the board of directors of the Company approved the issuance of
6,000,000 shares of the Company's common stock to two directors and one officer.
An aggregate $20,000 owed by the Company to two independent directors for unpaid
compensation for serving on the board of directors was paid by the issuance of
an aggregate 2,000,000 shares of the Company's common stock, at a share price of
$0.01 per share; and $40,000 owed by the Company to an officer of the Company
for accrued and unpaid compensation, was paid by the issuance of an aggregate
4,000,000 shares of the Company's common stock, at a share price of $0.01 per
share.
Also in July 2005, the Company's board of directors approved the issuance of an
aggregate of 4,390,000 shares of the Company's common stock to two consultants,
at a share price of $0.01 per share. This issuance was in satisfaction of an
aggregate of $43,900 owed by the Company for services previously performed by
these individuals.
All of these offerings and sales were made in reliance on the exemption from
registration contained in Section 4(2) of the Securities Exchange Act and/or
Regulation D promulgated thereunder as not involving a public offering of
securities.
Until the Company's stockholders approve an amendment to the Company's charter
to increase the number of authorized shares of common stock, the Company will be
unable to fulfill its obligations to all convertible noteholders to permit the
conversion into common stock of amounts due pursuant to the terms of the
convertible notes. In the event that the Company has not raised further capital
prior to the maturity dates of the convertible notes, the Company would be in
default of those notes if its stockholders have not formally approved an
increase in the number of authorized common shares. The Company is not, at this
time, in default of the convertible notes.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
EQUITY COMPENSATION PLAN INFORMATION
Number of Weighted average
securities to be exercise price
issued upon of outstanding
exercise of options, Number of
outstanding warrants and securities
options, rights remaining
warrants and available for
Plan category rights future issuance
---------------------------------------------------------------------------------------------------------
(a) (b) (c)
---------------------------------------------------------------------------------------------------------
Equity compensation plans approved by security 0 0 0
holders
Equity compensation plans not approved by
security holders 0 0 14,320,000
---------------------------------------------------------------------------------------------------------
Total 0 0 14,320,000
================= ================ =================
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
audited consolidated financial statements and the related notes to the
consolidated financial statements included elsewhere in this report.
This discussion contains forward-looking statements that involve risks and
uncertainties. Such statements, which include statements concerning future
revenue sources and concentration, selling, general and administrative expenses,
research and development expenses, capital resources, additional financings and
additional losses, are subject to risks and uncertainties, including, but not
limited to, those discussed above in Part I, Item 1 and elsewhere in this Form
10-KSB, particularly in "Risk Factors," that could cause actual results to
differ materially from those projected. The forward-looking statements set forth
in this Form 10-KSB are as of December 31, 2005, and we undertake no duty to
update this information.
17
PLAN OF OPERATIONS
The Company had no continuing business operations as of December 31, 2005. At
this time, the Company is operating as a public shell and management is seeking
merger and acquisition candidates with ongoing operations. The Company has
identified an acquisition candidate, BioLargo, the owner of the BioLargo
technology. The Company and BioLargo have entered into the M & L Agreement and
the Company intends to acquire substantially all of the assets of IOWC, subject
to various conditions, including approval of the Company's stockholders.
Over the course of several years, the Company had attempted to enter various
businesses through the acquisitions of entities operating ongoing businesses or
technology that needed to be developed and marketed. However, as a result of
various factors, primarily inadequate capital and the inability to raise
sufficient financing successfully, these acquisitions could not be properly
exploited and integrated to produce profitable operations by the Company and
such acquisitions were disposed of or abandoned.
The Company is presently focused primarily on maintaining the corporate entity
and seeking new business opportunities. The Company will need working capital
resources to maintain the Company's status and to fund other anticipated costs
and expenses during the year ending December 31, 2006 and beyond. The Company's
ability to continue as a going concern is dependent on the Company's ability to
raise capital to, at a minimum, meet its corporate maintenance requirements. If
the Company is able to acquire an ongoing business and/or technology that must
be exploited, it would need additional capital until and unless that prospective
operation is able to generate positive working capital sufficient to fund the
Company's cash flow requirements form operations.
As a result of the dramatic change in direction of the Company's scope and
focus, and the discontinuation of its previous operating businesses in 2004,
comparisons of year-to-year results of operations are not meaningful.
RESULTS OF OPERATIONS - COMPARISON OF THE YEARS ENDED DECEMBER 31, 2005 AND 2004
REVENUE
The Company had no revenues from operations during either 2005 or 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, and General and Administrative expenses were $945,000 for the year
ending December 31, 2005, as compared to $970,000 for the year ending December
31, 2004, or a net decrease of 3%. The largest components of these expenses
were:
a. Salaries and Payroll-related Expenses: These expenses were $220,000 in
2005, compared to $371,000 in 2004, a decrease of $151,000 or 41% percent. The
decrease is primarily attributable to an expense recorded by the company in the
prior year for the issuance of 3,000,000 shares of the Company's common stock to
an officer of the Company in lieu of cash compensation in the amount of
$118,000.
b. Consulting Expenses: These expenses were $324,000 in 2005, compared
$24,000 in 2004, an increase of $300,000. The increase is primarily attributable
to the increase in the Company's need for outside consultants, including Mr.
Code, the inventor of the BioLargo technology, to assist the Company in
preparing a comprehensive business plan for the commercialization of the
BioLargo technology; with advising the Company in various respects regarding the
BioLargo business and opportunities; further product development and design;
financial, valuation and marketing services; licensing, initial marketing and
pre-sale research and activities; and various other consulting services. The
increase is also partially attributable to a reversal of accrued consulting
expense relating to the issuance (and subsequent return to treasury) of the
Company's common stock in 2004.
18
c. Legal Expenses: These expenses were $199,000 in 2005, compared to $307,000
in 2004, a decrease of $108,000. This decrease is primarily attributable to the
high level of legal services required during 2004 with respect to the Premium
Medical Group, Inc ("PMG") acquisition and operations, which acquisition was
later rescinded, partially offset by increased legal work associated with the
Company's financing efforts and the IOWC Transactions.
d. Independent Director Compensation: These expenses were $120,000 in both
2005 and 2004.
e. Settlement Charge: This expense was $0 in 2005, compared to $163,000 in
2004, a decrease of $163,000. This decrease is attributable to the settlement
reached in the Flight Options litigation in 2004, in which the Company may be
obligated to pay up to approximately $163,000 to Flight Options (See Part I,
Item 3, "Legal Proceedings").
f. Reversal of Accrued Liability. In 2005, management reviewed the Company's
accrued liabilities and reversed an accrual for rental expense of $55,000, which
it currently believes that the Company will no longer have to pay.
EXPENSES ASSOCIATED WITH STOCK ISSUED FOR SERVICES
In 2005, the Company recorded an expense of $13,900 related to the issuance of
1,390,000 shares to one consultant. An additional amount of $90,000 related to
the issuance of 9,000,000 shares was recorded to reduce liabilities in
connection with prior services by advisory board members, lawyers and directors.
In 2004, the Company recorded an expense of $333,000 related to the issuance of
9,900,000 shares to approximately 14 directors, employees and consultants. Of
this amount, $135,000 related to consulting services, $80,000 related to service
by directors and advisory board members, and $118,000 related to salary expense.
NET LOSS
Net Loss for the year ended December 31, 2005 was $1,187,301 or $0.01 per share,
compared to a net loss for the year ended December 31, 2004 of $1,218,048, or
$.03 per share.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $283,462 at December 31, 2005. The Company had
no revenues in the twelve-month period ended December 31, 2005 and was forced to
consume cash on hand to fund operations. The Company's cash position is
insufficient to meet its expenses or its obligations under the LOI with IOWC to
acquire the BioLargo Technology. The Company will be required to raise
additional capital to sustain basic operations through the remainder of 2006 and
to consummate the transactions with IOWC. While the Company is actively seeking
investments through private investors and other parties, there is no assurance
that the Company will be able to raise additional capital for the entire period
required.
19
The Company has approximately $2,740,570 aggregate principal amount of its
promissory notes that mature at various times during 2006. The Company does not
presently have funds sufficient to repay these obligations as they mature. Even
though the terms of all of these notes permit the noteholder to convert the
notes into shares of our common stock, until the Company's stockholders approve
an amendment to the Company's charter to increase the number of authorized
shares of common stock, the Company will be unable to fulfill its obligations to
all noteholders to permit the conversion into common stock of amounts due
pursuant to the terms of the notes. In the event that the Company has not raised
further capital prior to the maturity dates of the convertible notes, the
Company would be in default of those notes if its stockholders have not formally
approved an increase in the number of authorized common shares, or unless the
Company is able to refinance or renegotiate the terms of these notes. No
financing is in place at present, and it is unknown if any financing will be in
place in the future, which would permit the Company to repay these notes in full
as they mature.
The financial statements accompanying this Annual Report have been prepared on a
going concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of our business.
As reflected in the accompanying financial statements, the Company had a net
loss of $1,187,301 for the twelve-month period ended December 31, 2005, negative
cash flow from operating activities of $825,008 for the twelve-month period
ended December 31, 2005, and a stockholders' deficiency of $28,229,187 as of
December 31, 2005. Also, as of December 31, 2005, the Company had limited liquid
and capital resources. The foregoing factors raise substantial doubt about the
Company's ability to continue as a going concern. Ultimately, the Company's
ability to continue as a going concern is dependent upon its ability to attract
new sources of capital, establish an acquisition or reverse merger candidate
with continuing operations, such as IOWC, attain a reasonable threshold of
operating efficiencies and achieve profitable operations. The financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
During 2005, the Company raised $1,055,620 gross proceeds ($1,035,370 net
proceeds) in three private offerings. This amount consisted of (i) $25,000 gross
proceeds which was raised in the First Offering; (ii) $756,120 gross proceeds
($735,870 net proceeds) which was raised in the Second Offering; and (iii)
$299,500 gross and net proceeds which was raised in the Third Offering. See Part
II, Item 5 "Sales of Unregistered Securities".
In the First Offering, the Company offered the First Offering Notes, which are
due and payable one year from the date of issuance. The First Offering Notes
bear interest at a rate of 10% per annum, payable on the maturity date, and can
be converted, in whole or in part, into shares of the Company's preferred stock,
on a basis of $.005 per share, at any time prior to maturity by either the
Company or the holder. See Part II, Item 5 "Sales of Unregistered Securities".
In the Second Offering, the Company offered the Second Offering Notes due and
payable one year from the date of issuance. The Second Offering Notes bear
interest at a rate of 10% per annum, payable on the maturity date, and can be
converted, in whole or in part, into shares of the Company's common stock, on a
basis of ranging from $.005 to $0.016 per share, at any time prior to maturity
by either the Company or the holder. See Part II, Item 5 "Sales of Unregistered
Securities".
In the Third Offering, the Company offered up to $1 million of the Third
Offering Notes due and payable on January 31, 2007. The Third Offering Notes
bear interest at a rate of 10% per annum, payable on the maturity date, and can
be converted, in whole or in part, into shares of the Company's common stock, on
a basis of $0.025 per common share, at any time prior to maturity by either the
Company or the holder. Purchasers of the Notes will receive, for no additional
consideration, a stock purchase warrant (the "Third Offering Warrant") entitling
the holder to purchase a number of Shares of Common Stock equal to the number of
Shares of Common Stock into which the Note is convertible, at an initial price
of $0.05 per Share, with an expiration of October 31, 2007. The Company amended
the terms of the Third Offering to increase the amount of the offering to up to
$2 million, extend the expiration of the offering, extend the maturity date of
the Third Offering Notes to January 31, 2007, and extend the expiration of the
Third Offering Warrants to January 31, 2008. The Third Offering terminated on
February 21, 2006, by which date the Company had raised $1,102,000 gross and net
proceeds. Of this amount, $299,500 was raised during 2005. See Part II, Item 5
"Sales of Unregistered Securities".
20
Even with the successful completion of the Third Offering, the Company will be
required to raise additional capital to sustain its operations and meet its
liabilities as they become due for the next twelve months, as well as to
consummate the transactions with IOWC, fund the operations of the Company after
the transactions are consummated and meet its obligations, including the First
Offering Notes, the Second Offering Notes, and the Third Offering Notes, as they
mature.
SIGNIFICANT DEBT OBLIGATIONS
Significant debt obligations at December 31, 2005 included:
(i) $420,000 due to the Augustine Fund, together with accrued but unpaid
interest, described in more detail below;
(ii) a $1,120,000 note payable which was purchased in March 2003 by New
Millennium, an entity owned and controlled by the Company's president, Dennis
Calvert, and certain members of his family, together with accrued but unpaid
interest, described in more detail below;
(iii) amounts owed to Mr. Calvert personally in the aggregate amount of
approximately $337,796, as described below;
(iv) convertible promissory notes to various investors pursuant to the First
Offering, the Second Offering, and the Third Offering, in the aggregate
principal amount of $1,165,570, plus accrued interest;
(v) approximately $21,000 outstanding remaining on a settlement agreement with
former convertible debenture holders; and
(vi) $35,000 in remaining balance due to a former advisory board member, from a
promissory note dated November 20, 2003 in the original principal amount of
$65,000.
For the twelve-month period ended December 31, 2005, there was $579,000 of
accrued interest recorded related to these obligations.
The Company has received extensions on the repayment of $230,000 principal
amount of the First Offering Notes and Second Offering issued between October
2004 through May 2005, with various maturity dates through May 2, 2006, together
with accrued and unpaid interest thereon. Assuming that at the 2006 Annual
Meeting the Company's, stockholders approve the BioLargo transactions and a
proposal to increase the number of authorized shares of the Company's common
stock, the Company intends to exercise its right to convert the First Offering
Notes, the Second Offering Notes, and the Third Offering Notes, along with
accrued and unpaid interest thereon, into shares of the Company's common stock.
AUGUSTINE FUND NOTE
On June 10, 2003 the Company entered into a Term Loan Agreement ("Loan
Agreement") with the Augustine Fund, pursuant to which the Augustine Fund agreed
to lend the Company $420,000, payable in installments of $250,000, $100,000, and
$70,000 (the "Augustine Loan"). The proceeds of the Augustine Loan were used by
the Company for working capital.
Principal and interest, at an annual rate of 10%, of the Augustine Loan, was
originally due on February 29, 2004. In addition, the Loan Agreement contains
certain requirements that the Company make mandatory prepayments of the
Augustine Loan from the proceeds of any asset sales outside of the ordinary
course of business, and, on a quarterly basis, from positive cash flow. In
addition, all or any portion of the Augustine Loan may be prepaid by the Company
may prepay all or any portion of the Augustine Loan at any time without premium
or penalty.
21
As additional consideration for making the Augustine Loan, the Augustine Fund
received five-year warrants to purchase up to 6,158,381 shares of the Company's
common stock at an exercise price of $0.16 per share. The Company could require
that the warrants be exercised if certain conditions were satisfied. Since these
conditions were not fully satisfied by the maturity date, the Loan Agreement
provides that the Augustine Fund may, at any time following the maturity date
and so long as the warrants remain exercisable, elect to exercise all or any
portion of the warrants pursuant to a "cashless exercise", whereby the Augustine
Fund would be issued the net amount of shares of our common stock, taking into
consideration the difference between the exercise price of the warrants and the
fair market value of our common stock at the time of exercise, without having to
pay anything to the Company for such exercise.
As security for the Augustine Loan, New Millennium, pledged 2.5 million shares
of the Company's common stock owned by New Millennium, and, in addition, the
Company has granted the Augustine Fund a security interest in its 51% membership
ownership interest in NuWay Sports. As a result, the Company will need to
consent of the Augustine Fund to release its security interest in NuWay Sports
if the Company is able to sell NuWay Sports.
Prior to the original maturity date of the Augustine Loan, the Company spoke
with representatives of the Augustine Fund and advised them that the Company was
unable to pay the amount due under the Augustine Loan by the February 29, 2004
maturity date. On March 30, 2004, the Augustine Fund agreed to extend the
maturity date of the Loan Agreement to August 2004. In addition to the extension
of the maturity date, the Augustine Fund was given the option of having the
Augustine Loan satisfied in cash or by the conversion of any remaining principal
balance and any accrued interest on the Augustine Loan to shares of the
Company's common stock at a 15% discount to market, so long as Augustine Fund's
holdings do not exceed 4.9% of the total issued and outstanding shares of the
Company's common stock at any time. In addition, the warrants held by the
Augustine Fund to purchase 6,158,381 shares of the Company's common stock were
re-priced to an exercise price of $.035 per share. Exercise of the warrants is
also subject to the limit that the Augustine Fund does not hold more than 4.9%
of the issued and outstanding shares of the Company's common stock. The Company
recorded $19,000 and $50,000 of interest expense for the three- and nine-month
periods ended September 30, 2004, related to the Augustine Loan.
On March 7, 2005, the Company and the Augustine Fund agreed to extend the
maturity date of the Augustine Loan to May 2006, in exchange for the issuance of
a warrant that gives the Augustine Fund the right to purchase 8,000,000 shares
of the Company's common stock at $0.005 per share for a period of five years. On
July 29, 2005, the Company and the Augustine Fund finalized the terms of this
amendment to the Augustine Loan and executed formal documentation, in which the
parties agreed to further extend the maturity date to May 2006. In exchange, the
Company issued a warrant that gives the Augustine Fund the right to purchase
8,000,000 shares of the Company's common stock at $0.005 per share for a period
of five years. Accordingly, as of December 31, 2005, the principal amount of the
loan, together with approximately $546,780 in accrued but unpaid interest, had
not been repaid.
OBLIGATION TO NEW MILLENNIUM
In conjunction with the acquisition from Med Wireless of the license for the Med
Wireless and PRLS technologies on August 21, 2002, the Company assumed a
$1,120,000 note (the "Med Wireless Note") with interest at 10% per annum payable
by Med Wireless to Summitt Ventures, Inc. ("Summitt Ventures"). Summitt Ventures
is controlled by Mark Anderson, a former consultant and principal stockholder of
the Company. The Med Wireless Note is secured by the Company's assets and was
originally due on June 15, 2003.
As part of a series of transactions that the Company undertook to separate
itself completely from Mr. Anderson, on March 26, 2003, Summitt Ventures sold
the Med Wireless Note, together with 4,182,107 shares of the Company's common
stock owned by Mr. Anderson's affiliates, Camden Holdings and Summit Healthcare,
to New Millennium, in exchange for a $900,000 promissory note issued by New
Millennium in favor of Summitt Ventures, Camden Holdings, and Summit Healthcare
(the New Millennium Note; see Part I, Item 1, "Business-Overview"). The New
Millennium Note is secured by all of the stock of the Company owned by New
Millennium and Mr. Calvert. (See "Augustine Fund Note" above.) Other than Mr.
Calvert, no individual, entity or party presently or previously associated with
the Company has ever had any ownership interest in New Millennium. Mr. Anderson,
a principal of those companies that sold and/or licensed the technologies to the
Company, conditioned the transaction with New Millennium on the Company's
agreeing to convert the Med Wireless Note to common stock.
22
Since New Millennium purchased the Med Wireless Note, the Company has attempted
multiple times to convert the Med Wireless Note, but has been unable to obtain
the required stockholder vote, due to a lack of quorum, to do so. The three
attempts are described below.
On March 26, 2003, the Company's board of directors voted to convert the Med
Wireless Note by New Millennium into 22,400,000 shares of common stock of the
Company, at a conversion price discounted 37.5% from the then market price of
$0.08. New Millennium agreed to this conversion.
In arriving at a conversion price, the board of directors determined that a
37.5% discount to market price was appropriate based on a number of factors,
including that (i) with the quantity of the shares that would be issued, a block
of shares that size could not be liquidated without affecting the market price
of the shares, and (ii) the shares would be "restricted shares" and could
therefore not be sold by New Millennium in the public markets prior to two years
from the date of the conversion, and thereafter would be subject to the volume
and manner of sale limitations of Rule 144 under the Securities Act of 1933.
Subsequent to the vote by the board to convert the Med Wireless Note, the
Company received notification from NASDAQ's Listing Qualifications Department
that converting the Note without stockholder approval violated certain NASDAQ
Marketplace Rules. In response to this notification, the board, with the
concurrence of New Millennium, voted to amend its resolution and delay
conversion of the Note until the Company's stockholders approved the conversion.
At the Company's June 6, 2003 board meeting, Mr. Calvert, on behalf of New
Millennium, and the Company, through the unanimous action of the board (with Mr.
Calvert abstaining), agreed that, in light of current market conditions (namely
the significant increase in the trading price of the Company's common stock
since March 26, 2003, the date on which the conversion of the Note was
originally approved by the board, from $0.08 to $0.28 as of June 6, 2003), it
would be inequitable for New Millennium to convert the Med Wireless Note at the
originally agreed to $0.05 per share price. Mr. Calvert, on behalf of New
Millennium, and the Company orally agreed to rescind the agreement to convert
the Med Wireless Note.
In addition, New Millennium orally agreed with the Company to extend the
maturity date of the Med Wireless 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 Med Wireless Note (to
correspond to the payment terms of the New Millennium Note), and furthermore to
reduce the Company's obligation on the Note to the extent that New Millennium
might be able to reduce its obligation on the New Millennium Note. While the
prior holder of the Med Wireless Note, Summitt Ventures, purported to condition
New Millennium's purchase on the conversion of the Med Wireless Note, Mr.
Calvert has represented to the Company that due to Mr. Anderson's failure to
honor his obligations in the purchase agreement, Mr. Calvert now believes that
conversion of the Med Wireless Note is no longer a required term of the
agreement between New Millennium and Summitt Ventures.
The Company was unable to make the $100,000 payment on the Med Wireless Note on
the extended due date of October 1, 2003. At a board meeting on October 15,
2003, the board decided to put the issue of conversion of the Med Wireless Note
to the Company's stockholders at a special meeting of the stockholders scheduled
for December 9, 2003. The stockholders meeting was held on December 9, 2003, but
adjourned without a vote, because not enough shares to constitute a quorum were
represented. The stockholders meeting was rescheduled for December 30, 2003, at
which a quorum was also not present. Because this was the second attempt to
obtain a quorum, and more than 4,000,000 additional shares were required to be
voted to obtain a quorum, the board adjourned the meeting indefinitely. As a
result, the Med Wireless Note was not converted into stock and the outstanding
principal amount, together with accrued and unpaid interest, remains as a
liability of the Company.
23
In conjunction with the Company's January 31, 2004 purchase of PMG (later
rescinded in October 2004), and as a condition to that transaction (the "PMG
Transaction"), the Premium Medical Group shareholders (the "PMG Shareholders")
required the Company to convert the Med Wireless Note so as to eliminate the
obligation from the Company's balance sheet. At a meeting on February 10, 2004,
the board of directors voted to convert the Med Wireless Note into 30,869,992
shares of its common stock, at a conversion price of $0.04, discounted 20% from
the then market price of $0.05. New Millennium agreed to this conversion. In
arriving at a conversion price, the board of directors determined that a 20%
discount to market price was appropriate based on a number of factors, including
(i) the holding period of the stock will be two years, and thus is not liquid
until that point, and (ii) the amount of the stock issued would make it
impossible to liquidate the stock at the current market price. This discount was
equal to the discount proposed to the stockholders in December 2003 at the
abandoned stockholders meeting, and less than the discount used by the board at
the first conversion attempt in April 2003.
The board approved the conversion knowing that, since its conversion was a
condition imposed by the PMG Shareholders, they (who would hold 45% of the
Company's common stock at the time of such meeting) would provide the additional
shares necessary to obtain a quorum and formal stockholder approval. Stockholder
approval was also necessary to increase the number of authorized shares
necessary to convert the Med Wireless Note. However, due to lack of operational
capital, the Company was unable to remain current in its SEC filings, and thus
was unable to hold the required stockholder meeting.
In October 2004, the Company, PMG and the PMG Shareholders rescinded the PMG
Transaction. Because the board of director's decision to convert the Med
Wireless Note was based in part on the requirements of the PMG Shareholders, the
board on October 28, 2004, determined not to convert the Med Wireless Note.
Considering that the Company at the time was a shell corporation with no
operations, Mr. Calvert also agreed to extend the maturity of the Med Wireless
Note indefinitely until the Company's status changed.
Accordingly, as of December 31, 2005, the principal amount of the Med Wireless
Note, together with $317,956 in accrued but unpaid interest, had not been
repaid.
On April 28, 2006, the Board and Mr. Calvert agreed to amend the New Millennium
Note to (i) extend the due date to January 15, 2008; (ii) waive any payments of
interest until the New Millennium Note becomes due; (iii) reduce the principal
amount of the New Millennium Note from $1,120,000 to $900,000, equal to a 19.6%
reduction, and New Millennium's basis in said Note; and (iv) correspondingly
reduce the accrued but unpaid interest due under the terms of the New Millennium
Note from $317,956 to $255,636, also equal to a 19.6% reduction.
Additionally, Mr. Calvert, the Company's President and CEO has proposed to the
Board of Directors a plan to amend the New Millennium Note to extend the due
date to January 15, 2008; waive any cash payments of interest until the New
Millennium Note becomes due; reduce the principal amount of the New Millennium
Note from $1,120,000 to $900,000, equal to a 19.6% reduction and New
Millennium's basis; and comparably reduce the accrued but unpaid interest due
under the terms of the New Millennium Note from $317,956 to $255,636, also equal
to a 19.6% reduction. The proposal is currently under consideration by the Board
of Directors but it is expected to approve the proposal.
OBLIGATIONS TO DENNIS CALVERT
In 2003 and 2004, the Company's President, Dennis Calvert, loaned money to the
Company by paying from his personal funds certain of the Company's expenses. A
significant portion of these personal funds was obtained by Mr. Calvert by
refinancing his primary residence and cashing out equity thereon. On March 7,
2005, the Company and Mr. Calvert agreed that the $101,770 still outstanding and
owed by the Company to Mr. Calvert would be repaid under the terms of a
promissory note bearing interest of 10% per annum, requiring monthly payments
and maturing on January 15, 2006. As of December 31, 2005, the Company had
repaid approximately $92,800 of this loan; approximately $9,000 principle
remained outstanding. Subsequent to the end of the fiscal year ended December
31, 2005, the balance of this obligation was repaid by the Company.
24
As of December 31, 2005, the Company had accrued an expense related to the
unpaid accrued compensation due Mr. Calvert in the amount of $328,821.
OBLIGATION TO DR. SEAY
In February 2005, the Company amended its obligations to Dr. James Seay under
its promissory note dated November 20, 2003 in the principal amount of $50,000
and which matured on February 18, 2004. On the maturity date of the note the
Company was obligated to pay Dr. Seay $65,000. The Company has paid Dr. Seay
$30,000 and the balance of $35,000 remains outstanding. The amendment to the
note entered into on February 10, 2005, (i) extends the maturity date of the
note to February 3, 2006, (ii) provides for interest to accrue at a rate of 10%
per annum (15% upon default), and (iii) allows for the conversion of the note
into 7,000,000 shares of the Company's common stock, or $.005 per share. In
February 2006, this note has been further extended to the sooner of June 30,
2006, or the date the Company's stockholders approve an amended to the Company's
charter increasing the number of authorized shares of common stock.
CRITICAL ACCOUNTING POLICIES
The SEC recently issued Financial Reporting release No. 60, "Cautionary Advice
Regarding Disclosure About Critical Accounting Policies" (FRR 60"), suggesting
companies provide additional disclosure and commentary on their most critical
accounting policies. In FRR 60, the SEC defined the most critical accounting
policies as the ones that are most important to the portrayal of a company's
financial condition and operating results, and require management to make its
most difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition,
the Company's most critical accounting policies include: non-cash transactions
and compensation valuations that affect the total expenses reported in the
current period and/or values of assets received in exchange.
The Company has established a policy relative to the methodology to determine
the value assigned to each intangible acquired with or licensed by the Company
and/or services or products received for non-cash consideration of the Company's
common stock. The value is based on the market price of the Company's common
stock issued as consideration, at the date of the agreement of each transaction
or when the service is rendered or product is received, as adjusted for
applicable discounts.
The methods, estimates and judgments the Company uses in applying these most
critical accounting policies have a significant impact on the results of the
Company reports in its financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets - An Amendment of APB No. 29." The provisions of this statement are
effective for non-monetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. This statement eliminates the exception to fair value for
exchanges of similar productive assets and replaces it with a general exception
for exchange transactions that do not have commercial substance - that is,
transactions that are not expected to result in significant changes in the cash
flows of the reporting entity. The Company does not believe that the adoption of
SFAS 153 will have a significant effect on its future consolidated financial
statements.
25
In May 2005, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 154, "Accounting Changes and Error Corrections, a Replacement of Accounting
Principles Board (APB) Opinion No. 20 and FASB Statement No. 3." SFAS 154
requires retrospective application to prior periods' financial statements for
changes in accounting principles, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. SFAS 154
also requires that retrospective application of a change in accounting principle
be limited to the direct effects of the change. Indirect effects of a change in
accounting principle, such as a change in non-discretionary profit-sharing
payments resulting from an accounting change, should be recognized in the period
of the accounting change. SFAS 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived, non-financial assets be
accounted for as a change in accounting estimate effected by a change in
accounting principle. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
Early adoption is permitted for accounting changes and corrections of errors
made in fiscal years beginning after the date this Statement is issued. The
Company is required to adopt the provisions of SFAS 154, as applicable,
beginning in fiscal 2007. The Company does not believe the adoption of SFAS 154
will have a significant effect on its future consolidated financial statements.
Other recent accounting pronouncements issued by FASB (including its Emerging
Issued Task Force), the American Institute of Certified Public Accountants and
the Securities and Exchange Commission did not or are not believed by management
to have a material impact on the Company's present or future consolidated
financial statements.
ITEM 7. FINANCIAL STATEMENTS.
Our consolidated financial statements as of and for the years ended December 31,
2005 and 2004 are presented in a separate section of this report following Item
14 and begin with the index on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As disclosed in our Current Report on Form 8-K filed on September 10, 2004, as
amended on September 17, 2004, we dismissed Haskell & White LLP ("H&W") as our
principal accounting firm as of September 9, 2004. As disclosed in our Current
Report on Form 8-K filed on September 16, 2004, we engaged Jeffrey S. Gilbert,
CPA ("Gilbert") as our principal accountant. Gilbert was engaged to audit our
consolidated financial statements for the year ended December 31, 2003. The
decision to change auditors was recommended by our audit committee and approved
by our board of directors. During the Company's relationship with H&W, since
H&W's initial engagement as the principal auditors on March 31, 2003, through
September 9, 2004, there were no disagreements with H&W, whether or not
resolved, on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which, if not resolved to
H&W's satisfaction, would have caused it to make reference to the subject matter
of the disagreement(s) in connection with its report on the consolidated
financial statements for the year ended December 31, 2002.
ITEM 8A. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures. Our management
evaluated, with the participation of Dennis Calvert, who serves as both our
Chief Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
Annual Report on Form 10-KSB. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.
26
(b) Changes in internal control over financial reporting. There was no change
in our internal control over financial reporting that occurred during the period
covered by this Annual Report on Form 10-KSB that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
IITEM 8B. OTHER INFORMATION.
None
27
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following is certain information as of April 28, 2006 regarding our
directors and officers:
NAME POSITION AGE DIRECTOR SINCE
---- -------- --- --------------
Dennis Calvert President, Chief Executive Officer, 43 2002
Chief Financial Officer and Chairman
Joseph Provenzano Secretary and Director 36 2002
Gary Cox (1)(2) Director 45 2003
Dennis E. Marshall (1)(2) Director 62 2006
----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
There are no family relationships between any director and any executive
officer of the Company.
BIOGRAPHICAL INFORMATION REGARDING DIRECTORS AND EXECUTIVE OFFICERS
Dennis Calvert is our President, Chief Executive Officer, Chairman of the
Board, and Interim Chief Financial Officer. Dennis Calvert was appointed a
director in June 2002, and has served as President and Chief Executive Officer
since June 2002, Corporate Secretary from September 2002 until March 2003, and
Interim Chief Financial Officer since March 2003. Mr. Calvert holds a BA degree
in Economics from Wake Forest University, where he was a varsity basketball
player on full scholarship. Mr. Calvert also studied at Columbia University and
Harding University. He was an honor student in high school with numerous
leadership awards. He is also an Eagle Scout. Mr. Calvert has an extensive
entrepreneurial background as an operator, investor and consultant. From June
2002 to September 2002 he served as president of Med Wireless, Inc. In 1998 he
was a founder, president and board member of Utelecom Communications, Inc. where
he led the acquisition of four companies and secured a line of credit for $7.5
million. He remains an owner and board member of that firm. He was an investor
and served as a manager of Beep for Free.com, LLC beginning in the year 2000, a
consumer products and technology related company. Mr. Calvert resigned as the
manager of Beep For Free.com, LLC in June 2002 and the company ceased operations
in December 2002. Mr. Calvert was a founder and chairman of ZZYZX Technologies,
Inc., a company that designed and produced high tech equipment. ZZYZX was sold
in 2001. From 1990 to 1996 Calvert served as head of mergers and acquisitions
for Medical Asset Management, Inc., a company that acquired and managed
medical-related businesses. During his tenure he participated in more than 50
acquisitions and served in numerous positions with the Company. Prior, he was a
founder and officer of a medical recruiting and consulting firm named Merritt
Hawkins and Associates from 1987 to 1990. Earlier, he was a top producing sales
associate for a leading physician recruitment firm, Jackson and Coker, Inc. and
served as a sales associate for Diamond Shamrock, Inc. from 1985 to 1986.
Joseph Provenzano was appointed a director in June 2002 and assumed the
role of Corporate Secretary in March 2003. Mr. Provenzano heads the Investor
Relations effort and manages the mergers and acquisitions function for NuWay. He
began his corporate career in 1988 as a Personnel Manager and Recruiter for
First American Travel, a marketing company in Southern California. He then
entered into an entry-level Technician position within the Commercial and
Residential security industry. He left the industry as a General Manager in the
mid 1990's to apply his marketing and sales training to the logistics industry.
He was then employed by two major Southern California moving and storage
companies as head of marketing. He formed his own marketing company called
Pre-Move Marketing Services (PMSA), offering advertising and direct marketing
products for the moving and storage industry, in 1996. He joined Camden
Holdings, Inc., an investment holding company to manage their mergers and
acquisitions department, in mid 2001, and participated in more than 50 corporate
mergers and acquisitions. He was employed there until March 2003, at which time
he became employed full time by the Company.
Gary Cox has been a director since May 2003. Mr. Cox has more than 10
years in the healthcare field as consultant to hospitals and medical groups. He
started his own firm in 1995 named Resource Medical International and is still
active in that business. He served for more than 10 years with UK firms in sales
and marketing positions prior to beginning his healthcare career. He holds a
technical degree in engineering from Leicester University in England. He was
also a competitive athlete and played for a number of professional soccer
(football) clubs in England in his early career.
Dennis E. Marshall has been a director of the Company since April 28,
2006. Marshall has over 35 years of experience in real estate, asset management,
management level finance, and operations-oriented management. Since 1981, Mr.
Marshall has been a real estate investment broker in Orange County, California,
representing buyers and sellers in investment acquisitions and dispositions.
From March 1977 to January 1981, Mr. Marshall was a real estate syndicator at
McCombs Corporation as well as the assistant to the Chairman of the Board. While
at McCombs Corporation, Mr. Marshall became the Vice President of Finance, where
he financially monitored numerous public real estate syndications. From June
1973 to September 1976, Mr. Marshall served as an equity controller for the Don
Koll Company, an investment builder and general contractor firm, at which Mr.
Marshall worked closely with institutional equity partners and lenders. Before
he began is career in real estate, Mr. Marshall worked at Arthur Young & Co.
(now Ernst & Young) from June 1969 to June 1973, where he served as Supervising
Senior Auditor and was responsible for numerous independent audits of publicly
held corporations. During this period, he obtained Certified Public Accountant
certification. Mr. Marshall earned a degree in Accounting from the University
of Texas, Austin in 1966 and earned a Master of Science Business Administration
from the University of California, Los Angeles in 1969.
28
COMMITTEES OF THE BOARD OF DIRECTORS; DIRECTOR INDEPENDENCE; CODE OF ETHICS
The board of directors has established an Audit Committee and a
Compensation Committee. Due to the Company's small size, it does not have a
Nominating/Corporate Governance Committee.
The Audit Committee operates under a written charter. The Audit Committee
meets with management and the Company's independent public accountants to review
the adequacy of internal controls and other financial reporting matters. Mr.
Harrison served as Chairman of the Audit Committee during 2005 and until April
6, 2006, when he resigned as a director. Mr. Marshall has served as Chairman of
the Audit Committee since April 28, 2006. Mr. Cox also serves on the audit
committee. The board of directors has designated Mr. Marshall an audit committee
financial expert and believes that Mr. Marshall also satisfies the current
definitional requirements of SEC rules and regulations to be an audit committee
financial expert.
The Compensation Committee operates under a written charter. The
Compensation Committee reviews the compensation for all officers and directors
and affiliates of the Company. The Committee also administers the Company's
stock option plan. . Mr. Harrison served as Chairman of the Compensation
Committee during 2005 and until April 6, 2006, when he resigned as a director.
Mr. Marshall has served as Chairman of the Compensation Committee since April
28, 2006. Mr. Harrison is Chairman of the Compensation Committee and Mr. Cox
serves on the Compensation Committee.
The board of directors has determined that each of Messrs. Marshall and
Cox is independent as defined under NASDAQ Marketplace rules.
In October 2004, the board of directors adopted a written code of ethics
that applies to its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, certain officers and persons holding 10% or more of the
Company's common stock to file reports regarding their ownership and regarding
their acquisitions and dispositions of the Company's common stock with the
Securities and Exchange Commission. Such persons are required by SEC regulations
to furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely upon a review of Forms 3, 4, and
5 (and amendments thereto) and written representations provided to the Company
by executive officers, directors and stockholders beneficially owning 10% or
greater of the outstanding shares, the Company believes that such persons filed
pursuant to the requirements of the Securities and Exchange Commission on a
timely basis.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company
to the chief executive officer, who was the only person who received
compensation in excess of $100,000 (the "Named Executive Officers") during 2005
and 2004:
ANNUAL
COMPENSATION LONG-TERM COMPENSATION
------------------ -------------------------------------------
PAYOUTS
AWARDS SECURITIES
ANNUAL OTHER ANNUAL RESTRICTED UNDERLYING TIP OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION STOCK AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
----------------------------- ----- ------- ------------ ------------ ------------ ------- -------------
Dennis Calvert, 2005 $ 168,000 -- -- -- -- --
Chief Executive Officer 2004 $ 168,000 -- -- -- -- --
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Dennis Calvert in
December 2002. Mr. Calvert's employment agreement provides for him to be
employed for five years at an annual salary of $168,000. The employment
agreement further provides that Mr. Calvert work with the Company on a full time
basis, that the office be located in Laguna Hills, California, that he receive
annual increases of 10% of his base income, that bonuses will be payable based
on the greater of a performance scale established by the Compensation Committee,
assigned by the Board, or 3% of the annual increase in market capitalization
value. The compensation plan includes benefits of a car allowance, insurance and
a standard vacation package. The agreement has certain minimum performance
standards and calls for a severance package equal to one year's base
compensation, plus an additional one half year's compensation for each year of
service beginning in 2003. Standard confidentiality, Company ownership rights to
property and assets and arbitration clauses are included in the agreement.
29
In contemplation of a proposed amendment to Mr. Calvert's employment
agreement, the Compensation Committee of the Board of Directors approved an
increase in Mr. Calvert's cash compensation, effective January 1, 2006, to a
rate of $184,800 per year.
OPTIONS GRANTED DURING LAST FISCAL YEAR
No options were granted to the Named Executive Officers during 2005.
EQUITY COMPENSATION PLANS
2002 CONSULTANT EQUITY PLAN
In August 2002, the Company's Board approved the formation of the 2002
Consultant Equity Plan (the "2002 Plan"), designed to allow consultants to be
compensated with shares of Company common stock for services provided to the
Company. A total of 1,500,000 shares under the 2002 Plan were registered with
the SEC. The 2002 Plan was amended by the Company's Board in December 2002. A
total of 3,500,000 additional shares were registered with the SEC on a Form S-8
registration statement on December 27, 2002. Approval of the 2002 Plan was not
submitted to the vote of the stockholders. Persons eligible to receive stock
awards under the 2002 Plan included "consultants" that provide bona fide
consulting services to the Company, excluding any services incident to the
raising of capital or promotion or maintenance of a market for the Company's
securities.
The 2002 Plan was terminated by the Board on December 16, 2004. From
August 2002 through February 2003, the Company issued all but 84,452 of the
5,000,000 shares available under the 2002 Plan to approximately 26 consultants,
employees and directors.
2003 STOCK COMPENSATION PLAN
In February 2003, the Board approved the 2003 Stock Compensation Plan
("2003 Plan") as a means of providing directors, key employees and consultants
additional incentive to provide services to the Company. The 2003 Plan was
terminated by the Board at its meeting on December 16, 2004. The 2003 Plan set
aside up to 15,000,000 shares of the Company's common stock for these purposes,
which shares were registered with the SEC on a Form S-8 registration statement
on February 27, 2003. Approval of the 2003 Plan was not submitted to a vote of
the stockholders. The Board administered the 2003 Plan. The 2003 Plan allowed
the Board to award grants of shares of the Company's common stock or options to
purchase shares of the Company's common stock.
From February through September 2003, the Company issued 14,863,230 shares
under the 2003 Plan to 27 directors, employees and consultants.
In March 2003, the Board approved, and the Company issued, 3,000,000
shares of common stock to Dennis Calvert, President and Chief Executive Officer
of the Company, as consideration for his services. The Board subsequently
modified its approval of this issuance to make it conditioned upon stockholder
approval of the transaction because of NASDAQ Marketplace Rules governing change
of control transactions. Mr. Calvert returned the 3,000,000 shares to the
Company. On December 9, 2003, the Company attempted to conduct a stockholder
meeting to approve the terms of the issuance of 3,000,000 shares of the
Company's common stock to Dennis Calvert. The Company was unable to obtain a
quorum at the meeting. The meeting was adjourned to December 30, 2003, but again
the Company was unable to obtain a quorum. As of the date of the filing of this
Annual Report, the 3,000,000 shares of the Company's common stock have not been
issued to Mr. Calvert.
2004 EQUITY PLAN
On March 10, 2004, the Board approved the Company's 2004 Equity Plan as a
means of providing directors, key employees and consultants additional incentive
to provide services for the Company. Both stock options and stock grants may be
made under this plan. The Plan sets aside up to 20,000,000 shares of the
Company's common stock for these purposes, which were registered with the SEC.
Approval of this plan was not submitted to the vote of the stockholders. The
Board administers this plan. The plan allows the Board to award grants of common
shares or options to purchase common shares. As plan administrator, the board
has sole discretion to set the price of the options. The Board may at any time
amend or terminate the plan. It does not expire on its terms.
During 2005, the Company issued an aggregate 10,390,000 shares to five
consultants, directors and employees. None of these shares have been registered
with the SEC, and all of such shares are therefore restricted securities. In
2005, there was $103,390 of expenses recorded related to the issuance of these
shares. Of this amount $13,390 related to consulting services, $30,000 related
to legal services, $20,000 related to Board expense and $40,000 related to
salary expense.
30
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information as of December 31,
2005, with respect to compensation plans under which equity securities of the
Company were authorized for issuance.
NUMBER OF
SECURITIES TO BE WEIGHTED
ISSUED UPON AVERAGE EXERCISE NUMBER OF
EXERCISE OF PRICE OF SECURITIES
OUTSTANDING OUTSTANDING REMAINING
OPTIONS, WARRANTS OPTIONS, WARRANTS AVAILABLE FOR
PLAN CATEGORY AND RIGHTS AND RIGHTS FUTURE ISSUANCE
------------------------------------------------------ ----------------- ----------------- -----------------
(a) (b) (c)
Equity compensation plans approved by security holders 0 0 0
Equity compensation plans not approved by security
holders 0 0 14,320,000
Total 0 0 14,320,000
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding the beneficial
ownership of shares of the Company's common stock as of April 28, 2006 by (i)
all stockholders known to the Company to be beneficial owners of more than 5% of
the outstanding common stock; (ii) each director and executive officer of the
Company individually and (iii) all directors and executive officers of the
Company as a group.
AMOUNT OF
BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1)(2) OWNERSHIP (3) CLASS (4)
------------------------------------------ ----------------- --------------
Dennis Calvert (5) 4,782,107 7.6%
Joseph Provenzano 8,224,936 13.1%
Dennis Marshall (6) 800,000 1.3%
Gary Cox 2,000,000 3.2%
All directors and officers as a
group (4 persons) 15,807,043 24.9%
1) Except as noted in any footnotes below, each person has sole voting
power and sole dispositive power as to all of the shares shown as beneficially
owned by them.
2) Unless otherwise indicated, the address for each person is 2603 Main
Street, Suite 1150, Irvine, California 92614.
3) Other than as indicated below, none of these security holders has the
right to acquire any amount of the shares within sixty days from options,
warrants, rights, conversion privilege, or similar obligations.
4) Percentage ownership is based on 62,703,501 shares of common stock
outstanding on April 26, 2006. Beneficial ownership is determined in accordance
with the rules of the SEC and generally includes voting or investment power with
respect to securities. Shares of common stock subject to options, warrants and
convertible notes currently exercisable or convertible, or exercisable or
convertible within 60 days, are deemed outstanding for determining the number of
shares beneficially owned and for computing the percentage ownership of the
person holding such options, but are not deemed outstanding for computing the
percentage ownership of any other person. Except as indicated by footnote, and
subject to community property laws where applicable, the persons named in the
table have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them.
5) This amount excludes 35,019,272 shares of the company's common stock
issuable upon conversion of the promissory note held by New Millennium LLC, an
entity affiliated with and controlled by Mr. Calvert. See "Certain Relationships
and Related Transactions".
6) This amount consists of 400,000 shares issuable upon conversion of the
Company's 10% Convertible Notes due January 31, 2007 and 400,000 shares of
common stock issuable upon exercise of the Company's warrants.
31
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH DENNIS CALVERT AND NEW MILLENNIUM
In conjunction with the acquisition of a technology license from Med
Wireless, Inc. on August 21, 2002, the Company assumed a $1,120,000 note (the
"Note") with interest at 10% per annum payable by Med Wireless to Summitt
Ventures, Inc. 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,
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 (the
"New Millennium Note") issued by New Millennium in favor of Summitt Ventures.
The New Millennium Note is secured by all of the stock of the Company owned by
New Millennium and Mr. Calvert. On March 26, 2003, the Board voted to enter into
an amendment to the Note (the "Original Note Amendment") to provide for
conversion of the Note into 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 the Note Amendment. Subsequent to the vote by the Board to
convert the Note, the Company received notification from Nasdaq's Listing
Qualifications Department that converting the Note without stockholder approval
violated certain Nasdaq Marketplace Rules. In response to this notification, the
Board, with the concurrence of New Millennium, voted to amend its resolution and
withhold issuance of the shares to New Millennium pending stockholder approval
for the conversion. 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, and prior to a stockholder
vote on the conversion, 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 the then-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 (together with
accrued interest thereon) 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 New Millennium
Note), and furthermore to reduce the Company's obligation on the Note to the
extent that New Millennium is able to reduce its obligation on the New
Millennium Note.
Due to the Company's lack of liquidity, the Company was unable to repay
the first $100,000 installment of the Note when it became due on October 1,
2003. To address this issue, the Board appointed a committee (the "Special
Committee") consisting of Board members Steve Harrison and Joseph Provenzano to
negotiate revised terms and conditions of the Note with Mr. Calvert. Mr. Calvert
informed the Special Committee that in order to accommodate the Company's
working capital needs, Mr. Calvert would be willing to convert the Note into the
Company's equity. Due to the Company's lack of liquidity, and because the terms
of the conversion were negotiated on behalf of the Company by Disinterested
members of the Board and management, the Board determined not to seek a
third-party fairness opinion on the terms of the proposed conversion. The Board
did, however, instruct the Special Committee to ensure that the Special Company
presented any proposed loan conversion transaction to the Company's shareholders
with a requirement that a majority vote of the disinterested stockholders be
required for approval.
Pursuant to a series of negotiations between Mr. Calvert and the Special
Committee, the Special Committee and Mr. Calvert agreed to once again provide
for the conversion of the Note into equity. The parties agreed that the Note
(together with accrued interest thereon) would be cancelled and converted into
shares of the Company's common stock at a per share price equal to $0.036 (a 20%
discount to the closing price of the Company's common stock of $0.045 on October
16, 2003, the date an agreement between the Special Committee and Mr. Calvert
was reached).
In arriving at the conversion price, the Special Committee determined that
a 20.0% 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 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.
The stockholders meeting was held on December 9, 2003, but adjourned
without a vote, because not enough shares to constitute a quorum were
represented. The stockholders meeting was rescheduled for December 30, 2003, at
which a quorum was also not present. Because this was the second attempt to
obtain a quorum, and more than 4,000,000 additional shares were required to be
voted to obtain a quorum, the board adjourned the meeting indefinitely. As a
result, the Note was not converted into common stock and the outstanding
principal amount, together with accrued and unpaid interest, remains as a
liability of the Company.
32
In conjunction with the Company's January 31, 2004 purchase of Premium
Medical Group ("PMG") (later rescinded in October 2004), and as a condition to
that transaction, the Premium Medical Group shareholders (the "PMG
Shareholders") required the Company to convert the note so as to eliminate the
obligation from the Company's balance sheet. At a meeting on February 10, 2004,
the board of directors voted to convert the note into 30,869,992 shares of its
common stock, at a conversion price of $0.04, discounted 20% from the then
market price of $0.05. New Millennium agreed to this conversion. In arriving at
a conversion price, the board of directors determined that a 20% discount to
market price was appropriate based on a number of factors, including (i) the
holding period of the stock will be two years, and thus is not liquid until that
point, and (ii) the amount of the stock issued would make it impossible to
liquidate the stock at the current market price. This discount was equal to the
discount proposed to the stockholders in December 2003 at the abandoned
stockholders meeting, and less than the discount used by the board at the first
conversion attempt in April 2003.
The board approved the conversion knowing that, since its conversion was a
condition imposed by the PMG Shareholders, they (who would hold 45% of the
Company's common stock at the time of such meeting) would provide the additional
shares necessary to obtain a quorum and formal stockholder approval. Stockholder
approval was also necessary to increase the number of authorized shares
necessary to convert the Note. However, due to lack of operational capital, the
Company was unable to remain current in its SEC filings, and thus was unable to
hold the required stockholder meeting.
In October 2004, the Company, PMG and the PMG Shareholders rescinded the
Stock Purchase Agreement. Because the board of director's decision to convert
the Note was based in part on the requirements of the PMG Stock Purchase
Agreement, the board on October 28, 2004, determined not to convert the Note.
Considering that the Company at the time was a shell corporation with no
operations, Mr. Calvert also agreed to extend the maturity of the Note
indefinitely until the Company's status changed.
Accordingly, as of December 31, 2005, the principal amount of the loan,
together with $229,911 in accrued but unpaid interest, had not been repaid. New
Millennium has informed the Company's board of directors that New Millennium
still intends to fully convert the Note to stock as soon as it is practical,
following stockholder approval. As of the date of the filing of this report, the
stockholder vote has not taken place and the Note has not been converted into
shares of the Company's common stock.
On April 28, 2006, the Board and Mr. Calvert agreed to amend the New
Millennium Note to (i) extend the due date to January 15, 2008; (ii) waive any
payments of interest until the New Millennium Note becomes due; (iii) reduce the
principal amount of the New Millennium Note from $1,120,000 to $900,000, equal
to a 19.6% reduction, and New Millennium's basis in said Note; and (iv)
correspondingly reduce the accrued but unpaid interest due under the terms of
the New Millennium Note from $317,956 to $255,636, also equal to a 19.6%
reduction.
ITEM 13. EXHIBITS
The following documents are filed as part of this Form 10-KSB.
(a) Financial Statements:
Reference is made to the contents to Financial Statements of Nuway Medical, Inc.
under Item 7 of this Form 10-KSB/A.
(b) Exhibits:
The exhibits listed below are required by Item 601 of Regulation S-B.
Exhibit No. Description of Exhibit
---------- ----------------------
3.1 Certificate of Incorporation (1)
3.2 Certificate of Amendment of Certificate of
Incorporation filed 11/26/1991 (9)
3.3 Certificate of Amendment of Certificate of
Incorporation filed 6/24/1994 (9)
3.4 Certificate of Amendment of Certificate of
Incorporation filed 7/22/1999 (10)
33
3.5 Certificate of Amendment of Certificate of
Incorporation filed 8/31/2001 (1)
3.6 Certificate of Amendment of Certificate of
Incorporation filed 10/30/2002 (2)
3.7 Certificate of Amendment of Certificate of
Incorporation filed 12/26/2002 (2)
3.8 Certificate of Merger merging Repossession
Auction, Inc. (Florida corporation) and
Repossession, Inc. (Delaware corporation) (9)
3.9 Certificate of Designations creating Series A
Preferred Stock (12)
3.10 Bylaws, as amended and restated (2)
4.1 Form of Warrant to Purchase Common Stock issued
to Preferred Stock investors (12)
4.2 Warrant to Purchase Common Stock issued to
Arthur Lipper (12)
4.3 Warrant No. AG-1 to purchase up to 6,158,381
shares of NuWay Medical, Inc. common stock held
by Augustine II LLC (5)
4.4 Amended and Restated Warrant No. AG-1 to
purchase up to 6,158,381 shares of NuWay
Medical, Inc. common stock held by Augustine II
LLC (12)
10.1 Employment Agreement between the Company and
Dennis Calvert dated December 11, 2002 (2)
10.2 Employment Agreement between the Company and
Joseph Provenzano dated March 1, 2003 (2)
10.3 License Agreement with Med Wireless Inc. dated
August 21, 2002 (2).
10.4 Amendment to License Agreement with Med Wireless
Inc. dated September 18, 2002 (2)
10.5 Secured Promissory Note in the face amount of
$1,120,000 issued to Med Wireless (4)
10.6 Secured Term Promissory Note in the face amount
of $900,000 by New Millennium to Camden Holdings
(4)
10.7 Agreement to issue warrant dated February 24,
2003 between NuWay Medical, Inc. and Sachi
International, Inc. (12)
10.8 Term Loan Agreement dated as of June 10, 2003
between NuWay Medical, Inc. and Augustine II LLC
(5)
10.9 Stock Pledge Agreement dated as of June 10,
2003, between New Millennium and Augustine II
LLC (5)
10.10 Stock Pledge Agreement dated as of June 10,
2003, between NuWay Medical, Inc. and Augustine
II LLC (5)
34
10.11 Promissory Note dated November 20, 2003 between
NuWay Medical, Inc. and James Seay, DDS. (12)
10.12 Amendment No. 1 to Promissory Note (dated
November 20, 2003 between NuWay Medical, Inc.
and James Seay, DDS) dated February 10, 2005
(14)
10.13 Promissory Note by NuWay Medical, Inc. in favor
of Augustine II, LLC (5)
10.14 Amendment No. 1 to Term Loan Agreement dated as
of March 30, 2004 between NuWay Medical, Inc.
and Augustine II LLC (12)
10.15 Amended and Restated Convertible Term Note by
NuWay Medical, Inc. in favor of Augustine II,
LLC (12)
10.16 Convertible Loan Agreement and Note between
NuWay Medical, Inc. and James Burchard (12)
10.17 Conversion Agreement with New Millennium dated
October 16, 2003 (6)
10.18 Stock Purchase Agreement with Premium Medical
Group, Luis Ruiz and Eduardo Ruiz (7)
10.19 Rescission Agreement with Premium Medical Group,
Luis Ruiz and Eduardo Ruiz (8)
10.20 Unsecured Promissory Note dated March 7, 2005 in
favor of Dennis Calvert (13)
10.21 Form of Convertible Term Note issued in Second
Offering (14)
10.22 Second Amended and Restated Convertible Term
Note by NuWay Medical, Inc., in favor of
Augustine II, LLC (16)
10.23 Amendment Number 2 to Term Loan Agreement dated
as of July 29, 2005 between NuWay Medical, Inc.
and Augustine II, LLC (16)
10.24 Warrant Number AG-II to Purchase Common Stock
issued July 29, 2005 in favor of Augustine II,
LLC (16)
10.25 Marketing and License Agreement (17)
10.26 Form of Promissory Note issued in the Third
Offering Note (17)
10.27 Form of Warrant issued in the Third Offering
(17)
21.1 List of Subsidiaries of the Registrant (18)
24.1 Power of Attorney (included on Signature Page)
(18)
31.1* Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 and Rules 13(a)-14 and 15(d)-14
under the Securities Exchange Act of 1934
35
32.1* Certification of Chief Executive Officer and
Interim Chief Financial Officer Pursuant to 18
U.S.C. Section 1350.
----------
* Filed herewith
(1) Incorporated herein by reference from the 10-KSB filed by the Company for
the year ended December 31, 2001.
(2) Incorporated herein by reference from the 10-KSB filed by the Company for
the year ended December 31, 2002.
(3) Incorporated herein by reference from the Form S-8 filed by the Company on
August 8, 2002, and amended on Form S-8 filed by the Company on December
27, 2002.
(4) Incorporated herein by reference from the Form 8K filed by the Company on
May 1, 2003.
(5) Incorporated herein by reference from the 10-QSB filed by the Company for
the period ending March 31, 2003.
(6) Incorporated herein by reference from the Form 8-K filed by the Company on
October 31, 2003.
(7) Incorporated herein by reference from the Form 8-K filed by the Company on
February 17, 2004.
(8) Incorporated herein by reference from the Form 8-K filed by the Company on
October 15, 2004.
(9) Incorporated herein by reference from the 10-KSB filed by the Company for
the year ended December 31, 1998
(10) Incorporated herein by reference from the 10-KSB filed by the Company for
the year ended December 31, 1999
(11) Incorporated herein by reference from the Form S-8 filed by the Company on
February 27, 2003.
(12) Incorporated herein by reference from the 10-KSB filed by the Company for
the year ended December 31, 2003
(13) Incorporated herein by reference from the 10-QSB filed by the Company for
the period ending March 31, 2004.
(14) Incorporated herein by reference from the 10-KSB filed by the Company for
the year ended December 31, 2005.
(15) Incorporated herein by reference from the Form 8-K filed by the Company on
July 8, 2005.
(16) Incorporated herein by reference from the 10-QSB filed by the Company for
the period ending March 31, 2005.
(17) Incorporated herein by reference from the Form 8-K filed by the Company on
January 9, 2006.
(18) Incorporated herein by reference from the Form 10-KSB filed by the Company
on March 31, 2006.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table summarizes the fees charged by Mr. Gilbert for certain
services rendered to the Company and its subsidiaries during 2004 and 2005:
AMOUNT BILLED AND PAID
TYPE OF FEE FISCAL YEAR 2004 FISCAL YEAR 2005
------------------------ ------------------- --------------------
Audit (1) $ 18,000 $ 55,925
Audit-Related (2) 8,000 4,050
Tax (3) -- --
All Other (4) -- --
------------------- --------------------
Total $ 26,000 $ 59,975
=================== ====================
----------
(1) This category consists of fees for the audit of our annual financial
statements included in the Company's annual report on Form 10-KSB and review of
the financial statements included in the Company's quarterly reports on Form
10-QSB. This category also includes advice on audit and accounting matters that
arose during, or as a result of, the audit or the review of interim financial
statements, statutory audits required by non-U.S. jurisdictions and the
preparation of an annual "management letter" on internal control matters.
(2) Represents services that are normally provided by the independent
auditors in connection with statutory and regulatory filings or engagements for
those fiscal years, aggregate fees charged for assurance and related services
that are reasonably related to the performance of the audit and are not reported
as audit fees. These services include consultations regarding Sarbanes-Oxley Act
requirements, various SEC filings and the implementation of new accounting
requirements.
(3) Represents aggregate fees charged for professional services for tax
compliance and preparation, tax consulting and advice, and tax planning.
(4) Represents aggregate fees charged for products and services other
than those services previously reported as charged by former auditors.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused the amendment to this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NUWAY MEDICAL, INC.
Date: April 28, 2006 By: /s/ Dennis Calvert
-------------------------------
Dennis Calvert, President,
Chief Executive Officer and
Interim Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the date indicated:
NAME TITLE DATE
-------------------------- ------------------------ ---------------
/s/Dennis Calvert Chairman of the Board, April 28, 2006
-------------------------- Chief Executive Officer,
Dennis Calvert President and Chief
Financial Officer
/s/Joseph Provenzano* Director April 28, 2006
--------------------------
Joseph Provenzano
/s/Gary Cox* Director April 28, 2006
--------------------------
Gary Cox
Director _________, 2006
--------------------------
Dennis E. Marshall
*by Dennis Calvert, Attorney-in-fact
37
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm....................F-1
Consolidated Balance Sheets as of December 31, 2005 and
December 31, 2004.................................................F-2
Consolidated Statements of Operations for the years
ended December 31, 2005 and 2004..................................F-3
Consolidated Statements of Changes in Stockholders'
Deficit for the years ended December 31, 2005 and 2004............F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 2005 and 2004..................................F-5
Notes to Consolidated Financial Statements..........................F-6 - F-29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders NuWay Medical, Inc.
I have audited the consolidated balance sheets of NuWay Medical, Inc. and
Subsidiary (the "Company") as of December 31, 2005 and 2004 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these consolidated financial statements based on my audit.
I conducted my audits in accordance with standards of the Public Company
Accounting oversight Board (United States). Those standards require that I plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedure that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the company's
internal control over financial reporting. Accordingly, I express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosure in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. I believe my audits provide a reasonable basis for my opinion.
In my opinion, the consolidate financial statements referred to above present
fairly, in all material respects, the consolidated financial position of NuWay
Medical, Inc. and Subsidiary as of December 31. 2005 and 2004 and the results of
their operations and their cash flows for the years then ended, in conformity
with the accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has limited liquid resources,
recurring losses, and is seeking to implement its business plan, which requires
the Company to acquire or develop a business. These matters raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also discussed in Note 1. The consolidated financial
statements do not include any adjustment that might result from the outcome of
this uncertainty.
/s/ Jeffrey S. Gilbert
Los Angeles, California
March 22, 2006
F-1
NUWAY MEDICAL, INC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2005 AND 2004
ASSETS
December 31, December 31,
2005 2004
------------ ------------
CURRENT ASSETS
Cash and Cash Equivalents $ 283,462 $ --
------------ ------------
Total Current Assets 283,462 --
------------ ------------
TOTAL ASSETS $ 283,462 $ --
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 2,312,663 $ 2,054,270
Notes Payable 2,740,570 1,632,100
Debentures Payable, Net 21,151 21,151
------------ ------------
Total Current Liabilities 5,074,384 3,707,521
------------ ------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT
EVENTS
SHAREHOLDERS' EQUITY
Convertible Preferred Series A, $.00067 Par Value, 25,000,000
Shares Authorized, 559,322 Shares Issued and
Outstanding at December 31, 2005 and December 31, 2004 375 375
Common Stock, $.00067 Par Value, 100,000,000 Shares
Authorized, 62,453,501 and 51,981,236 Shares Issued
At December 31, 2005 and December 31, 2004, respectively 41,136 34,120
Additional Paid-In Capital 23,396,754 23,299,870
Accumulated Deficit (28,229,187) (27,041,886)
------------ ------------
Total Shareholders' Equity (4,790,922) (3,707,521)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 283,462 $ --
============ ============
See accompanying notes to consolidated financial statements
F-2
NUWAY MEDICAL, INC AND SUBSIDIARY
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2005 AND 2004
2005 2004
Revenue ------------ ------------
Total Revenues -- --
------------ ------------
Costs and Expenses
Selling, General and Administrative $ 944,807 $ 971,944
Depreciation, Depletion and Amortization -- --
------------ ------------
Total Costs and Expenses 944,807 971,944
------------ ------------
Loss from operations (944,807) (971,944)
------------ ------------
Other Income and Expense
Interest Expense (242,494) (250,704)
Other Income -- 4,600
------------ ------------
Net Other Expense (246,104) (246,104)
------------ ------------
------------ ------------
Net Loss $ (1,187,301) $ (1,218,048)
============ ============
Loss Per Common Share - Basic and Diluted
Loss per share $ (0.02) $ (0.03)
============ ============
Weighted Average Common Share Equivalents Outstanding 54,041,809 45,987,808
============ ============
See accompanying notes to consolidated financial statements
F-3
NUWAY MEDICAL, INC AND SUBSIDIARY
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2005
Preferred Stock Common Stock
----------------------- ----------------------------
Number Par Number Par Additional Retained
of Value of Value Paid-In Earnings Treasury
Shares $.00067 Shares $.00067 Capital (Deficit) Stock
---------- -------- ------------- ------------ ------------- ------------- ----------
BALANCE DECEMBER 31, 2003 559,322 375 36,386,486 $ 23,976 $ 23,002,818 $ (25,823,838) $ (127,004)
STOCK ISSUED FOR SERVICES 9,183,400 6,181 362,885
CONVERSION OF
DEBENTURES 1,100,000 405 34,595
RETIREMENT OF TREASURY STOCK (44,900) (30) (126,974) 127,004
SALE OF COMMON STOCK 5,156,250 3,454 26,546
ADJUSTMENT TO COMMON STOCK 200,000 134
NET LOSS FOR THE YEAR
ENDED DECEMBER 31, 2003 (1,218,048)
---------- -------- ------------- ------------ ------------- ------------- ----------
BALANCE DECEMBER 31, 2004 559,322 375 51,981,236 34,120 23,299,870 (27,041,886) --
ADJUSTMENT TO COMMON STOCK 82,265 55 (55)
STOCK ISSUED FOR SERVICES 10,390,000 6,961 96,939
NET LOSS (1,187,301)
---------- -------- ------------- ------------ ------------- ------------- ----------
BALANCE DECEMBER 31, 2005 559,322 $ 375 62,453,501 $ 41,136 $23,396,754 $ (28,229,187) $ --
========== ======== ============= ============ ============= ============= ==========
See accompanying notes to consolidated financial statements
F-4
NUWAY MEDICAL, INC AND SUBSIDIARY
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2005 AND 2004
----------- -----------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(1,187,301) $(1,218,048)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Issuance of Stock for Services 103,900 362,898
Amortization of Discount on Note -- 62,131
Increase in Accounts Payable and Accrued Expenses 258,393 725,248
----------- -----------
Net Cash Used In Operating Activities (825,008) (67,771)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
----------- -----------
No Cash Used In or Provided by Investing Activities -- --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Funds from Loan 1,108,470 60,000
Payments to reduce Note Payable -- (22,900)
Proceeds from Sale of Common Stock -- 30,000
Proceeds from Sale of Preferred Stock -- --
----------- -----------
Net Cash Provided By Financing Activities 1,108,470 67,100
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 283,462 (671)
CASH AND CASH EQUIVALENTS - BEGINNING -- 671
----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 283,462 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION
Cash Paid During the Period for:
Interest
$ -- $ --
=========== ===========
Income Taxes $ -- $ --
=========== ===========
See accompanying notes to consolidated financial statements
F-5
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND ORGANIZATION
OUTLOOK
The Company had no continuing business operations as of December 31, 2005. The
Company operated as a public shell during the twelve month period ended December
31, 2005, and operations primarily consisted of the Company's president seeking
funding, maintaining the corporate entity, complying with the requirements of
the Securities Exchange Commission (the "SEC") and seeking merger and
acquisition candidates or new business opportunities. (See discussion of the
letter of intent with IOWC Technologies, Inc. ("IOWC"), in Note 5.)
The Company will need working capital resources to maintain the Company's status
and to fund other anticipated costs and expenses during the year ending December
31, 2005 and beyond, as well as to consummate the transactions with IOWC and
fund the operations of the Company after the transactions are consummated. The
Company's ability to continue as a going concern is dependent on the Company's
ability to raise capital to, at a minimum, meet its corporate maintenance
requirements. If the Company is able to acquire IOWC or another ongoing business
and/or technology that must be exploited, it would need additional capital until
and unless that prospective operation is able to generate positive working
capital sufficient to fund the Company's cash flow requirements from operations.
Cash and cash equivalents totaled $283,462 at December 31, 2005. The Company had
no revenues in the twelve-month period ended December 31, 2005 and was forced to
consume cash on hand to fund operations. The Company will be required to raise
additional capital to sustain basic operations through the remainder of 2006 and
to consummate the transactions with IOWC. While the Company is actively seeking
investments through private investors and other parties, there is no assurance
that the Company will be able to raise additional capital for the entire period
required.
The Company has approximately $2,740,570 aggregate principal amount of its
promissory notes that mature at various times during 2006. The Company does not
presently have funds sufficient to repay these obligations as they mature. Even
though the terms of all of these notes permit the noteholder to convert the
notes into shares of our common stock, until the Company's stockholders approve
an amendment to the Company's charter to increase the number of authorized
shares of common stock, the Company will be unable to fulfill its obligations to
all noteholders to permit the conversion into common stock of amounts due
pursuant to the terms of the notes. In the event that the Company has not raised
further capital prior to the maturity dates of the convertible notes, the
Company would be in default of those notes if its stockholders have not formally
approved an increase in the number of authorized common shares, or unless the
Company is able to refinance or renegotiate the terms of these notes. No
financing is in place at present, and it is unknown if any financing will be in
place in the future, which would permit the Company to repay these notes in full
as they mature.
F-6
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
The financial statements accompanying this Annual Report have been prepared on a
going concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of our business.
As reflected in the accompanying financial statements, the Company had a net
loss of $1,187,301 for the twelve-month period ended December 31, 2005, negative
cash flow from operating activities of $825,008 for the twelve-month period
ended December 31, 2005, and a stockholders' deficiency of $28,229,187 as of
December 31, 2005. Also, as of December 31, 2005, the Company had limited liquid
and capital resources. The foregoing factors raise substantial doubt about the
Company's ability to continue as a going concern. Ultimately, the Company's
ability to continue as a going concern is dependent upon its ability to attract
new sources of capital, establish an acquisition or reverse merger candidate
with continuing operations, such as IOWC, attain a reasonable threshold of
operating efficiencies and achieve profitable operations. The financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
During 2005, the Company raised $1,055,620 gross proceeds ($1,035,370 net
proceeds) in three private offerings. This amount consisted of (i) $25,000 gross
proceeds which was raised in a private offering (the First Offering) of
convertible notes that commenced in October 2004 and terminated in January 2005;
(ii) $756,120 gross proceeds ($735,870 net proceeds) which was raised in a
private offering (the Second Offering) of convertible notes that commenced in
January 2005 and terminated in August 2005; and (iii) $299,500 gross and net
proceeds which was raised in a private offering (the Third Offering) of
convertible notes that commenced in September 2005 and terminated in February
2006.
In the First Offering, the Company offered 10% convertible notes (the First
Offering Notes) due and payable one year from the date of issuance. The First
Offering Notes bear interest at a rate of 10% per annum, payable on the maturity
date, and can be converted, in whole or in part, into shares of the Company's
preferred stock, on a basis of $.005 per share, at any time prior to maturity by
either the Company or the holder. See Part II, Item 5 "Sales of Unregistered
Securities".
In the Second Offering, the Company offered 10% convertible notes (the Second
Offering Notes) due and payable one year from the date of issuance. The Second
Offering Notes bear interest at a rate of 10% per annum, payable on the maturity
date, and can be converted, in whole or in part, into shares of the Company's
common stock, on a basis of ranging from $.005 to $0.016 per share, at any time
prior to maturity by either the Company or the holder. See Part II, Item 5
"Sales of Unregistered Securities".
F-7
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
In the Third Offering, the Company offered up to $1 million of its 10%
convertible notes due October 31, 2006 (the Third Offering Notes) and stock
purchase warrants (the Third Offering Warrants) to purchase up to an aggregate
40,000,000 shares of the Company's common stock. The Third Offering Notes are
convertible into shares of common stock at $.025 per share. The Third Offering
Warrants are exercisable at a price of $.05 per share and expire on October 31,
2007. The Second Offering was made to a limited number of individuals who are
"accredited investors" as that term is defined by Rule 501(a) of Regulation D
promulgated under the Securities Act of 1933, as amended (the "Securities Act").
The Company amended the terms of the Third Offering to increase the amount of
the offering to up to $2 million, extend the expiration of the offering, extend
the maturity date of the Third Offering Notes to January 31, 2007, and extend
the expiration of the Third Offering Warrants to January 31, 2008. The Third
Offering terminated on February 21, 2006, by which date the Company had raised
$1,102,000 gross and net proceeds. Of this amount, $299,500 was raised during
2005.
Even with the successful completion of the Third Offering, the Company will be
required to raise additional capital to sustain its operations and meet its
liabilities as they become due for the next twelve months, as well as to
consummate the transactions with IOWC, fund the operations of the Company after
the transactions are consummated and meet its obligations, including the First
Offering Notes, the Second Offering Notes, and the Third Offering Notes, as they
mature.
ORGANIZATION
The Company was initially organized as Repossession Auction, Inc. under the laws
of the State of Florida in 1989. In 1991, the Company merged into a Delaware
corporation bearing the same name. In 1994, the Company's name was changed to
Latin American Casinos, Inc. to reflect its focus on the gaming and casino
business in South and Central America, and in 2001 the Company changed its name
to NuWay Energy, Inc. to reflect its new emphasis on the oil and gas development
industry. During October 2002, the Company's name was changed to NuWay Medical,
Inc. coincident with the divestiture of its non-medical assets and the retention
of new management.
PROPOSED ACQUISITION OF IOWC ASSETS
On July 25, 2005, the Company executed a letter of intent ("LOI") with IOWC,
pursuant to which the Company will acquire certain of BioLargo's assets (the
"Purchased Assets"), consisting of certain intellectual property, including two
United States patents (collectively, the "BioLargo Technology"), and two license
and/or distributor agreements pursuant to which IOWC has licensed the BioLargo
Technology for use in products designed for distribution in the food, medical
and biohazardous material transportation industries. All assets not constituting
the Purchased Assets will remain the property of BioLargo following the closing.
The Company will not assume any liabilities of BioLargo.
F-8
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
The parties also agreed that on or prior to the closing, they would enter into a
definitive asset purchase agreement (the "Asset Purchase Agreement"), and other
agreements, including a research and development agreement (the "R&D
Agreement"), to effect the transactions on or prior to the closing. Pursuant to
the R&D Agreement, the Company will pay BioLargo a monthly fee to conduct
research to further develop the existing BioLargo Technology and products based
on the existing and new technologies.
The letter of intent also requires the Company to raise sufficient funds to (i)
cover the costs of the transactions, (ii) three months post-closing operating
expenses, the latter of which is estimated at approximately $300,000 and (iii)
provide interim funding to BioLargo on a best efforts basis and in amounts
agreed between the parties in an aggregate amount not to exceed $1,000,000.
The letter of intent further provides that, at the Closing, the Company and
Dennis Calvert will enter into an employment agreement for a term of five years,
providing Mr. Calvert with a monthly salary of $15,400 for 2006, and a 10%
increase in his monthly salary for each calendar year thereafter.
It is anticipated that the present management of the Company will remain in
place after the closing and that Mr. Code will become the Company's Chief
Technology Officer. In connection therewith, Mr. Code will enter into an
employment agreement with the Company (the "Code Employment Agreement").
In connection with the previously described transactions and in partial
implementation thereof, on December 31, 2005, the Company executed a Marketing
and Licensing Agreement ("M&L Agreement") with BioLargo. Pursuant to the M&L
Agreement, the Company, through its wholly-owned subsidiary BioLargo Life
Technologies, Inc., a California corporation formed January 3, 2006 ("BLTI"),
acquired certain rights ("Rights") from BioLargo to develop, market, sell and
distribute products that were developed, and are in development, by BioLargo
using the BioLargo Technology.
BioLargo also assigned to BLTI its rights and obligations under two license
agreements, including BioLargo, LLC, in which BioLargo has a 20% interest, as
well as its rights set forth in a letter of intent with another entity
(collectively, the "Assigned Agreements"). The M&L Agreement provides that the
Company is to receive any and all royalties, payments, license fees, and other
consideration generated by the Assigned Agreements. As part of the M&L
Agreement, IOWC has agreed to transfer its 20% interest in BioLargo, LLC to the
Company. In consideration of the Rights and the Assigned Agreements, the Company
has agreed to issue IOWC a total of 38% of its common stock.
F-9
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
The parties further agreed to enter into additional agreements in furtherance of
the July 2005 letter of intent between the Company and IOWC, including (i) the
Asset Purchase Agreement, whereby the Company would acquire the two U.S. patents
held by IOWC; (ii) the R&D Agreement, with a company to be managed and
controlled by Mr. Code; and (iii) the Code Employment Agreement. In
consideration of the Asset Purchase Agreement, the Company has agreed to issue
IOWC an additional one percent of its common stock. In consideration of the R&D
Agreement and Code Employment Agreement, the Company has agreed to issue to Code
individually 17.6% of its common stock. As a result of the foregoing
transactions, the Company will issue a total of 56.6% of its common stock to
BioLargo, calculated on January 1, 2006. The parties further agreed that to the
extent that the Company issues additional equity in connection with one or more
financing transactions after January 1, 2006, then the percentage of equity to
be issued to BioLargo would be diluted pro rata.
The Code Employment Agreement is anticipated to provide that Mr. Code will be
appointed Chief Technology Officer of BLTI, and receive a monthly salary of
$15,400. As explained below, the Company is required to obtain the approval of
its stockholders prior to the issuance of the common stock to IOWC required
pursuant to the M&L Agreement.
The foregoing transactions are subject to approval by IOWC's board of directors
and stockholders, approval by the Company's board of directors, and approval by
the Company's stockholders of the following matters:
o an amendment to the Company's Certificate of Incorporation increasing the
number of authorized shares of its common stock;
o the issuance of the number of shares of common stock to IOWC required
pursuant to the Transactions;
o a reverse split of the Company's common stock; and
o the election of Mr. Code to the Company's board of directors.
In the event that the Company's stockholders do not approve the issuance of
stock, the M&L Agreement shall terminate, and all rights granted to the Company
shall revert to BioLargo.
The closing of the transactions is subject to various conditions, including
those described hereinabove, and conditions customary for transactions of this
nature.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Principles of Consolidation.
The Company has one subsidiary which is inactive called NuWay Sports, LLC.
Management has not been able to sell it. There are no other subsidiaries. The
consolidated balance sheets include the accounts of NuWay Medical, Inc. and
NuWay Sports, LLC. All significant inter-company balances have been eliminated
in consolidation.
F-10
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
b) Property and Equipment.
On April 1, 2004 the Company closed its offices and has in storage its
furniture, fixtures and office equipment. While in use, depreciation was
provided on a straight-line basis over the estimated useful life of the
respective asset. Maintenance and repairs was charged to expense as incurred.
There were no major renewals or betterments.
c) 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."
d) Earnings (Loss) Per Share.
The Company reports basic and diluted earnings (loss) 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
adding to the weighted average shares the dilutive effect if stock options and
warrants were exercised into common stock. For the years ended December 31, 2005
and 2004, the denominator in the diluted EPS computation is the same as the
denominator for basic EPS due to the anti-dilutive effect of the warrants and
stock options on the Company's net loss.
For the years ended December 31, 2005 and 2004, the computation of basic EPS is
as follows:
2005 2004
------------------ -----------------
Numerator - net loss $ (1,187,301) $ (1,218,048)
================== =================
Denominator - weighted shares
outstanding 54,041,809 45,987,808
------------------ -----------------
Loss per share from Continuing
Operations $ (0.02) $ (0.03)
================== =================
e) 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 period reported.
Actual results could differ from those estimates. Estimates are used when
accounting for stock-based transactions, uncollectible accounts receivable,
asset depreciation and amortization, and taxes, among others.
F-11
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
f) 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.
In December 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 123 (Revised 2004), "Share-Based Payment" ("SFAS No.123(R)"). SFAS
No. 123(R) replaces SFAS No. 123 "Accounting for Stock-Based Compensation",
which supersedes Accounting Principles Board ("APB") Opinion No. 25 "Accounting
for Stock Issued to Employees", ("APB 25"), and amends FASB Statement No 95,
"Statement of Cash Flows". SFAS No. 123 (R) requires all share-based payments to
employees, including grants to employee stock options, to be recognized in the
financial statements based on their fair values. SFAS No. 123(R) is effective
for the first annual reporting period beginning after June 15, 2005. The Company
does not expect the impact of the adoption of SFAS 123(R) to have a material
effect on the Company's results of operations.
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 the stock issuance.
g) Non-Cash Transactions
The Company has established a policy relative to the methodology to determine
the value assigned to each intangible acquired with or licensed by the Company
and/or services or products received for non-cash consideration of the Company's
common stock. The value is based on the market price of the Company's common
stock issued as consideration, at the date of the agreement of each transaction
or when the service is rendered or product is received, as adjusted for
applicable discounts.
The methods, estimates and judgments the Company uses in applying these most
critical accounting policies have a significant impact on the results of the
Company reports in its financial statements.
NOTE 3. WARRANTS
During 2005, the Company issued warrants purchase total of 19,980,000 shares of
the Company's common stock. Warrants to purchase 8,000,000 shares of the
Company's common stock were issued to the Augustine Fund as consideration for
the extension of the maturity date of the Augustine Loan. (See Note 8.) These
warrants allow for the holder to purchase shares of common stock at an exercise
price of $0.005 per share through July 29, 2010. Warrants to purchase 11,980,000
shares of the Company's common stock were issued in a private offering to twelve
investors. These warrants allow for the holder to purchase shares of common
stock at an exercise price of $0.05 per share through January 31, 2008. The
value of the warrants at the time of issuances were immaterial as the exercise
price was equal to or greater than the market price of the common shares at that
time.
F-12
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
During 2003, the Company issued warrants to purchase a total of 7,011,036 shares
of the Company's common stock on the following terms: (i) 120,000 shares to an
investor in connection with a purchase of the Company's preferred stock, at a
price of $0.20 per share, which expires March 7, 2006 (ii) 399,322 shares to
investors in connection with a purchase of the Company's preferred stock, at a
price of $0.20 per share, which expires April 15, 2006; (iii) 6,158,381 shares
to an investor in connection with a loan to the Company, originally at a price
of $0.16 per share, which price adjusted to $0.035 per share in connection with
an extension of the loan repayment obligation, which expires June 10, 2008; (iv)
333,333 shares to a consultant in connection with consulting services, at a
price of $0.06 per share, which expires August 29, 2008. The compensation
expense related to (iv) above is immaterial.
In December 2000, the board of directors authorized the issuance of 3,300,000
private five-year stock warrants to acquire common stock at $1.75 per share.
1,500,000 of these warrants as well as 200,000 shares of restricted stock were
issued to the then existing executive officers. In February 2002, 3,000,000 of
the 3,300,000 warrants issued in year 2000 were cancelled. The remaining 300,000
warrants expired unexercised in 2005.
NOTE 4. STOCK COMPENSATION PLANS
NUWAY MEDICAL, INC. 2004 EQUITY PLAN
On March 10, 2004, the board of directors approved the Company's 2004 Equity
Plan as a means of providing directors, key employees and consultants additional
incentive to provide services for the Company. Both stock options and stock
grants may be made under this plan. The Plan sets aside up to 20,000,000 shares
of the Company's common stock for these purposes, which were registered with the
SEC. Approval of this plan was not submitted to the vote of the shareholders.
The Board administers this plan. The plan allows the Board to award grants of
common shares or options to purchase common shares. As plan administrator, the
board has sole discretion to set the price of the options. The Board may at any
time amend or terminate the plan. It does not expire on its terms.
F-13
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
During 2004, the Company issued approximately 9,180,000 shares to 16
consultants, directors, and employees. Of this total 5,680,000 have been
registered with the SEC, while the balance, 3,500,000 shares were not registered
and are restricted securities. Of the total issued in 2004, 1,580,000 shares
relate to services performed in 2003 and 7,600,000 shares relate to 2004. The
effect of the shares issued for 2003 services in 2004 was accrued in the
Company's financial statements for the year ending December 31, 2003. In 2004
there were $275,400 of expenses recorded related to the issuance of these
shares. Of this amount $120,000 related to consulting services, $5,400 related
to legal services, $60,000 related to Board of Directors expense, and $90,000
related to salary expense.
During 2005, the Company issued no shares under the plan.
NOTE 5. SALE OF UNREGISTERED SECURITIES
FIRST OFFERING
In January 2005, pursuant to a private offering that commenced in October 2004
and terminated in January 2005 (the "First Offering"), the Company received
gross and net proceeds of $25,000 from an outside investor and issued its
convertible promissory note (the "First Offering Note") due and payable one year
from the date of issuance. The First Offering Note bears interest at a rate of
10% per annum, payable on the maturity date. The First Offering Note can be
converted, in whole or in part, into shares of the Company's Series A Preferred
stock, on the basis of $.005 per share, at any time prior to maturity by either
the Company or the lender. Each share of Series A Preferred Stock may be
converted by the holder into one share of the Company's common stock. If the
noteholder converts the First Offering Note into Series A Preferred Stock, on or
after the note's original maturity date the noteholder may require the Company
to buy back the shares of Series A Preferred Stock for 110% of the principal
amount of the note (the "Buy Back Provision"). If the Company is unable to do
so, the Company's president, Dennis Calvert, has agreed to buy back the shares
on the same terms. If shares of Series A Preferred Stock are converted into
common stock, the holder has the right to include (piggyback) the shares of
common stock in a registration of securities filed by the Company, other than on
Form S-4 or Form S-8.
The Company's payment obligations under the First Offering Note may be
accelerated upon the following events: (i) the sale of the Company's assets
outside the ordinary course of business; (ii) a breach of the representations
and warranties contained within the evidencing the loan; (iii) the failure to
timely pay the note; (iv) the Company's default in any other loan obligation
greater than $100,000; (v) the Company's dissolution, liquidation, merger,
consolidation, bankruptcy, or future insolvency; and (vi) the commencement of
any suit that threatens to have a material adverse effect on the Company,
including the entry of a final judgment or settlement in excess of $100,000.
F-14
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
SECOND OFFERING
In January 2005, pursuant to a private offering that commenced in that month and
terminated in August 2005 (the "Second Offering"), the Company received gross
and net proceeds of $75,000 from two outside investors and issued its
convertible promissory note (the "Second Offering Note") due and payable one
year from the date of issuance. The Second Offering Note bears interest at a
rate of 10% per annum, payable on the maturity date. The Second Offering Note
can be converted, in whole or in part, into shares of the Company's common
stock, on the basis ranging from $.005 to $0.016 per share, at any time prior to
maturity by either the Company or the holder. The holder has the right to
include (piggyback) the shares of common stock in a registration of securities
filed by the Company, other than on Form S-4 or Form S-8.
The Company's payment obligations under the Second Offering Note may be
accelerated upon the following events: (i) the sale of the Company's assets
outside the ordinary course of business; (ii) a breach of the representations
and warranties contained within the evidencing the loan; (iii) the failure to
timely pay the note; (iv) the Company's default in any other loan obligation
greater than $100,000; (v) the Company's dissolution, liquidation, merger,
consolidation, bankruptcy, or future insolvency; and (vi) the commencement of
any suit that threatens to have a material adverse effect on the Company,
including the entry of a final judgment or settlement in excess of $100,000.
In February 2005, the Company received gross proceeds of $51,000 and net
proceeds of $47,000 from four outside investors and issued Second Offering Notes
which allow conversion into an aggregate total of 5,558,036 shares of common
stock (at a conversion price of approximately $0.009 per common share).
In April 2005, the Company received gross proceeds of $29,000 and net proceeds
of $23,750 from two outside investors and issued Second Offering Notes which
allow conversion into an aggregate total of 2,500,000 shares of common stock (at
a conversion price of approximately $0.009 per common share).
In May 2005, the Company received gross and net proceeds of $50,000 and $47,500
from an outside investor and issued a Second Offering Note which allows
conversion into a total of 7,142,857 shares of common stock (at a conversion
price of $0.007 per common share).
In June 2005, the Company received gross and net proceeds of $256,120 from
eleven outside investors and issued Second Offering Notes which allow conversion
into an aggregate total of 28,612,000 shares of common stock (at a weighted
average conversion price of approximately $0.009 per common share).
Also in July 2005, the Company received gross proceeds of $10,000 and net
proceeds of $9,500 from an outside investor and issued a Second Offering Note
which allows conversion into an aggregate total of 625,000 shares of common
stock (at a conversion price of $0.016 per common share).
F-15
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
In August 2005, the Company received gross proceeds of $260,000 and net proceeds
of $252,000 from five outside investors and issued Second Offering Notes which
allow conversion into an aggregate total of 16,250,000 shares of common stock
(at a conversion price of $0.016 per common share).
THIRD OFFERING
Pursuant to another private offering that commenced in September 2005 and
terminated in February 2006, on December 31, 2005, the Company sold an aggregate
amount of $299,500 of its promissory notes (the "Third Offering Notes") due and
payable January 31, 2007 to twelve individual investors. Each Third Offering
Note bears interest at a rate of 10% per annum, and can be converted, in whole
or in part, into shares of the common stock of the Company at an initial
conversion price of $0.025 per share. The Company sold additional notes under
this offering subsequent to December 31. 2005 (see Note 15 - Subsequent Events).
The Third Offering Notes may not be converted by either the Company or the
holder unless and until each of the following events has first occurred: (i) the
Company's stockholders have approved an increase in the number of shares of
common stock authorized by the Company's Certificate of Incorporation in an
amount not less than the amount required to permit all notes and warrants issued
in this series to be converted into shares of the Company's Common Stock as
provided herein, at a validly held meeting of stockholders at which a quorum is
present and acting throughout; and (ii) the Company has filed with the Secretary
of State of State of Delaware a Certificate of Amendment to the Company's
Certificate of Incorporation to amend its Certificate of Incorporation to
increase the number of shares of common stock authorized by the Company's
Certificate of Incorporation.
Purchasers of the Third Offering Notes received, for no additional
consideration, a stock purchase warrant (the "Third Offering Warrant") entitling
the holder to purchase a number of Shares of Common Stock equal to the number of
Shares of Common Stock into which the Third Offering Note is convertible. The
Third Offering Warrant is exercisable at an initial price of $0.05 per Share and
will expire on January 31, 2008.
OTHER ISSUANCES
In July 2005, the board of directors of the Company approved the issuance of
6,000,000 shares of the Company's common stock to two directors and one officer.
An aggregate $20,000 owed by the Company to two independent directors for unpaid
compensation for serving on the board of directors was paid by the issuance of
an aggregate 2,000,000 shares of the Company's common stock, at a share price of
$0.01 per share; and $40,000 owed by the Company to an officer of the Company
for accrued and unpaid compensation, was paid by the issuance of an aggregate
4,000,000 shares of the Company's common stock, at a share price of $0.01 per
share.
F-16
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
Also in July 2005, the Company's board of directors approved the issuance of an
aggregate of 4,390,000 shares of the Company's common stock to two consultants,
at a share price of $0.01 per share. This issuance was in satisfaction of an
aggregate of $43,900 owed by the Company for services previously performed by
these individuals.
All of these offerings and sales were made in reliance on the exemption from
registration contained in Section 4(2) of the Securities Exchange Act and/or
Regulation D promulgated thereunder as not involving a public offering of
securities.
Until the Company's stockholders approve an amendment to the Company's charter
to increase the number of authorized shares of common stock, the Company will be
unable to fulfill its obligations to all convertible noteholders to permit the
conversion into common stock of amounts due pursuant to the terms of the
convertible notes. In the event that the Company has not raised further capital
prior to the maturity dates of the convertible notes, the Company would be in
default of those notes if its stockholders have not formally approved an
increase in the number of authorized common shares. The Company is not, at this
time, in default of the convertible notes.
NOTE 6. TERMS OF PREFERRED SHARES
Each share of the Series A Preferred Stock is convertible into one share of the
Company's common stock. In addition, for each share of preferred stock sold, the
purchaser received one warrant to purchase one share of common stock at a price
of $0.20 per share. 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. The Series A
Preferred Stock vote with the holders of the outstanding shares of Common Stock
and not as a separate class or series, except as may be required by law.
The holders of outstanding shares of Series A Preferred Stock (which may be
referred to as the "Series A Preferred Stock") shall be entitled to receive in
any fiscal year, dividends, if, when and as declared by the Board of Directors,
out of any assets at the time legally available therefore in cash at a rate
equal to 7% per share, per annum, of the original liquidation preference of
$2.00 per share, subject to adjustment as provided herein. There have been no
dividends declared by the Board of Directors of the Company.
NOTE 7. 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 was converted
into 666,283 shares of the Company's common stock. During 2002, $2,250,000 of
the remaining debentures plus accrued interest was converted into 1,332,570
shares of common stock.
F-17
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
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 then 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. The Company and the
Remaining Debenture Holders then entered into a settlement agreement in which
the Remaining Debenture holders would convert the debentures into common stock
equal to approximately $70,000. The settlement agreement called for conversion
into stock over a period of three months. The Company had partially satisfied
the obligations under this agreement as of December 31, 2003, and further
satisfied its obligations in 2004. As of December 31, 2005, approximately
$21,000 remains outstanding.
NOTE 8. LOAN AGREEMENT - AUGUSTINE LOAN
On June 10, 2003 the Company entered into a Term Loan Agreement ("Loan
Agreement") with Augustine II, LLC ("Augustine Fund"), pursuant to which
Augustine Fund agreed to loan the Company $420,000, payable in installments of
$250,000, $100,000, and $70,000 (the "Augustine Loan"). The Company received all
scheduled installments, and principal and interest (at an annual rate of 10%)
were originally due in full on February 29, 2004. As additional consideration
for making the Augustine Loan, Augustine Fund received five year warrants to
purchase up to 6,158,381 shares of the Company's common stock at an exercise
price of $0.16 per share. The Company 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 Augustine 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 Fund may, at any time
following the maturity date and so long as the warrants remain exercisable,
elect to exercise all or any portion of the warrants pursuant to the "cashless
exercise" provisions of the warrants.
F-18
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
In March 2004, Augustine Fund agreed to extend the maturity date of the Loan
Agreement to August 2004. In consideration of the extension, Augustine Fund was
given the option of having the Augustine Loan satisfied in cash or by the
conversion of any remaining principal balance and any accrued interest on the
Augustine Loan to shares of the Company's common stock at a 15% discount to
market, so long as Augustine Fund's holdings do not exceed 4.9% of the total
issued and outstanding shares of the Company's common stock at any time. In
addition, the warrants held by the Augustine Fund to purchase 6,158,381 shares
of the Company's common stock were re-priced to an exercise price of $.035 per
share. Exercise of the warrants is also subject to the limit that the Augustine
Fund does not hold more than 4.9% of the issued and outstanding shares of the
Company's common stock.
On March 7, 2005, the Company and the Augustine Fund agreed to extend the
maturity date of the Augustine Loan to May 2006 in exchange for the issuance of
a warrant that gives the Augustine Fund the right to purchase 8,000,000 shares
of the Company's common stock at $0.005 per share for a period of five years. On
July 29, 2005, the Company and the Augustine Fund finalized the terms of this
amendment to the Augustine Loan and executed formal documentation.
The Loan Agreement is subject to certain requirements that the Company make
mandatory prepayments of the Augustine Loan from the proceeds of any asset sales
outside of the ordinary course of business, and, on a quarterly basis, from
positive cash flow. In addition, the Company may prepay all or any portion of
the Augustine Loan at any time without premium or penalty. The proceeds of the
Augustine Loan were used by the Company for working capital. As security for the
Augustine 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 Fund a security interest in its ownership interest in the
Company's subsidiary, NuWay Sports, LLC.
The Company recorded interest expense of $72,478 for the year ended December 31,
2005 and $69,445 for the year ended December 31, 2004.
F-19
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
Using the Black-Scholes pricing model, the Company allocated approximately
$245,000 of the Augustine Loan proceeds to the warrants and $175,000 to the note
payable, which allocations were made on a pro rata basis based on the fair value
of the warrants. The Black Scholes calculation assumed a discount rate of
approximately four percent, volatility of 257 percent and no dividends. Given
that the warrants were issued in conjunction with Loan Agreement, such fair
value represents an effective discount on the debt and will be amortized over
the term of the loan. Amortization of this discount for the year ended December
31, 2005 was approximately $0 and $61,500 for the years ended December 31, 2005
and 2004 and is recorded as additional interest expense in the accompanying
consolidated statement of operations. In conjunction with the extension of the
maturity date of the Augustine Loan from February 2004 to August 2004, the
warrants held by Augustine Fund to purchase 6,158,381 shares of the Company's
common stock were re-priced to an exercise price of $.035 per share.
As of December 31, 2005, the principal amount of the loan of $420,000, together
with approximately $165,256 in accrued but unpaid interest, had not been repaid.
NOTE 9. OTHER LOAN
On November 20, 2003, the Company received $50,000 in exchange for a promissory
note in which it agreed to pay $65,000 to Dr. James Seay 90 days from the date
of the loan. The Company's president personally guaranteed the note. The note
matured on February 18, 2004. The Company has paid Dr. Seay $30,000 and the
balance of $35,000 remains outstanding. On February 10, 2005, the Company
amended its obligations to Dr. Seay, which amendment (i) extends the maturity
date of the note to February 3, 2006, (ii) provides for interest to accrue at a
rate of 10% per annum (15% upon default), and (iii) allows for the conversion of
the note into 7,000,000 shares of the Company's common stock, or $.005 per
share. In February 2006, this note has been further extended to the sooner of
June 30, 2006, or the date the Company's stockholders approve an amended to the
Company's charter increasing the number of authorized shares of common stock.
NOTE 10. RELATED PARTY TRANSACTIONS
NEW MILLENNIUM
In conjunction with the acquisition from Med Wireless of the license for the Med
Wireless and PRLS technologies on August 21, 2002, the Company assumed a
$1,120,000 note (the "Med Wireless Note") with interest at 10% per annum payable
by Med Wireless to Summitt Ventures, Inc. ("Summitt Ventures"). Summitt Ventures
is controlled by Mark Anderson, a former consultant and principal stockholder of
the Company. The Med Wireless Note is secured by the Company's assets and was
originally due on June 15, 2003.
F-20
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
As part of a series of transactions that the Company undertook to separate
itself completely from Mr. Anderson, on March 26, 2003, Summitt Ventures sold
the Med Wireless Note, together with 4,182,107 shares of the Company's common
stock owned by Mr. Anderson's affiliates, Camden Holdings and Summit Healthcare,
to New Millennium, in exchange for a $900,000 promissory note issued by New
Millennium in favor of Summitt Ventures, Camden Holdings, and Summit Healthcare
(the "New Millennium Note"). The New Millennium Note is secured by all of the
stock of the Company owned by New Millennium and Mr. Calvert. (See "Augustine
Fund Note" above.) Other than Mr. Calvert, no individual, entity or party
presently or previously associated with the Company has ever had any ownership
interest in New Millennium. Mr. Anderson, a principal of those companies that
sold and/or licensed the technologies to the Company, conditioned the
transaction with New Millennium on the Company's agreeing to convert the Note to
common stock.
Since New Millennium purchased the Med Wireless Note, the Company has attempted
multiple times to convert the note, but has been unable to obtain the required
stockholder vote, due to a lack of quorum, to do so. The three attempts are
described below.
On March 26, 2003, the Company's board of directors voted to convert the Med
Wireless Note into 22,400,000 shares of common stock of the Company, at a
conversion price discounted 37.5% from the then market price of $0.08. New
Millennium agreed to this conversion.
In arriving at a conversion price, the board of directors determined that a
37.5% discount to market price was appropriate based on a number of factors,
including that (i) with the quantity of the shares that would be issued, a block
of shares that size could not be liquidated without affecting the market price
of the shares, and (ii) the shares would be "restricted shares" and could
therefore not be sold by New Millennium in the public markets prior to two years
from the date of the conversion, and thereafter would be subject to the volume
and manner of sale limitations of Rule 144 under the Securities Act of 1933.
Subsequent to the vote by the board to convert the Med Wireless Note, the
Company received notification from NASDAQ's Listing Qualifications Department
that converting the Note without stockholder approval violated certain NASDAQ
Marketplace Rules. In response to this notification, the board, with the
concurrence of New Millennium, voted to amend its resolution and delay
conversion of the Note until the Company's stockholders approved the conversion.
At the Company's June 6, 2003 board meeting, Mr. Calvert, on behalf of New
Millennium, and the Company, through the unanimous action of the board (with Mr.
Calvert abstaining), agreed that, in light of current market conditions (namely
the significant increase in the trading price of the Company's common stock
since March 26, 2003, the date on which the conversion of the Med Wireless Note
was originally approved by the board, from $0.08 to $0.28 as of June 6, 2003),
it would be inequitable for New Millennium to convert the note at the originally
agreed to $0.05 per share price. Mr. Calvert, on behalf of New Millennium, and
the Company orally agreed to rescind the agreement to convert the note.
F-21
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
In addition, New Millennium orally agreed with the Company to extend the
maturity date of the Med Wireless Note to a first payment due October 1, 2003 in
the amount of $100,000 and the balance of the principal due on April 1, 2004,
with interest due according to the original terms of the note (to correspond to
the payment terms of the New Millennium Note), and furthermore to reduce the
Company's obligation on the note to the extent that New Millennium might be able
to reduce its obligation on the New Millennium Note. While the prior holder of
the Med Wireless Note, Summitt Ventures, purported to condition New Millennium's
purchase on the conversion of the Med Wireless Note, Mr. Calvert has represented
to the Company that due to Mr. Anderson's failure to honor his obligations in
the purchase agreement, Mr. Calvert now believes that conversion of the Med
Wireless Note is no longer a required term of the agreement between New
Millennium and Summitt Ventures.
The Company was unable to make the $100,000 payment on the Med Wireless Note on
the extended due date of October 1, 2003. At a board meeting on October 15,
2003, the board decided to put the issue of conversion of the note to the
Company's stockholders at a special meeting of the stockholders scheduled for
December 9, 2003. The stockholders meeting was held on December 9, 2003, but
adjourned without a vote, because not enough shares to constitute a quorum were
represented. The stockholders meeting was rescheduled for December 30, 2003, at
which a quorum was also not present. Because this was the second attempt to
obtain a quorum, and more than 4,000,000 additional shares were required to be
voted to obtain a quorum, the board adjourned the meeting indefinitely. As a
result, the Med Wireless Note was not converted into stock and the outstanding
principal amount, together with accrued and unpaid interest, remains as a
liability of the Company.
In conjunction with the Company's January 31, 2004 purchase of Premium Medical
Group, Inc., a Florida corporation ("PMG"), later rescinded in October 2004,
(see Note 13), and as a condition to that transaction (the "PMG Transaction"),
the Premium Medical Group shareholders (the "PMG Shareholders") required the
Company to convert the Med Wireless Note so as to eliminate the obligation from
the Company's balance sheet. At a meeting on February 10, 2004, the board of
directors voted to convert the note into 30,869,992 shares of its common stock,
at a conversion price of $0.04, discounted 20% from the then market price of
$0.05. New Millennium agreed to this conversion. In arriving at a conversion
price, the board of directors determined that a 20% discount to market price was
appropriate based on a number of factors, including (i) the holding period of
the stock will be two years, and thus is not liquid until that point, and (ii)
the amount of the stock issued would make it impossible to liquidate the stock
at the current market price. This discount was equal to the discount proposed to
the stockholders in December 2003 at the abandoned stockholders meeting, and
less than the discount used by the board at the first conversion attempt in
April 2003.
F-22
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
The board approved the conversion knowing that, since its conversion was a
condition imposed by the PMG Shareholders, they (who would hold 45% of the
Company's common stock at the time of such meeting) would provide the additional
shares necessary to obtain a quorum and formal stockholder approval. Stockholder
approval was also necessary to increase the number of authorized shares
necessary to convert the Med Wireless Note. However, due to lack of operational
capital, the Company was unable to remain current in its SEC filings, and thus
was unable to hold the required stockholder meeting.
In October 2004, the Company, PMG and the PMG Shareholders rescinded the PMG
Transaction. Because the board of director's decision to convert the Med
Wireless Note was based in part on the requirements of the PMG Shareholders, the
board on October 28, 2004, determined not to convert the Note. Considering that
the Company at the time was a shell corporation with no operations, Mr. Calvert
also agreed to extend the maturity of the Med Wireless Note indefinitely until
the Company's status changed.
Accordingly, as of December 31, 2005, the principal amount of the Med Wireless
Note, together with $317,956 in accrued but unpaid interest, had not been
repaid.
Under the terms of the New Millennium Note, it is possible that Summitt
Ventures, Camden Holdings and Summit Healthcare may have a claim to reacquire
the shares of the Company's common stock that were sold to New Millennium. The
New Millennium Note is purportedly secured by the purchased shares of the
Company's common stock; however, New Millennium and Mr. Calvert believe that Mr.
Anderson and his affiliates have not perfected their security interest in those
shares. In addition, the Augustine Fund is the pledgee of 2,500,000 of these
shares and has physical possession of those shares.
Mr. Calvert has proposed to the Board of Directors a plan to amend the New
Millennium Note to extend the due date to January 15, 2008; waive any cash
payments of interest until the New Millennium Note becomes due; reduce the
principal amount of the New Millennium Note from $1,120,000 to $900,000, equal
to a 19.6% reduction; and comparably reduce the accrued but unpaid interest due
under the terms of the New Millennium Note from $317,956 to $255,636, also equal
to a 19.6% reduction. The proposal is currently under consideration by the Board
of Directors.
OBLIGATIONS TO DENNIS CALVERT
In 2003 and 2004, the Company's President, Dennis Calvert, loaned money to the
Company by paying from his personal funds certain of the Company's expenses. A
significant portion of these personal funds was obtained by Mr. Calvert by
refinancing his primary residence and cashing out equity thereon. On March 7,
2005, the Company and Mr. Calvert agreed that the $101,770 still outstanding and
owed by the Company to Mr. Calvert would be repaid under the terms of a
promissory note bearing interest of 10% per annum, requiring monthly payments
and maturing on January 15, 2006. As of December 31, 2005, the Company had
repaid approximately $92,800 of this loan; approximately $9,000 principle
remained outstanding. Subsequent to the end of the fiscal year ended December
31, 2005, the balance of this obligation was repaid by the Company.
F-23
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2005, the Company had accrued an expense related to the
unpaid accrued compensation due Mr. Calvert in the amount of $328,821.
The Company currently occupies space from a consultant at no cost to the
Company.
NOTE 11. PROVISION FOR INCOME TAXES
Any deferred tax assets have been subjected to a 100% valuation allowance, as
management is unable to determine that it is more likely than not that such will
be realized. Due to changes in the Company's ownership through various issuance
of common stock during 2002 and 2003, the utilization of net operating loss
carryforwards may be subjected to annual limitations under provisions of the
Internal Revenue Code. Such limitations could result in the permanent loss of a
portion of the net operating loss carry forwards. The Company has not yet
evaluated the status of its net operating loss carry forwards and may not do so
until such time as the Company expects operating profits.
The Company has not filed its 2002, 2003 and 2004 Federal and State Income tax
returns. Management of the Company does not feel that it will have a material
impact on the financial condition of the Company.
NOTE 12. COMMITMENTS AND CONTINGENCIES
LITIGATION
In June 2002, Geraldine Lyons, the Company's former Chief Financial Officer,
sued the Company and the Company's former president Todd Sanders, for breach of
her employment contract. The lawsuit was brought in the Circuit Court of the
11th Judicial Circuit in Miami-Dade County in Florida. Ms. Lyons seeks
approximately $25,000 due under the contract and the issuance of 100,000 shares
of common stock, with a guarantee that the stock could be sold by Ms. Lyons for
$300,000. Ms. Lyons alleges that additional funds are due under her employment
contract; that the contract requires the Company guarantee that she can sell for
$300,000 the 100,000 shares of stock the Company is required to issue her; and,
that Mr. Sanders promised to purchase from her 100,000 shares of Company common
stock held by her at the price of $4.00 per share.
F-24
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
The Company has counter-sued Ms. Lyons for breach of fiduciary duty, fraud,
violation of Section 12(a)(2) of the Securities Act of 1933, violation of
Section 517.301 of the Florida Statutes, negligent misrepresentation, conversion
and unjust enrichment resulting from the required restatement of the Company's
financial statements for the years ended December 31, 2000 and December 31,
1999. The restatements corrected the previous omission of certain material
expenses related primarily to compensation expense arising from warrants issued
and repriced stock options, as well as other errors.
The case is ongoing at this time, although it has not been vigorously prosecuted
by Ms. Lyons or the Company, in the Company's case primarily because the Company
had lacked the resources to do so. The Company entered into an agreement ("Legal
Defense Agreement") in December 2004 such that Augustine Fund would pay for the
legal expenses associated with the Company's defense and affirmative claims in
this lawsuit (with the right to withdraw funding at any time), and in exchange
would share any net proceeds awarded to the Company pursuant to a settlement or
judgment. The sharing arrangement provides that Augustine Fund will recover
first, out of any money available from recovery, its legal and out of pocket
expenses related to the lawsuit; second, 85% of any additional amounts recovered
up to $500,000; and third, 50% of amounts recovered beyond $500,000. While the
Company believes that it has meritorious positions in this litigation, given the
inherent nature of litigation, it is not possible to predict the outcome of this
litigation or the impact it would have on the Company.
In May 2004, the Company was sued by Flight Options, Inc. ("Flight Options"), a
jet plane leasing company, in the Superior Court of Orange County California.
The lawsuit alleges that the Company owes Flight Options approximately $418,300,
pursuant to a five-year lease assigned to the Company by the Company's former
president Todd Sanders, from his corporation, Devenshire Management Corporation
("Devenshire"). Management of the Company believes that the assignment of the
lease was not properly authorized or approved by the Company, and that by Mr.
Sander's failure to identify the lease in a December 2002 settlement agreement
with the Company, he breached the terms of that settlement agreement and,
pursuant to the settlement agreement, must indemnify the Company for any losses
owed to Flight Options. The Company filed a cross-complaint against Mr. Sanders
and Devenshire seeking indemnity and alleging Mr. Sander's breached his
fiduciary duties in connection with the assignment of the lease. The Company's
Legal Defense Agreement with the Augustine Fund applies also to the Flight
Options litigation.
On March 17, 2005, the Company settled with Flight Options pursuant to a
stipulation that would have allowed the Company to pay Flight Options $100,000
on or before August 5, 2005; if $100,000 was not paid by August 5, 2005, Flight
Options could file a judgment against the Company for $163,310. The Company did
not make a payment on or before August 5, 2005. Subsequently, the parties agreed
that the Company would pay Flight Options a total of $116,000, which amount was
paid. In exchange, Flight Options dismissed the case.
F-25
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
At about the time of the settlement with Flight Options, the Company, Mr.
Sanders and Devenshire agreed to submit the matters in the cross-complaint,
including the indemnity claim, to binding arbitration. On March 7, 2006, an
arbitrator issued an binding award in favor of the Company and against Mr.
Sanders for $120,000.
Legal Fees in the matter have been paid by Augustine, pursuant to the Legal
Defense Agreement between Augustine and the Company. In January 2006, Augustine
and the Company agreed to modify the terms of the Legal Defense Agreement to
allow for both parties to share in any amounts which might be recovered from
Sanders, on a percentage basis equal to the respective costs incurred by each
party. Legal Fees incurred by Augustine are estimated to be approximately
$81,000 as of February 2006, but will likely increase.
On December 4, 2004, the Company was sued by the law firm of Enenstein Russell
and Saltz, LLP to collect fees that had been billed to the Company in the amount
of $15,233, which had been disputed by the Company. In August of 2005, the
Company settled the lawsuit for $9,000. The Company paid the settlement and the
law firm dismissed the lawsuit.
The Company is party to various other claims, legal actions and complaints
arising periodically in the ordinary course of business. In the opinion of
management, no such matters will have a material adverse effect on the Company's
financial position or results of operations.
EMPLOYMENT AGREEMENTS
In January 1997, the Company entered into a five year employment agreement with
Lloyd Lyons, which provided in part that in the event of a merger,
consolidation, sale or conveyance of substantially all the assets of the Company
which resulted in the discharge of Mr. Lyons, he would be entitled to 200
percent of the balance of payments remaining under the contract. The contract
provided salary continuation for a period of two years after his death. In
January 2000, Mr. Lyons passed away and effective August 2, 2000 the Company
amended its employment contract with his widow and primary beneficiary of his
estate, whereby the salary continuation clause included in his contract was
replaced with a severance arrangement that requires the Company to pay Mrs.
Lyons $100,000 over a one year period commencing on the first month following
the termination of her employment with the Company. Furthermore, upon her
termination she is to receive 100,000 shares of common stock pursuant to an
amendment to her employment agreement. The amended employment agreement will
obligate the Company to register these shares and reimburse her for the
difference in the gross proceeds upon the sale of such shares and $300,000;
regardless of the time she holds such shares. Effective October 29, 2001 Mrs.
Lyons tendered her resignation and based upon the terms of her severance
agreement, expenses of $350,000 had been recorded of which $308,000 is included
in accounts payable and accrued expenses at December 31, 2004 and 2005.
F-26
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
In December of 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. He 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. Mr. Provenzano 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. In 2005, the Company and Mr. Provenzano agreed that
he would work for the Company on an as needed basis. In 2005, the Company
accrued and paid Mr. Provenzano $39,900 for services performed.
STOCK-BASED COMMITMENTS
The Company has utilized the services of a number of consultants who were
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 13. ABANDONED ACQUISITION
On January 31, 2004, the Company entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement") with PMG and the PMG Shareholders. Prior to this
transaction, there was no business or other relationship between the Company and
its affiliates and PMG or the PMG Shareholders.
Pursuant to the Stock Purchase Agreement, the Company agreed to acquire 100% of
the shares of PMG from the PMG Shareholders in exchange for 30,000,000 shares of
the Company's common stock, subject to certain adjustments. The exact number of
Company Shares to be issued to the PMG Shareholders was subject to adjustment in
the event certain revenue was generated by PMG during one year following the
closing of the transaction. PMG had been organized in June 2003 to provide
medical products to hospitals and medical clinics in South America, primarily
Venezuela. One of the PMG Shareholders (Luis A. Ruiz) became a director of the
Company in connection with the transaction.
The parties had a difference in expectations regarding who would be ultimately
responsible for paying for the audit of PMG that was required in order for the
Company to complete its disclosure obligations under the Securities Exchange
Act. Additionally, the Company did not have a sufficient number of authorized
and unissued shares of its common stock to both satisfy its obligations to the
PMG Shareholders and to issue shares of common stock in a meaningful financing
transaction, given the low price per share at which the Company's common stock
trades. The Company lacked the financial resources to schedule a stockholders'
meeting, prepare a proxy statement and solicit proxies for the purpose of
amending its Certificate of Incorporation to increase its authorized capital
stock. As a result of these and other factors, the Company and PMG never
consolidated their operations, the Company never exercised control over PMG or
its operations and the parties never exchanged stock certificates evidencing
their ownership in each other.
F-27
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
Therefore, the parties entered into discussions and concluded amicably that it
was in the mutual best interest of the respective companies and their respective
stockholders, to rescind the transactions provided for in the Stock Purchase
Agreement and return all parties to their respective positions prior to the
transactions contemplated in the Stock Purchase Agreement.
The parties entered into a Rescission Agreement on October 14, 2004 that
provides, in relevant part, that (i) all transactions contemplated by the Stock
Purchase Agreement shall be rescinded as if the Stock Purchase Agreement had
never been executed and delivered; (ii) the parties forever waive all rights to
receive stock in PMG and the Company, as the case may be; (iii) Luis A. Ruiz
shall resign as a director of the Company; and (iv) the Company and PMG shall
file appropriate documents with the Secretary of State of the State of Florida
with respect to the rescission of the exchange of shares provided for in the
Stock Purchase Agreement.
NOTE 14. RETIREMENT OF TREASURY STOCK
During 2004, the Company determined that based on reconciliations of its stock
records and its stock transfer agent that 200,000 shares of the Company's common
stock has been issued in prior years but not recorded in the Company's books. An
adjustment was made as of December 31, 2004 to give effect to this non-material
error. In addition, the shares included in treasury stock were determined to
have been formally cancelled and an adjustment was made at December 31, 2004 to
reflect this cancellation.
NOTE 15. SUBSEQUENT EVENTS
SALES OF UNREGISTERED SECURITIES
On March 6, 2006, the Company issued its Third Offering Notes in the aggregate
principal amount of $797,500, due and payable January 31, 2007, to 44 individual
investors. Each Third Offering Note bears interest at a rate of 10% per annum,
and can be converted, in whole or in part, into shares of the common stock of
the Company at an initial conversion price of $0.025 per share. Purchasers of
the Third Offering Notes also received, for no additional consideration, a Third
Offering Warrant entitling the holder to purchase a number of Shares of the
Company's Common Stock equal to the number of Shares of Common Stock into which
the Third Offering Note is convertible. The Third Offering Warrant is
exercisable at an initial exercise price of $0.05 per Share and expires on
January 31, 2008.
F-28
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO FINANCIAL STATEMENTS
The Notes may not be converted by either the Company or the holder unless and
until each of the following events has first occurred: (i) the Company's
stockholders have approved an increase in the number of shares of common stock
authorized by the Company's Certificate of Incorporation in an amount not less
than the amount required to permit all the Notes and Warrants issued in this
series to be converted into shares of the Company's Common Stock and (ii) the
Company has filed with the Secretary of State of State of Delaware a Certificate
of Amendment to the Company's Certificate of Incorporation to amend its
Certificate of Incorporation to increase the number of shares of common stock
authorized by the Company's Certificate of Incorporation.
This offering and the sales thereunder were made in reliance on the exemption
from registration contained in Section 4(2) of the Securities Act of 1933 and/or
Regulation D promulgated thereunder as not involving a public offering of
securities.
Until the Company's stockholders approve an amendment to the Company's charter
to increase the number of authorized shares of common stock, the Company will be
unable to fulfill its obligations to all convertible noteholders to permit the
conversion into common stock of amounts due pursuant to the terms of the
convertible notes. In the event that the Company has not raised further capital
prior to the maturity dates of the convertible notes, the Company would be in
default of those notes if its stockholders have not formally approved an
increase in the number of authorized common shares. The Company is not, at this
time, in default of the convertible notes.
F-29